The Deal from Hell (32 page)

Baquet had settled in as editor of the
Times
, and we had joined forces in an effort to deal with some of the legitimate issues that Kern raised. We all understood we could save the company money with commonsense steps like collaborating to limit the number of people each paper sent to cover a story. But we also knew that cooperation had its limits and, despite what Kern thought, could compromise the quality of our news reports. Our main goal was to limit the centralization of news coverage championed by Kern and others at Tribune Publishing. We didn't want to hurt smaller papers with foreign and national news staffs like
Newsday
and the
Baltimore Sun
. But this was every newspaper for itself, and Baquet and I came up with a plan to cut the foreign and national staff 20 percent by phasing out numerous foreign and national bureaus at the smaller papers, forcing them to rely on the
Los Angeles Times
and
Chicago Tribune
for coverage. This was not fun, but all Tribune papers faced enormous challenges as revenue started to dry up and the company's stock price sunk. We understood that the mission at hand was to maintain the integrity of our newspapers.

In Los Angeles, Baquet was sitting on a powder keg. He was a charismatic man who was popular with his staff, but there was a lingering sourness over how Carroll had been forced out of the organization, despite his claim, upon stepping down, that he was doing so to spend more time with his family.
Times
employees had had it, and in a survey conducted by an outside research firm, they let the
Times
editors know just how disheartened they were. Although the
Los Angeles Times
newsroom viewed itself as the lone voice of journalistic dissent, the Tribune Company policies also angered
Chicago Tribune
journalists, but the anger was not as public as in Los Angeles, where Kevin Roderick, a former
Los Angeles Times
reporter who had started the blog
LA Observed
, had a pipeline into the newsroom.

In the fall of 2005, for the first time in decades, I had to lay off a handful of employees at the
Tribune.
I started losing highly regarded reporters, like Jeff Zeleny, a brilliant young political writer whom I had hired from the
Des Moines Register
who left for the
New York Times
, and Jan Crawford, for my money the nation's best legal affairs reporter, who went to a national network television job. Baquet and I fought cuts and knew that keeping star reporters would be much harder without a robust foreign and national news staff. But the problems that we faced paled in comparison to the bad news that started to engulf FitzSimons.

The first dose came courtesy of the due diligence in the Times Mirror deal led by Hiller and Tribune's general counsel, Crane Kenney. The proxy on the deal suggests it had lasted only two days. As noted earlier, Times Mirror had sold the Matthew Bender & Company, a legal publishing subsidiary, and health science publisher Mosby, Inc., for more than $2 billion. Times Mirror had structured the convoluted sale as a tax-free deal that allowed the company, then controlled by the Chandlers, to avoid federal income taxes. But the IRS had challenged Times Mirror's handiwork, and Tribune inherited the dispute when it bought the company. Tribune knew what it was getting into and could have paid the tax and applied for a refund, thereby avoiding the IRS' substantial interest and penalties. Unterman said he told Tribune Company that that was the strategy that Times Mirror had planned to follow. But given the optimistic revenue projections that underpinned the deal, Tribune considered the Bender case an acceptable risk. Bad bet. In September 2005, the Tax Court ruled that Tribune owed the government
$1 billion
in unpaid taxes, interest, and penalties. Chagrined, FitzSimons said the company would pay the $1 billion and appeal. Wall Street pounded Tribune's already depressed stock price. (Eventually the case was settled with Tribune paying about $650 million in taxes and penalties.) But the Bender case was just the start.

At first, relations between the Chandlers and the management in Chicago had seemed cordial. Soon after Tribune purchased Times Mirror, three Chandlers and Unterman took seats on the Tribune
board. However, about a year after the deal was closed, Madigan kicked Unterman off the board because Tribune needed more people with CEO pedigrees. From day one, Unterman, a Jewish Democrat, thought the Tribune board, which was packed with Madigan's friends, was insular and suspicious of anyone who wasn't white, Irish, Catholic, and Republican. It soon became clear that Tribune board members were determined to keep control of the company in Chicago at all costs. Unterman warned Madigan that he might one day need someone on the board that had a good relationship with the Chandlers. But Unterman said Madigan ignored the advice.

The Chandlers became concerned with the slide in newspaper stock prices in mid-2005. To diversify the family's investment in Tribune, the Chandlers wanted to carefully unwind two trusts that had been established earlier to increase their dividends and avoid taxes. They had a lot riding on the timing of the transaction and the financial valuations that would be placed on the assets in the trusts, which included real estate headquarters for most of the Times Mirror papers and some Tribune preferred and common stock.

The Chandlers' negotiations with Tribune about how their trusts could be skillfully handled involved a range of proposals. But they soon found themselves locked in a disagreement with FitzSimons that turned bitter. FitzSimons said the Chandlers wanted to place valuations on the assets in the trusts and time their dissolutions in a way that would minimize the family's taxes at the expense of Tribune shareholders. Smarting from the $1 billion welt the company had suffered in the Bender tax case, the non-Chandler Tribune board members said no way.

The dispute came to a head in May 2006 when FitzSimons and the Tribune board authorized a “leveraged recapitalization” or “Dutch auction” in which the company would buy back up to 25 percent of its stock from shareholders for up to $32.50 a share. Managers typically engineer buybacks to goose a company's reported earnings by retiring stock so profits can be spread across fewer shares. It is a tactic largely viewed as an alternative for weak managers
who, in the words of one Tribune executive, “are not looking out for our tomorrow.”

But the move infuriated the Chandlers, who thought the recapitalization was a bad idea and a move that would jeopardize the value of the assets in their trusts. “It was like giving the Chandlers the finger,” Unterman said. So the Chandlers trotted out the family lawyer, William Stinehart, who publicly filed a blistering eleven-page critique of the company, its management, its board, and its lack of strategy that, in effect, put the company up for sale. “It's the beginning of the end game,” Edward Atorino, a stock analyst at the Benchmark Company, told reporters.

In the spring of 2006,
Newsday
hit the news again when Sito, Brennan, Czack, Smith, Garcia, and four others pleaded guilty in the U.S. District Court to a range of fraudulent circulation practices. Judge Weinstein didn't sentence anyone, though, because they had begun cooperating with Banar's investigation as she continued to scrutinize the upper reaches of the company, particularly after the judge raised questions about how such a substantial fraud could take place without the knowledge and culpability of higher authorities at Tribune.

Even journalists accustomed to a heavy diet of news had a hard time digesting the developments at Tribune Company and keeping their focus on their jobs. In August, Kern convened a meeting with Baquet, myself, Earl Maucker, the editor of the Tribune-owned
Sun Sentinel
in Fort Lauderdale, and a couple of others to discuss—you guessed it—“working together.” Kern held the meeting at Maucker's paper in Fort Lauderdale.

A native of Alton, Illinois, Maucker, the
Sun Sentinel
's longtime editor, was a go-along kind of man who lived in a huge, gorgeous house. He took us to dinner in his yacht,
The Final Edition
, which docked at a pier in his backyard. The paper he ran did some excellent investigative reporting, but Maucker bought FitzSimons' line of mixing marketing and local news with a heavy emphasis on parochial stories. After dinner, we cruised the canals around Fort Lauderdale, smoked cigars, and had drinks on a delightfully pleasant night. We were there to discuss
foreign and national news collaboration (otherwise known as budget cuts), but most of the discussion revolved around the turmoil engulfing Tribune, as we swapped rumors about who in the upper reaches of Tribune would survive and who wouldn't.

Baquet and I had arrived early to have dinner in Miami the night before and to talk strategy to ward off the centralization that Kern was championing with the support of Scott Smith, who had succeeded Fuller as head of the publishing group. “If I tell Scott that I won't make any more cuts, do you think he will fire me?” Baquet asked. (Smith's philosophy was to push managers until they reached their limits.) “No,” I reassured him. “He will just keep pressing you to agree to cuts and will quit when he thinks he got as much as he can get.”

Later I asked Baquet if he had indeed resisted Smith's pressure for more cuts when he had returned to Los Angeles. “I did,” he replied. “I felt pretty good about it, although I don't think Scott did. I told him I wasn't going to cut anymore. I then got up, walked over to him, shook his hand, and said, ‘You have to do what you have to do, and I have to do what I have to do.' I then walked away and he just kind of sat there and slumped in his chair.”

Meanwhile, FitzSimons discovered that his problems weren't limited to the breakdown in the talks with the Chandlers. In the midst of his fight with the family, he learned he had prostate cancer and had to check into a hospital to deal with his health. Once FitzSimons had recovered from his surgery, private talks with the Chandlers resumed as the family started proposing scenarios in which the company would either be broken up in tax-free spinoffs or sold at a premium at a time when buyers of newspapers were about as plentiful as Dead Sea Scrolls. The Tribune had said it would find another $200 million in budget cuts to help repay the $2 billion it had borrowed to buy back stock, and Smith started seeking plans to implement the cuts when another bomb dropped.

The headline in the
New York Times
of September 15, 2006, said it all: “
Los Angeles Times
Editor Openly Defies Owner's Call for Job Cuts.” The day before, Baquet had gone public with his opposition to
more budget cuts in a
Los Angeles Times
story, and his publisher, Jeff Johnson, had backed him up. “Newspapers,” Johnson said in a quote that infuriated Smith and FitzSimons,“can't cut their way to the future.” Gambling that the Tribune Company wouldn't fire him, Baquet reiterated that he was not opposed to cuts. “But you can go too far,” he said, “and I don't plan to do that.” The simmering tensions between Tribune and its largest paper had reached a tipping point. I called Baquet to voice support but also to warn him that taking the controversy public placed him in uncharted waters. Smith and FitzSimons summoned Johnson to Chicago, berated him for his comments, and offered him an opportunity to back down. Johnson declined the offer and headed back to Los Angeles. He had, in the words of the
Times
columnist Steve Lopez, “drunk Baquet's Kool-Aid.”

A week later as the Tribune board met to hear about FitzSimons' compromise plan to deal with the Chandlers, the
New York Times
ran a September 21, 2006, story entitled: “At
Los Angeles Times
, a Civil Executive Rebellion.” With that headline, the
Los Angeles Times
newspaper and boardroom became a national stage in a fight between editors and owners of newspapers: “Would Mr. FitzSimons fire Mr. Johnson and Mr. Baquet and risk a full-scale revolt at Tribune's largest property?” the
Times
story asked. “Or will he try to smooth things over and thereby risk undermining his authority with other Tribune editors and publishers?” The fight was on.

A group of twenty Los Angeles civic leaders had written a letter to the Tribune voicing concerns about budget cuts and calling on the beleaguered company to invest more money in the paper or sell it to someone who would. Baquet clearly wanted to rally support for the paper during a time of intense pressures, not only in Los Angeles but across the country. The
Washington Post
, the
New York Times
, papers in Dallas and Akron, Ohio, all had announced layoffs and buyouts as they struggled with the demands of Wall Street investors and the changing habits of readers and advertisers on Main Street. As prospective buyers like Broad and Geffen circled the
Times
, the newsroom circulated petitions voicing solid support for Baquet. Most of the editorial department
signed them. The staff commissioned Baquet T-shirts, and rumors emerged of a “suicide pact” between Baquet's top three aides, managing editor Doug Frantz, features editor John Montorio, and managing editor for readership and production Leo Wolinsky, all of whom had reputedly agreed to resign if Baquet were replaced.