The Deal from Hell (40 page)

Because California voters tend to pass initiatives that inhibit local government, community leaders like Greg Devereaux, the city manager of Ontario, told me that towns like his needed enhanced coverage from Sacramento and Washington and that they didn't “expect the
Times
to cover our local school board.” I soon began thinking of a twofold metro strategy that was similar to Puerner's idea: Build a better local presence by beefing up and showcasing new bureaus strategically located throughout the region, and capitalize on the paper's ability to cover the big issues of the day through its seasoned journalists at national and international bureaus, particularly our correspondents in Sacramento, the state capitol.

But Puerner was Carroll's publisher; Hiller was mine and he didn't agree with me or Puerner. David Murphy, a
Chicago Tribune
advertising man dispatched to Los Angeles to revive the paper's sagging ad revenues, had Hiller's ear. He told him advertisers didn't like the weighty content in the
Times
. “The dogs don't like the dog food,” he would often say. Murphy and others argued for zoned local sections with news tailored to specific towns, an expensive editorial proposition that would
force me to divert resources to attempt something that was impossible—beating the locals at their own game. It was a strategy designed for advertisers, not readers, and one championed by FitzSimons. Some editors, particularly those allied with
www.latimes.com
, agreed with Murphy's local zoning initiatives, which also included more “innovative” ad positions in the pages of the paper. But others told me the
Times
had tried zoning and it hadn't worked. As I gave Hiller a ride back from the Inland Empire, he told me that the company's lackluster revenues were jeopardizing the Zell deal. Just before we reached downtown Los Angeles, he mentioned he'd all but decided to help resolve the problem by adopting some innovative ad positions, including one on page one of the newspaper.

I knew my reaction angered Hiller; his face got red and he grew silent when I told him that I not only opposed ads on page one, but that I didn't know if I wanted to be the editor who put them there. Over the ensuing weeks, I discussed front-page ads often, not only with Hiller but also with William Pate and Nils Larsen, Zell's top lieutenants who had responded positively to my invitation to come to the
Los Angeles Times
to learn about the biggest paper in the company.

Once his anger eased, Hiller actually tried to understand my thinking. I did—and still do—oppose ads on the front page of the newspaper. I told Hiller that every newspaper should have one page dedicated solely to the news and that it should be the front page, the place where knowledgeable, skilled editors steeped in the news select the most important, significant, and relevant news of the day for readers. An honest page one crafted by professionals would house news of death, sacrifice, heroics, and knotty decisions about complex policy decisions. At times, editors could punctuate the drama with lighter fare, something that was sheer fun to read. But commercial messages urging a reader to buy a Toyota Prius or a Prada purse had no place in that space; ads would rob the page of integrity, cheapen it, and chip away at its authority. To my mind, the dispute was about the values of the paper. About who we were, not about money.

Moreover, I told Hiller, Pate, and Larsen that front-page ads could endanger the paper's perceived value as an advertising medium. As an avid newspaper consumer, I knew Tiffany often ran its small ads on page two of the
New York Times
, the
Chicago Tribune
, and the
Los Angeles Times
, and I expected to see them there. I couldn't—and still don't—remember who advertises on page one of the
Wall Street Journal
. I pick up page one to get the news, not to see where I can get a good deal on a car. What will happen, I asked, if an advertiser buys an ad on page one of the
Los Angeles Times
and fails to get a good response because of readers like me? As I saw it, advertisers would be scratching their heads over why they bothered to purchase ad space on any page of the paper if they didn't receive the response they were after from the almighty page one.

I think I was more adamantly opposed to page one ads than my staff. As scuttlebutt about my disagreement with the publisher swept through the newsroom, some reporters and editors told me they sympathized with me but understood if I had to acquiesce. But I wasn't budging on this one. I told Hiller that he was the publisher and that, if he wanted to run ads on page one, that was his decision. But, I also told him, as the paper's editor, I felt an obligation to oppose him and, if questioned about the change in policy, to be publicly critical if he decided to diminish the front page of a paper I edited. I later learned that Hiller had decided against the ads, but FitzSimons forced his hand. When he announced his decision, I was publicly critical. I thought my comments were mild, but editors urged me to tone them down lest I come off as insubordinate. In the end, I merely said I disagreed with the decision and that I didn't think ads had a place on page one. The story announcing Hiller's decision, in which my opinion was stated, ran on the inside pages of the business section and prompted a sharp rebuke from FitzSimons, who said my comments “made a fool of [the] publisher.” Hiller probably agreed, and, although he never said so, I think it marked a turning point in our relationship. In retrospect, I should not have criticized him publicly. It was unfair of me to do so.

Even after we started putting ads on the front page, Hiller, Murphy, and I continued to joust over timing and taste, but the controversy regarding my relations with them paled in comparison to the turmoil in the financial markets after the first phase of the deal had closed. I had naïvely thought things would start to improve once the deal was in place. On their visit, Pate and Larsen spent a day at the
Times
and impressed the staff with their positive comments about the paper. They echoed Zell's remarks that we couldn't cut our way to prosperity and showed far more sophisticated understanding of newsroom dynamics than did FitzSimons. At a dinner the night before I escorted them into the newsroom, when I mentioned FitzSimons' anger at my comments about passing out bonuses while I was cutting staff, Pate responded, “What did he expect you to say? You're an editor.” But things didn't get better after phase one—they got worse.

One thing overshadowed all else as the company lumbered toward the close of phase two. The debt burden that Zell had piled on Tribune further dimmed the company's lights on Wall Street. The loans gave Zell the money he needed to buy half of the company's stock at $34 per share, but shareholders who couldn't sell all of their stock in the phase one tender offer soon saw the price drop as analysts and traders speculated that added debt and Tribune Company's failure to hit its financial targets would sink the company before Zell could close phase two. The Chandlers didn't help things. In phase one the family had sold close to 28 million shares of Tribune for nearly $1 billion. Once the first phase closed, the three Chandler directors promptly resigned from the Tribune board and sold the family's remaining 20 million shares for $31.19 each (about $625 million) in one huge sale to Goldman Sachs. Goldman quickly resold the shares to other investors for $31.50 each, which was $6.2 million more than Goldman had paid for the stock. The Chandler sale put downward pressure on Tribune stock that the company had not yet reacquired. Investors speculated that the Chandlers would have waited a few months to get
$34 a share if they'd had any faith in the success of the Zell deal. Their sale to Goldman made prospective investors assume that there was something amiss.

Jill Greenthal, a Blackstone Group banker advising the McCormick Trust, noted: “From what I heard, Goldman was way oversubscribed on the Chandler block. The stock has pretty consistently traded over $32 a share, so the arbs [short for arbitrage, a class of trader that tries to make big money on small price movements] all thought getting a chance to buy at $31.50 [from Goldman] was a way to make sure money. . . . Interesting logic . . . will be interesting [to see what happens when] they all try to capture [or profit from] the spread [by selling the stock]. . . . The fun never stops.” Stinehart said the stewards of the family wealth had an absolute duty to dump the stock: “A quarter of the [Chandler Trust's] net worth was in this stock, and they had suspended paying dividends for six months.”

Zell dismissed speculation that the deal wouldn't close as “shit happens.” When the first phase closed, he recalled, “I thought the chances of getting the second stage closed were pretty high. As the months [passed], my belief in it materially decreased. One week the stock was trading at 27, the next week someone was taking 34. I tried to get everyone to listen to me [telling investors he intended to close phase two at $34 per share]. It was indicative of where the markets were at the time; panic was in the air.” A report from Lehman Brothers, a firm whose bone-headed decisions would plunge it into bankruptcy just twelve months hence, speculated that Tribune stock would fall to anywhere from $3 to $10 per share if phase two of the deal didn't close. Other analysts started bad-mouthing the deal, too.

Although Zell and his lieutenants publicly voiced confidence in the transaction, they scrambled behind the scenes as the panic-induced pressure intensified and everyone looked for ways to keep the banks from pulling back on their commitment to fund phase two of the deal. Hiller asked that I squeeze expenses and stop filling open jobs to help lower the budget. Although I complied, I began to worry that we were reverting to the Tribune's ironclad controls where accountants, not
editors, made crucial decisions on newsroom resources. But Chris Avetisian, an accountant on the business side, pleaded, “Just do this for me so we can get this deal closed and get these assholes in Chicago off our backs.”

But the real problem wasn't in Chicago; it was in New York, on Wall Street, where speculation about Tribune's fate soon bit the hand of the investment banks that fed it. Although no one knew it at the time, the Tribune deal was a bellwether for the financial market meltdown that would bring the entire global economy to its knees in months. The same kind of greed, ego, and hubris that generated reckless lending and fat fees for bankers in the subprime market mess powered Zell's acquisition of Tribune. Davan Maharaj, a journalist I had promoted to business editor of the
Los Angeles Times
, started warning me in the summer of 2007 that a disaster loomed in the subprime mortgage market. Banks had made billions of dollars in mortgage loans to dubious borrowers, collected their loan origination fees, and promptly sold the loans to other investors so they didn't have to worry about getting their money back—a process called “syndication.” In other words, repayment of the loan was now someone else's problem.

Tribune Company was hardly in a class with some schoolteacher in Temecula who had borrowed $1 million to buy an Inland Empire dream castle. FitzSimons had failed to hit the financial projections the company had made earlier in the year, and soft ad markets at papers where the real estate bubble was starting to burst (in California and Florida) knocked the company's 2007 operating profit off 40 percent. And the company wasn't generating the huge cash flows that it had racked up a few years earlier. But Tribune was still quite profitable; it earned $634 million in profit off revenues of just over $5 billion in 2007, a margin of 12.5 percent, hardly the kind of results that justified the doomsday forecasts on Wall Street.

Nevertheless, Tribune Company and FitzSimons faced a thorny problem: They needed more cash to generate the payments the company would have to make, not only on the $7 billion debt that Zell had just piled on Tribune's books, but also on the $4 billion to
$5 billion debt he intended to take on to fund phase two of the deal. The banks had an even bigger problem.

When JPMorgan Chase tried to syndicate the loans and resell them to big institutional investors like pension and mutual funds, it encountered resistance. Short sellers who profited when stock prices fell and analysts like Craig Huber of Lehman Brothers whose reports on Tribune were particularly negative bred pessimism about the Zell deal. In effect, the market started treating Tribune like the schoolteacher in Temecula: While the schoolteacher might be able to get a $1 million mortgage loan, there was no way he could repay it on a teacher's salary. One brokerage firm analysis suggested Tribune was more likely to default on its bonds than was Ford Motor Company, which had just reported a $12.6 billion loss. Banks soon became increasingly reluctant to extend loans in the second half of 2007—not just to Tribune but to all types of borrowers.

At JPMorgan Chase, no one was singing “ka-ching.” When the bank initially started syndicating the Tribune loans, traders in the secondary syndication markets had priced them at their face value. In other words, big institutional investors would pay $1 billion for $1 billion worth of Tribune debt so they could collect the interest (just under 8 percent at the time) the company was paying on the deal. But the uneasiness of the markets had changed things, and by July 2007, Peter Cohen told his boss, the bank's chairman Jamie Dimon, that the syndication efforts had garnered only $3 billion worth of orders on $7.1 billion in loans.