The Deal from Hell (19 page)

“Mark Willes is just a symbol—and perhaps even a victim—of the combination of fear and ambition that in recent years has led many managers of media enterprises to put stockholders ahead of readers or listeners,” wrote Max Frankel, a former managing editor of the
New York Times
, in an op-ed piece that compared the Staples deal to a kickback scheme designed to generate positive coverage. “By giving priority to stock values and profit margins, they slighted their obligations to the public. Indeed they have shown themselves ignorant or even contemptuous of the ethical standards so long and painstakingly erected to protect the credibility of their news operations.”

Even Otis Chandler broke his silence. From his retirement ranch north of Los Angeles, he released a statement that he had Bill Boyarsky read in the newsroom, calling the Staples deal “unbelievably stupid and unprofessional” and the Willes and Downing era “the single most devastating period in the history of this great newspaper.” In an incredible instance of self-flagellation that could only be found in the newspaper business, the
Los Angeles Times
had media writer David Shaw write a thirty-thousand-word piece on Staples.

As the Staples scandal lingered in the collective journalistic memory, a short, stocky man with a winsome smile deplaned at O'Hare International Airport and made his way to downtown Chicago for a board meeting of Classified Ventures, a collaboration between Tribune and other major media companies dedicated to combating the threats that the Internet posed to the industry's lucrative classified advertising business. A native of Evanston, Illinois, Tom Unterman was about to leave his job as CFO of Times Mirror in 1999 to pursue his new career managing money, mainly for the Chandler family, but also some other clients. To those who knew him, Unterman was a “smart off the charts” lawyer and deal guy who had a reputation for cleverly avoiding taxes. Just before the board meeting, Jack Fuller, who by then had been promoted to head Tribune's publishing unit and a fellow Classified Ventures board member, pulled him aside: “I told Tom ‘we are not going to give up on this. This is the smartest thing either of our companies could do,'” a not-so-veiled reference to the proposed Tribune–Times Mirror merger.

Unterman listened to Fuller and said nothing in reply, until a few months later at another board meeting when he told Fuller that “things were changing in Los Angeles and that he might be able to do something.” The Chandlers, Unterman said, might be interested in a deal. Fuller then immediately informed Madigan and David Hiller, the original advocate of a Tribune–Times Mirror merger, and shortly thereafter Unterman had a meeting with Fuller and Hiller.

In Chicago a few weeks later, Fuller set up a meeting at Madigan's North Shore home to discuss possibilities. The Chandlers, Fuller learned, were far more embarrassed by the Staples scandal than anyone realized. “Tom said the Chandlers realized they couldn't get much more out of Times Mirror through cost cutting and were angry and embarrassed by Staples. They wanted to find new leadership [for Times Mirror],” Fuller recalled.

One of Unterman's clients had sent him a copy of
News Values
, a book Fuller had written in which he argued that newspapers had to maintain a strong ethical backbone despite the economic challenges the
industry faced. Unterman had confidence in Fuller, and the Tribune publishing chief impressed the Chandlers, too. When Unterman began to work his magic, things moved quickly and quietly.

“We went there first, and then they [the Chandlers] came here to the Tower,” Madigan recalled. A string of clandestine meetings unfolded at the Sidley Austin law offices and the California Club in downtown Los Angeles. Willes was deliberately left out of the loop. “They [the Chandlers] didn't tell Willes, and they didn't tell the other directors,” Madigan explained. “They had all of this control [of Times Mirror], they had that high voting stock. They could just do this.” Willes had made Unterman's job easier with his political naïveté. The steady stream of changes in his executive suite meant he had few longtime allies watching his back. Unterman, on the other hand, had solid ties to the family, a cunning mind, enough political smarts to fill the Grand Canyon, and good relations in his native Chicago.

Even in his days at Salomon Brothers, Madigan wasn't seen as a deal guy. His mentor, Ira Harris, considered him a strong corporate operations executive—someone good at imposing solid financial controls on a company, and a man who could maneuver easily in a boardroom. Putting together risky deals was not his forte.

Madigan and Fuller were hungry for a deal with Times Mirror though, and Merrill Lynch, Tribune's longtime investment banker, didn't pull down big fees sitting in the financial bleachers. The Tribune Company was known as a careful, plotting outfit that maintained a steady lumber, not a quick step. Madigan and Fuller were determined to reverse that image. As events played out after Thanksgiving in 1999 and into the new year, both sides moved quickly and secretly, lest anyone discover a deal was in the works.

In a move that surprised no one, the Chandlers had structured the terms of the merger to benefit their family, at the expense of minority shareholders. Overall, the Chandlers' holdings gave the family 28 percent of all Times Mirror shares, but the family could still control Times Mirror, because their stock enjoyed super-voting status. In effect, Chandler stock was worth ten votes per share, while regular stock
received only 1 vote per share. The price Tribune was willing to pay turned heads. Madigan and Fuller's deal initially offered $92.50 per share to Times Mirror stockholders for shares then changing hands at about $47, a premium of nearly 100 percent. But, as Willes, Zimbalist, and non-Chandler directors soon learned, the family intended to exchange their Times Mirror stock for shares in Tribune, a move that would make the transaction tax-free to the Chandlers, while everyone else would get what was left of the stock pro rata, and the rest in cash.

The end result? Non-Chandler stockholders would be responsible for paying income taxes on their profits. By March 2000, Madigan and the Chandlers sprang the news on everyone. As Willes recalled, “John and his people came in to make a presentation to our board about why this was such a wonderful combination. They talked about their television ventures, you know,
Buffy the Vampire Slayer
and all that. I just sat there and thought, this can't be happening. I didn't know whether to sit there and cry or stomp out of the meeting. Fortunately I did neither.”

Zimbalist explained:

Zimbalist and independent directors met in secret, too, to determine what to do: “We were trying to get some leverage, and we were looking at everything when all of a sudden this paralegal, a young woman, comes in with a big smile on her face. She found a clause in the charter of Times Mirror Corp. that said super-voting shares could not be voted as super-voting shares in a change of control. This meant they [the Chandlers] couldn't dictate the terms.”

An atmosphere of smugness prevailed in the downtown Los Angeles offices of Sidley Austin when Zimbalist, a clean-cut, steelgray-haired man, walked confidently into the conference room armed with his fresh intelligence about the company charter:

On March 10, 2000, Tribune started “management interviews and due diligence,” the proxy said, scrutinizing the details of the proposed deal and looking for problems, a process that should take months. On March 12, two days later, the Tribune and Times Mirror boards approved the deal. The Chandlers made quick work of Willes. Once the deal was agreed upon, Willes wandered the halls of the Times Mirror building. “He would cry very easily,” Wolinsky remembered. “It was waterworks for the rest of the time he was there.”

During Willes' tenure, the
Times
circulation rose, its operating profits soared at a compound rate of 25 percent, and earnings per share increased more than 50 percent. Some industry executives credited Willes with forcing a hidebound industry to face up to declining readership and a dubious outlook for long-term revenue. Willes raised some important issues, too. “Tom and everybody else were talking about putting our content online for free, and somehow make it up on the ad side. And I said, let me give you something to think about. If you are going to give away for free what you stand for, then what kind of message are you sending? It's a message I don't think you want to send,” Willes noted.

But Unterman, who felt the Internet was the future, worried that Willes devoted too much effort and resources to increasing newspaper circulation, which would continue to fall regardless of what the industry did. In addition, Willes had sacked 2,000 people and presided over a revolving door in his executive suites. When he left Times Mirror—only after loading the last of the Diet Coke in his fridge into the back of his car—Willes walked away with a severance package worth $64.5 million. For his part, Unterman, who by then had formed Rustic Canyon Partners—a company that would manage the Chandler family wealth—earned an $8 million dollar fee for working both sides of the transaction behind Willes' back.

As word reached Chicago on the evening of March 12, 2000, that a group of high-level Tribune executives (including Hiller, the executive in charge of Tribune's development arm) were in Los Angeles, Lipinski and I headed into the Tribune Tower. Rumors had hardened enough for
Tribune
media writer Tim Jones to work up the story all weekend and prepare a draft. Lipinski and I began calling sources, trying to confirm the rumors and pry details from tight-lipped Tribune executives, whose reluctance to talk convinced us something was up. As we speculated on how the deal would work, John Puerner, publisher of the Tribune-owned
Orlando Sentinel
, took our call and heard us out. He was out in Los Angeles as part of the deal team, but said he couldn't talk. He promised to call back, though, and at about 10:30, Puerner phoned and told us we were good to go; we could publish our story.

The headlines the next morning stunned the industry. Tribune had acquired Times Mirror for $95 a share in cash and stock, a price that, in retrospect, would prove to be far too high. It was the largest deal in newspaper history, a combination of resources that made Tribune Company the third-largest media powerhouse in the country after Gannett Corporation and Knight Ridder. The difference was Tribune had hands down the best collection of quality newspapers in America: the
Chicago Tribune
, the
Los Angeles Times
,
Newsday
, the
Baltimore Sun
, the
Hartford Courant
, the
Orlando Sentinel
, the
South Florida Sun-Sentinel
, the
Morning Call
in Allentown, Pennsylvania, the
Newport News
in Virginia, and several small suburban papers just north of New York City that sold a combined 3.6 million newspapers every day. By then, Tribune Company had successfully acquired twenty-two television stations, making the broadcast wing of Tribune as large as a network with viewers in 38.4 million households in America, including stations in the nation's three largest markets, New York City, Los Angeles, and Chicago. “Frankly,” Madigan wrote in a memo to employees that day, “the newspaper industry is consolidating, and the only way to survive and prosper in the face of this trend is to have greater size and scale.” Madigan explained that Tribune wanted to blend Times Mirror's journalistic prowess with its broad media reach and realize
synergies that would pay for the transaction: “A major portion of the value creation from this combination will be derived from faster revenue growth in our media businesses.” He predicted that by 2005, revenue growth combined with expense savings would generate an additional $225 million in cash flow. The combined company's Internet audience would total 34 million, bigger than the websites of the
New York Times
and
USA Today
combined.