I didn’t give much thought to the financial condition at the New York Times until a few years ago, when the company chose self-flagellation to deal with the plagiarism of Jayson Blair. For those of you who can’t quite find Blair on the radar, he was a young reporter for the newspaper who had been promoted from the ranks of the company’s internship program. It happened that Blair was African-American, so color and affirmative actions lent a subtext to the story, although since American journalism and letters are replete with Caucasians who have invented stories, let’s leave race out of this summary. In my experience, fabrication is an equal opportunity employer.
After September 11, 2001, when the Times needed every warm body in the newsroom to strike keyboards in anger, Blair was promoted from cub reporter to the national desk, where he filed front-page dispatches on such stories as the Washington sniper and the family of Pfc. Jessica D. Lynch. He was a young man in a hurry, like many Timesmen, until another newspaper spotted his cribbed passages. Then a reconstruction of his expenses and phone records showed that, for many of his scoops, he had not been reporting from the heartland but e-mailing his stories from a Starbucks in Brooklyn. Looking at the episode from the vantage of 2005, I sense Blair must have thought himself part of the newer New Journalism, a virtual reporter, gleaning truth from downloaded Web sites, while the Times was still clinging to the quaint tradition that “all the news fit to print” ought to include at least showing up at the fire.
Blair was canned, although never very contrite. Notoriety has its markets, too, and he withdrew to the redoubt of his Web site. Instead of leaving Blair to the spike of history, however, the Times convened a West Side Inquisition and published a 7,397-word story on how many of his fabrications had found their way into the newspaper of record. As if its informed source was the Canon Law of heresy, a Times committee of rectitude intoned: “He fabricated comments. He concocted scenes. He lifted material from other newspapers and wire services. He selected details from photographs to create the impression he had been somewhere or seen someone, when he had not.” They described his actions as a “low point in the 152-year history of the newspaper,” although, without putting in a word for apostasy, I have to say that in one specific dealing I had with a Times reporter, his standards did not strike me as much higher than Jayson’s.
Woven into the Blair stake burning, however, was veiled criticism of the paper’s executive editor, Howell Raines, who had, they discovered, once sent his Jimmy Olson “a note of praise for his ‘great shoe-leather reporting.’” Any reader of Pravda would have known that the central committee at the Times was pointing a Siberian finger at Raines. But he nonetheless convened a staff meeting in a nearby Broadway theatre, to answer questions about Blair’s imaginary friends. He might well have leased the Coliseum and some Roman lions to hear his oration. The assembled reporters and management gave him the thumbs down, and shortly thereafter the newspaper’s publisher, Arthur Sulzberger, Jr., fired Raines—to quell the mobs and to retrieve the paper from the spectacle playing out on the Circus Maximus.
Raines brooded for about a year, and then published his own version of the story, perhaps some 20,000 words, in the Atlantic Monthly. He made the point that he had been the editor of a newspaper with 375 reporters, and 1200 staff members in the news division, and that none of his sub-editors had raised concerns to him about Blair’s sloppiness. Some of his deputies had known that Blair could disappear like Clark Kent, and they suspected he was no Superman. But no one dared tell the chief that Blair’s shoe leather was as ethereal as Perry White’s “great Caesar’s ghost.”
Raines’s Atlantic piece, however, does not dwell on Blair’s Fletch-like deceptions, so much as it makes the point that the Times has serious management issues, which it wasn’t addressing, and he hints at looming financial difficulties. In 2001, Raines had been promoted to the Times editorship as “our Patton,” someone there to mobilize the complacent troops. Phrases in his Atlantic article make it clear that if someone had ever asked him, “How many people work at the Times?” he might have used the caustic response: “About half of them.” In the piece he talks about “manãna journalism…clock-punching atmosphere” and “getting the Times off its glide path toward irrelevance.” As if still composing an in-house board position paper, he writes: “On a newsroom floor with some 1,200 journalistic employees and an even larger, more militantly pro-Guild support staff, where the company is daddy and the union is mommy, no one is supposed to speak publicly about the attitudes of entitlement and smug complacency that pervade the paper.” But by then he was gone and we were hearing about the kinder, gentler Times.
As editor, Raines had wanted to “raise our competitive metabolism” but then found the Times divided between the “culture of achievement and the culture of complaint.” The virtually peripatetic Blair had appealed to him, as he once noted: “This guy’s hungry,” when explaining why he had put him on a big story. Clearly, in ditching Raines as editor, the housecats and cultural complainers had outlasted those from hunger. But Raines is unrepentant through his 20,000 words. At one point he recalls a passage from the memoirs of an earlier editor, Turner Catledge, who wrote: “No one was ever fired at the Times. God was our personnel director.” But the line from the piece that got my attention reads: “But ad sales peaked at $1.3 billion in 2000 and have now settled back into the $1.1 billion range. If those ad revenues were to drop much below that mark, the Times as a business would be severely strapped.”
Just to be clear, I don’t work for the Times. Nor do I own its shares. I have read the paper daily for about 35 years. But more recently, recalling Raines’s dire forecast about ad revenues, and thinking in general that hardcopy newspaper readers are going the way of trolley riders, I decided to read through the paper’s financial statements. A friend of mine who works in a brokerage firm once said to me that he equated statement analysis “to the reading of a sonnet.” For my part, I find the language of annual reports and 10-Ks as difficult to deconstruct as Elizabethan English. But I take his point that both are worth the effort required to read them. Dante Rossetti wrote: “A Sonnet is a coin: its face reveals;/The soul, —its converse, to what 'tis due…”
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At first glance, the New York Times Company appears sound and profitable. In 2004, from the last full-year audited accounts, the company reported net income of $292 million on revenue of $3.3 billion. Its return on equity was more than 20 percent, healthy in any industry. In 2005, it will report net income of $259 million on revenues that were up 2.1 percent to $3.4 billion. During recent years the company has steadily increased its dividend to shareholders, although the yield is a modest 2.4 percent. In 2004, it reported EBITDA (earnings before interest, tax, depreciation, and amortization—a Wall Street mantra for corporate earning power) of $664 million, which implies that even in their sunset years, newspapers can be cash cows. (But don’t confuse your gross pay with what’s left in the envelope.) The company has a market capitalization (shares outstanding times market price) of $4 billion, which is $1 billion more than its rival, Dow Jones, the publisher of the Wall Street Journal. If you were a shareholder, and glanced through the annual report, you might not like the recent drop in the share price from 53 to 27, but you would think NYT (its ticker symbol) remains a solid, if currently unrewarding investment.
The heart of the New York Times Company is the newspaper in New York, the Boston Globe, and a group of daily papers in one-horse towns like Gadsden, Alabama, and Thibodaux, Louisiana. Some years ago, the Times owned some second-tier magazines, but refocused the business on daily papers when they purchased (for $1.1 billion) the Globe in 1993. The company also has interests in radio stations, television, some Internet operations, and several paper mills. The straws stirring the drinks at Sardi’s, however, are daily newspapers, which account for 95 percent of the group’s revenue. And in the so-called News Media Group, 65 percent of the revenue comes from advertising.
At the Times, more and more of the ads are from national advertisers, so its competition is papers like U.S. Today or the Wall Street Journal. At the Globe and among the regional dailies, classified and local ads still account for a larger percentage of the revenue base. In an era when people buy houses and cars, and rent apartments online, the question for the group is whether in the long-term it can keep its local advertising base. When was the last time you “checked the classified ads?” Measured by group column inches, the Times ran slightly fewer ads in 2004 and 2005 than it did in 2002, although total ad revenue for the company increased in 2005 by 3.8 percent. In answer to Raines’s concerns, ad revenue at the Times has increased to $1.26 billion, although that account now includes two radio stations, which it did not when Raines cited his $1.1 billion. (In net terms, the figure for the New York paper is still around $1.1 billion.) Overall, the group has increased ad revenue of $1.9 billion in 2002 to $2.3 billion in 2005, and that is the good news cited to the market whenever concerns are raised about the future of newspapers.
In looking at the group’s circulation, the figures don’t always tell the entire story, as there are good subscribers—those paying the rack rate of $481 per year to have the paper heaved onto to their front porch—and those who pick it up free in front of their hotel bedroom door. That said, the Times continues to have “the largest daily and Sunday circulation of all seven-day newspapers in the United States.” In 2004, the Times had a daily circulation of 1.12 million, and 1.66 million on the Sunday. But between 2003 and 2004, it lost 7.3 percent and 12.4 percent, respectively, in daily and Sunday circulation. In 2005, the Times circulation grew slightly (although revenue in this category was flat) while the Globe gave back the 8.3 percent circulation gain by which it had grown the year before, and the New England Regional Media group’s circulation revenue dropped by 5.7 percent.
Another shift occurred in the location of the readers, who became increasingly national, especially in the case of the Times. About half the readers of that paper now live outside the New York metropolitan area. To give an idea of the paper’s declining presence in its home market, circulation in Manhattan, according to a gleeful New York Post, dropped to about 166,000 during 2004. In the Bronx, the Times only sells about 12,000, hardly enough copies to pass around the luxury boxes at Yankee Stadium.
Bigger than demographic shifts, however, is the dramatic change in all of our newspaper habits. It used to be that we read newspapers at breakfast or while commuting to work on a train or bus. The same pattern might have repeated itself on the way home in the evenings, with a so-called afternoon paper. Now people eat breakfast standing up, if not in the car, and catch up on news all day, from radio, TV, and Web sites. Newspapers tend to lie idle on kitchen tables until after dinner, when they are “flipped through” rather than read in detail. Competition is not from a cross-town paper, but billions of Web sites, 500 cable channels, and multiplex cinemas.
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In 2005, as reported both in the company’s third-quarter Form 10-Q and its press releases announcing year-end unaudited results, what hurt the company more than flat circulation figures was the jump in expenses over the slight increase in revenue. Whereas revenue in 2005 grew 2.1 percent, the company’s total expenses were up 7.9 percent. Interest expense alone was up 17.7 percent, from $42 million to $49 million, although these figures are net of capitalized interest, which in 2004 was $7 million. What makes the income statement of 2005 hard to deconstruct are the extraordinary gains and losses that hit the bottom line. For example, during 2005 the company booked $115 million from the sale of its headquarters. At the same time it took pre-tax charges of $58 million, to cover certain staff reductions, and $11 million in association with a change in accounting principles. Remove the extraordinary gain on the building sale from the income statement, but leave in the charges (which don’t look all that extraordinary), and year-end net income would have been $145 million, as opposed to $292 million the year before—a drop that would explain why the market price of the stock is down 30 percent in the last year.
Not so apparent in the figures is whether having an online edition helps or hurts the bottom line. Among its peers, the New York Times is credited with being ahead of the newspaper technology curve in terms of having developed an excellent Web site, dating to 1996. In 2004, according to Business Week, the online edition was getting around 9 million monthly hits. I am sure it is more now. According to the company, but not available in the financials, is that New York Times Digital earned revenue of $198 million in 2005. It also reported it had about 390,000 subscribers for Times Select, the new online subscription service. Of those numbers, 156,000 customers had paid $49.95 up for complete online readership (the rest get Select as a fringe benefit of a normal subscription). But is this good news or potential bad news? Select clients are now contributing $7.8 million in circulation revenue and, no doubt, driving online ad sales. But the newsstand revenue from 156,000 readers (probably not a perfect analogy; they might not all buy it everyday) would be $75 million. In a larger sense, can the Web site be considered a profit center when it needs the print edition’s 1200 staff members to post articles online? NYTimes.com might even prove an expense item, at least initially, if it forces the Times to convert itself into a 24-hour news gathering organization, with that much more staff and technology investment required.
Moving to the company’s balance sheet (the last figures I have are for the third quarter of 2005 and were filed with the Securities and Exchange Commission), the Times reported total assets of $4.3 billion. It had current assets, such as receivables and inventory, of $572 million, property and plant of $1.4 billion (after depreciation of $1.3 billion over the life of these assets), and $1.84 billion in goodwill and intangible assets. Keep in mind that balance sheets record accounting, not street values. Take NYT to a pawn broker, and he might give you more or less than $4.3 billion for the assets. With a market cap of $4 billion, this would suggest that balance sheet assets are worth considerably more than reported. But market cap assumes a growing company and what accountants call a “going concern.” Liquidation values are something else, as became clear when billions in assets vanished from the balance sheets of companies like Enron and World.com—not to suggest that the Times bears any comparison with those Ponzi-like companies. Most analogous to the Times’s financial situation would be the bind of network news programs, which are losing market share to new technology.
Nor is it clear how well the company’s assets will hold up in a changing world. Take the $1.4 billion line item for property, plant and equipment—in the case of the NYT, many printing centers around the U.S. and now the world. In 1987, the company built a huge printing complex in Edison, New Jersey for a cost of $400 million. Each year, the company records as an expense a portion of the total cost of these assets, on the theory that the plant is wearing out over time, like a delivery truck. But in some cases, property appreciates, and in other cases, depreciation schedules do not match the deterioration of an asset correctly. In other words, little judgment can be made about the company’s $1.4 billion in property unless you were to go door-to-door at the plants, and appraise their value in the local market. But in general, I would not want to be a seller of used newspaper equipment.
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Equally problematic, for anyone reading financial sonnets, are goodwill and intangible assets. In the case of the Times, they are reported at $1.84 billion (more than the company’s book equity). The figure represents the amounts paid for assets over their net book value, and it also recognizes the value of certain trademarks, such as the name “Boston Globe.” Clearly those names, and other properties acquired for premiums, may have substantial value, and they may throw off substantial cash. (Who would not want to own the intangible asset that is the trademark Coca-Cola?) But in a media company, especially one heavily concentrated in newspapers, what represents an intangible asset today—for example, owning the only paper in town—could well become a liability in the future, should readers vanish and should the company be left with expensive union or pension obligations. We still don’t know if newspapers are on the road to Detroit or Silicon Valley. And consider this: if the Times had to write off all of its goodwill and intangible assets, it would be left with negative equity.
Accounting for goodwill is guesswork more than science, and many industries refuse to let their companies consider it as an asset. But media companies can and do. For example, during 2004 the Times paid $65 million to buy out the 50 percent of the International Herald Tribune it did not own. Even though the Herald Tribune was and is continuing to lose money, the invested $65 million is recorded as an intangible asset. But the advantage media companies have other industries that it can depreciate (record as an expense) an annual amount that should correspond with the depleting worth of certain assets, like a trademark or a masthead value. In 2005 and 2004, the Times expensed $143 million and $142 million, respectively, in depreciation and amortization—something accountants call a “non-cash expense.” (It is a cost you don’t cover with hard cash, unless the company establishes a sinking fund to renew the assets at the end of their useful life.) Things like broadcast licenses and mastheads may not lose their value in the way that a truck or plant lose theirs, but these generous allowances have allowed media companies for years to lower taxable income.
Theoretical as some of the Times’s assets could be in the digital future, its liabilities are those of a rust belt industry. Basically, the company is like a car or furniture company, in that it takes a raw material (paper), blends in intelligent designs (words and pictures), runs the work-in-progress through a factory (printing and production), and sells the finished product to consumers. I realize that the editorial board of the Times would prefer to see itself working in the Elysian Fields of intellectual property. But the fact is that the Times is in a smokestack industry that manufactures news, and to do it well means borrowing a lot of money, all of which is listed on the liability side of the balance sheet.
At year-end third-quarter in 2005, the company had almost $1 billion in current or short-term liabilities (another disproportionate figure, which could lead to liquidity issues, given that current assets are only $572 million). It also reported $1.7 billion in long-term obligations, which include anticipated liabilities for pensions and health care benefits. For years, while God was the personnel director of the Times, he generously awarded the employees, after negotiations with various guilds, handsome retirement benefits. Plus we know from Raines that it was impossible to get fired from the paper. General Motors had the same paternalism for its workers. For the Times, these accruing liabilities at third quarter-end 2005 were calculated at $728 million, but that figure could increase, should the company not correctly estimate either the performance of its pension assets or its actual health care costs. Its pension shortfall is estimated at $358 million (gap between assets on hand and future obligations), and it should be noted that the Times has 74 percent of its pension assets at risk in the stock market, a fairly aggressive bet on irrational exuberance.
In addition to shareholder funds of $1.5 billion, the company funds its balance sheet with a variety of short, medium and long-term lines of credit. I give credit to the company’s finance department for its skill in negotiating competitive rates on these facilities. Nevertheless, I notice several concerning trends. First, the company’s overall debt is now $1.4 billion, and interest expense in 2005 was $49 million, net of capitalized interest. Second, the debt-to-equity ratio is now 88 percent. In 1997, that ratio was 37 percent. Third, while cost efficient, the company relies extensively on a short-term commercial paper facility to fund even long-term assets, such as its intangibles and real estate investments. Overall, with the share price dropping, its only sources of long-term funding are in the capital markets, and there the company could be squeezed, should that industry draw negative conclusions about the future of the company’s assets. Also crippling would be another 114-day newspaper strike, as happened in 1962, and which eventually wiped out the intangible assets, and funding, of New York papers like the World Telegram and Journal American.
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Of all the accounts in the Times financial statements, nothing is more revealing than the company’s sources and uses of cash. Basically, what has the Times done with the money that it has earned? Profitable companies have the option of paying more dividends or keeping the money in the business. Raines writes in the Atlantic: “Money is the oxygen of journalism.” But in the case of the Times, little of its free cash was reinvested in the business of searching for the truth. More recently it even made cutbacks in its editorial budget, which Raines reports was $180 million a year. During 2005, the paper announced after-tax charges of $35 million, to cover group-wide staff reductions, with the goal of saving “$50 to $70 million” in 2007 and beyond. That prompted Editor & Publisher to editorialize: “Using the bizarre premise that newspapers can bring back lost circulation and ad revenue by making their products worse, top executives at major chains from The New York Times Company to Tribune took a butcher knife to staffing with buyouts and layoffs that appeared almost epidemic.”
Yes, the Times made a few acquisitions in media-related businesses, including recently a 49-percent stake in a Boston freebie newspaper, Metro. As noted, in 2004, it paid $65 million to acquire the outstanding shares in the International Herald Tribune (circulation about 240,000). But Raines says that the goal of the acquisition was to use it as the platform to launch that paper as the International New York Times. Now the company has backed away from a name change, given reader preference, although the company is clearly investing heavily in this operation. As a reader, I can say it is a better paper than before. But profitability is harder to track. Ad revenues at the Herald Tribune grew 30 and 33 percent in the last two quarters of 2005, although profit and losses for the paper are not broken out of the News Media Group. Elsewhere I have read that the paper used to lose $6-8 million, but that in 2005 this loss has temporarily grown to $25 million, as the Paris-based paper ramps up its reporting and distribution capabilities.
In 2005, NYT paid $410 million for the Web site, About.com, which answers questions on a variety of subjects and that in December 2005 got 29 million hits. Management believes passionately in the investment, stating it will be cash-neutral to the group in 2007, and profitable thereafter. Year-end 2005 figures for the site indicate it had revenue of $44 million and an operating profit of $11.6 million. But that is a gross figure that leaves aside the cost of parent capital to buy a company, without net income, for the aggressive price of about 12 times revenue—on the theory that it will lure advertisers and Web surfers to other NYT products. Recently the paper has also acquired shares in television production companies, with the idea that someday—perhaps like the BBC—the Times will be a seamless source of print, audio, and video news reporting. At the moment, however, video broadcasts on the Web site still look like home movies.
For all that the Times says that its core purpose is to “enhance society” by publishing top-quality news, it has mostly used its free cash, in recent years, to buy back its own shares. According to the 2004 annual report, since 1997 the Times has used $2.9 billion to repurchase “nearly 77 million shares” of the company’s common Class A stock. In the talk of Wall Street, these purchases are known as “stock buybacks.” Usually a company will buy back its own stock, and then cancel the shares, when the company stock is trading at distressed prices but the management believes the company is sound, and worth more than the market believes it to be. (That was the case in 1997.)
Share buybacks are perfectly legal. If done at the right price, they can increase a company’s earnings per share, as net income is divided among a smaller number of outstanding shares. But what is extraordinary about the Times’s repurchase program is both the large amount of committed capital ($2.9 billion isn’t chump change) and the fact that, since 2000, it was undertaken when the Times’s shares were trading at a high multiple. Even today, the company’s multiple is 14 times earnings—a level that rarely generates interest in buying back shares.
Just for the fun of it, I went to About.com and typed in “share buybacks,” and got a primer from “Your Guide to Investing for Beginners,” which reads as follows: “Principle 3: Stock buy back programs are not good if the company pays too much for its own stock! Even though buybacks can be huge sources of long-term profit for investors, they are actually harmful if a company pays more for its stock than it is worth. In an overpriced market, it would be foolish for management to purchase equity at all. Instead, the company should put the money into assets that can be easily converted back into cash.”
Clearly, no one on the Times board surfed its own Web sites before authorizing the recent stock buybacks. By my calculations, since 2002, when the stock hit a record high of $53 a share, the Times has lost $248 million from its buyback program—that figure being the cost of the repurchased stock (until 9/05), as reported in the annual reports, and what those shares would be worth today at the current market price of $27.50. (You can find thousands of words in the Times on Jayson Blair’s expenses, but on this blunder, the paper is silent. Imagine the editorials if someone the Times did not like, a politician or a company, had blown $248 million?)
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Although it hardly explains the volume of shares repurchased, one justification the paper uses, in explaining the buybacks, is that the company has shifted more to a compensation model that links performance with the granting of stock options and restricted stock. That would explain modest share repurchases, not $2.9 billion. It also should be pointed out that most of the options granted since 2002 remain out-of-the-money, which would indicate unhappy staff campers, when it comes to their options. The 2005 earnings release notes that: “In 2005, option exercises were lower than anticipated,” as if maybe that was a cost-saving virtue. But of the company’s 30,799,000 outstanding options at the end of 2004, 29,167,000 had average strike prices between 37 to 46. Wait until Raines assesses the morale of those option holders; he may have a pile of underwater options himself.
Here’s another puzzling fact: normally, when a company aggressively buys back its own stock, the price of its shares tends to go up (given an endlessly eager buyer in the market), as does the ratio that measures earnings-per-share. NYT did go up during the late 1990s, although so did the shares of all media companies during the salad days of the Bubble. But in the Times’s case, earnings-per-share have been flat since 2002, and the price of the stock has tanked. As a market vital sign, that’s alarming.
While writing this assessment, I have spent the most time trying to figure out why a company would relentlessly buy back its own shares—to the extent that NYT has spent more than its net income some years on buybacks and dividends. The obvious answer is that the board believes the company to be undervalued. But I suspect the magic of media-company accounting may also be an incentive, which could work as follows: NYT borrows large amounts in the market and invests in other media companies at huge premiums to book value. (About.com is a perfect example. Its assets could largely be summarized as “Hits Received;” the gold mine is ethereal, not under the Utah desert.) Then the paper depreciates the intangible part of the asset, which lowers taxable income. But new media assets don’t wear out like strip mines, so you can then use depreciation and amortization as cash that will never be called, and then you invest that saving, plus net income, in share buybacks. The purpose is to increase earnings per share and lift the share price, giving shareholders an eventual capital gain (taxed at 15 percent) as opposed to more corporate income (taxed at 39 percent). The scheme, however, only works if the price of the stock goes up. Even if it doesn’t, it leaves the Sulzbergers with a larger percentage of the company, provided that they have not been sellers.
The other thing the company did with its cash was to make a huge bet in New York real estate, again during a bull market. In 2004, the company sold its old building on West 43rd Street for $175 million. Earlier, in 2001, it had committed to pay about $639 million for a majority share of a 52-storey building across the street from Port Authority. (The Times paid $86 million to New York State to clear the lot, evict the tenants, and lease the land for 99 years. Bet you didn’t read the tearful details of that eviction in the paper?) Its minority partner is Forest City Ratner (FC), a real estate company that, as I read the small type, got the better of the Times when it came to cutting the deal. When the tower, which looks like a giant paper shredder, is finished around 2007, the Times will own 58 percent and FC 42 percent. But as the 2004 annual report notes: “Because NYT is funding its contribution equity first, a portion of those funds will be used to fund FC’s share of Building costs (the “FC funded share”) prior to the commencement of funding of the construction loan.” In other words, Ratner gets his 42 percent share for nothing down. The company believes the new headquarters will solve problems ranging from office politics to television production. But Raines is more cryptic, concluding offhandedly: “If and when it is built, the space for the broadcast and digital activities central to the Times’s future will be inadequate.” Gee, Howell, whaddaya want for $639 mill?
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Between the stock repurchases, About.com, and the new building, in recent years the Times will have spent almost $4 billion of shareholder money, and very little of it will have improved the quality of its journalism. Just the opposite, I fear. Without a coherent strategy the board seems to be gambling the company’s future at time when its industry may be in brutal transition. (Witness the owners of the Knight-Ridder chain flogging off its newspapers.)
What may partly explain these quirky corporate decisions—to bet the ranch on newspapers, to buy back the stock, and to flip Port Authority condos—is that the Times is neither a family nor a public company, but an uneasy partnership between the worlds of corporate democracy and trust fund aristocracy. On the front page of the annual report, the company proclaims its core purpose is “to enhance society by creating, collecting and distributing high-quality news, information and entertainment.” That’s slightly different than the “primary objective” of the family trust that controls the board of directors, which is: “to maintain the editorial independence and the integrity of the New York Times and to continue it as an independent newspaper, entirely fearless, free of ulterior influence and unselfishly devoted to the public trust.” Under the first declaration, you can probably justify paying $75 million in 2002 to own 16.9 percent of New England Sports Ventures LLC, owner of the Boston Red Sox, Fenway Park, and its cable network. Under the second, that sounds like more Blairian heresy.
In terms of corporate democracy, the Times is a banana republic. Technically a public company, it has two shareholder classes, Class A and Class B. (In dollar terms, all the shares have the same par value.) Under the by-laws of the company, a 1997 Trust, established by the Sulzberger family as a successor to an earlier trust of Adolph S. Ochs, the holders of Class B shares in the New York Times can appoint 70 percent of the board of directors. Class A shareholders elect the rest. At present, the Sulzberger clan controls about 88 percent of the 1997 Trust, and thus they get 9 of the company’s 14 board seats. In turn, that majority ensures that the family stays in daily control of a company in which it does not own a majority of the shares.
You can read NYT proxy statements until faint and still not calculate the exact holding that the Sulzbergers (who have both A and B shares) have in the Times. Business Week estimates their shareholding at 19 percent (that would represent a market value of $760 million). Other financial reporting services, such as Yahoo!, estimate that outside institutions hold 66 percent of the A shares. Smaller investors would then hold the balance. But neither Arthur Sulzberger, Sr. nor his siblings are any longer officers of the company. As they have placed some of their Times Class A shares in trusts beyond their control, it is difficult to reconstruct the shareholder accounts of the family members. But Yahoo! is conservative to report that insiders control only 5.3 percent of the company, and the New Yorker is exaggerating to write that the family “controls sixty per cent of the voting stock.” In fact, the biggest block of shares are held in custody or managed by T. Rowe Price or related partnerships, such as Private Capital Management. They accounted for 36 percent of the company’s shareholding, as reported by Computershare on January 13, 2006. But it may be that some Sulzberger family shares are held in custody at T. Rowe Price. Who its clients are is not disclosed.
Nevertheless, by controlling a majority of the Class B shares (worth only about $20 million in dollar terms and thus valued at less than 1 percent of the company’s market worth), the Sulzberger family appoints the majority of the board and dominates the management. At present, the company chairman is Arthur Sulzberger, Jr. The rest of the shareholders, who have about $3.2 billion at stake in the company, are along for the ride, like it or not, and a sense of that roller coaster illustrates that seat belts might be in order.
The first thing that strikes you about the Sulzberger-appointed board of directors is how little background any of them have in daily newspapers. Admittedly, Arthur Sulzberger, Jr. worked as a reporter for the Times, and other family members and insiders on the board either still have jobs there or worked in other papers, although rarely in a senior capacity. (The exception is company CEO Janet L. Robinson, who runs the business side of the Times and can recite the figures on want-ad growth in Worcester.) But most of the outside board members might well be overseeing a bank or rental car company. Two directors have experience at IBM, where one, John Akers, was the CEO. The other directors have worked in areas like food, orange juice, pharmaceuticals, engines, and investment banking. They may all be excellent business people. But for a company that earns 95 percent of its revenue from daily newspapers, and of that about 70 percent from advertising, you would think a few of the non-family directors might have spent some time in the industry. (Raines might have been the Bear Byrant of editors, shouting at his team from a towering height. But if I owned the Times, I would want someone with his experience and drive on the board before I would nominate the CEO of Sara Lee.) Lastly, the average age of the board in 2004 was 56—with several members over 70—, which could be old for company that partially lists its business as the Internet. I wonder how many of them listen to Podcasts of WQXR?
In a brave new world, the Times will slowly shift to a high-quality provider of online feed, and its stock market valuation will approach, for example, that of Google, which has a market capitalization of $128 billion and a stratospheric P/E of 99, but which lacks anything as serious online as you can read at the Times. Already the Times can claim to be among the Internet’s top ten in greatest hits. Even at 30 times this year’s depressed earnings, the paper would trade at $53 a share. In a worst case scenario, however, the age of the Internet will kill the golden geese of newspaper circulation and advertising by forcing companies like the Times largely to give away a product that annually costs $3 billion to turn out. In return, they may get millions of hits, and some ad revenue, but not enough income to pay the benefits of the 12,000 employees needed to boot the servers. Alas, the competition is phoning in its stories from Starbucks. And not many bloggers are buying into $1 billion towers.
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Now that the stock is under pressure, and the business of newspapering is uncertain, the board of directors needs to confront the fact that, in a corporate sense, the Times is running out of ideas faster than it is running out of money. With about $4 billion to spend in the last ten years, the company could have paid down third-party debt. It could have sent legions of reporters to Burma or the Bronx. It could have repositioned itself. Or it could have kept the money in the company as capital, to fund the wish of Adolph S. Ochs that the Times remain “independent.” But one thing stock buybacks signal to the market, when the acquired shares are expensive, is that the company has no better ideas as what to do with its capital.
I sense further trouble brewing for the company in the areas of corporate governance. The interests of Class A and Class B shareholders are divergent and untenable. In theory, Class A is there to make money while Class B has the mission of keeping the newspaper independent. No matter who appoints the directors, they have a fiduciary duty to all the shareholders, not just their minders. Imagine what the Times would have written if some troubled public company in recent years had been run by a trust fund of minority shareholders? If the stock keeps going down (as I have written it has gone down to $26.75 and then rebounded over $28), I suspect the current board could be vulnerable to shareholder lawsuits. What would happen if unhappy Class A shareholders were to allege, for example, that the directors, in foolishly repurchasing $2.9 billion in company stock or making other loser investments, were acting more in the interests of the minority Class B shareholders? Personally I think these flyers were ill founded more than deceitful, but I could imagine Messrs. Sarbanes and Oxley taking the charge seriously.
The board could also, for example, break ranks in agreeing that the Sulzbergers—Arthur, Jr., in particular—are the most capable managers to lead the company forward. Who would win that argument? In my view, Class A, after protracted litigation. Raines has this observation: “I had long noticed in business situations that when Arthur was worried, he tended to yell Hi-ho, Silver! and gallop into the middle of things, and also to form committees.” But how many silver bullets are available to the 1997 Trust, which owns 738,810 of the145 million shares in circulation?
In my mind, not that I am a consultant to the enterprise, I think the only hope to reconcile the different objectives of the shareholder classes is to divide the company into two parts. One should be run like a charitable trust, and own the New York Times, according to the principles of the 1997 Trust, if not the tenets of Adolph S. Ochs. It would reinvest profits in an endowment that would maintain the paper’s independence. It would remove the paper, print or otherwise, from the constraints of trying to make money, other than to cover its costs. If it so chose, it could invite both readers and contributors into the financial collaboration, much the way mutual savings banks are owned by their depositors. Reading the trust stipulations, I think the model should be Yale University, not the Gannett chain. As for the rest of the company, I would spin it off to the Class A shareholders and wish them well with the Red Sox, Ratner, the Daily Comet in Thibodaux, LA, and About.com.
Do I think it conceivable that the Times will reconfigure itself, or at least part of the company, into a non-profit corporation? No, I don’t, at least not by choice. I doubt that the Sulzbergers would commit their family fortune to taking the New York paper private, and I doubt that the Class A shareholders would let the cash cow leave the corporate pasture. Watching the shares drop, I think the more immediate problems will come from some distant family members who own the B shares (there are 34 shareholders listed in that class) and who fear losing their inheritance in investments like the Petaluma Argus-Courier. These shareholders could convert into Class A, if no one in the family wants to buy them out, and sell. But the moment the family ceases to become the buyer of last resort for the B shares, the 1997 Trust will lose its influence over the paper, and the Times will become just another media company, being stalked by AOL Time Warner or General Electric.
In the meantime, some of NYT’s incongruous investments may pan out, although you have to wonder about a company that, with $4 billion in its wallet, devotes most of it to buying back its own stock. It reminds me of those authors who order their own books on amazon.com, to boost the book’s rank. Also, the reading of the verse of the financials tells me that the company has a liability-heavy balance sheet: growing short- and long-term debt, increasing pension and health care costs, and capital tied up in intangible assets. In recent quarters, growth in cash flow has not matched the increase in expenses, and interest, in particular, is a heavy burden, which could perhaps reach $60 million this year, if average rates are 4.5 percent. Anyone who owns the shares is betting over the long-term that Internet revenues will more than compensate for vanishing print readers. In conclusion, although I am not saying NYT is broke, I do think the newspaper of record, as you know it anyway, is doomed, either by a dispute among shareholders or Internet market forces.
One of the recent ironies at the Times is that it thought it could divine its soul, or perhaps its future, in reading the entrails of either Jayson Blair’s phone bills or maybe Judith Miller’s subpoenas. Hence all the ritual sacrifices along West 43rd Street, including those of Blair, Raines, and Miller. But the paper’s soothsayers would have done better to start by divining the annual report and Form10-K, although one thing I do know about journalists is that very few of them understand the iambic pentameter of accounting. Raines writes: “I didn’t care what Times people said so long as they broke stories…” and off went Blair to the virtual front porch of the anxious Lynch family. He also writes that: “The Times is it own country, too.” It might have been a good place to send a foreign correspondent. As Jayson Blair would understand, to get there, all you have to do is open the paper’s Web site and click on its financials. You can even do it from Starbucks.
