Hedge funds seek to shake up board of the New York Times

By Stephen Foley
Tuesday 29 January 2008 01:00

Arthur Sulzberger, the publisher of The New York Times and the chairman of its family-controlled parent company, picked out one of the most irritating thorns in his side in October when, after a two-year campaign to shake up the company, a Morgan Stanley fund manager finally gave up and bailed out of the stock.

But the departure from the shareholder register of Hassan Elmasry provided only short-term relief from the pressures of Wall Street, because this week, Mr Sulzberger is contending with not one, but two new thorns.

A pair of hedge funds has amassed a 5 per cent stake and wants to impose a slate of new directors and a sharp new business strategy on the company, whose flagship newspaper is a beacon of the liberal media and bastion of serious, well-resourced journalism.

The trouble, according to Firebrand Partners and Harbinger Capital, is that the New York Times company has moved far too slowly to replace the revenue that is being lost as readership figures come under pressure and advertisers shift their spending from newspapers to the internet.

Diversify, or see the Times wither and die – that was the message delivered by Firebrand's founder, Scott Galloway, in a letter to Mr Sulzberger over the weekend. "We believe a renewed focus on the core assets and the redeployment of capital to expedite the acquisition of digital assets affords the greatest shareholder appreciation and creates the appropriate platform to compete in today's media landscape."

A falling share price and a failing business model will imperil The New York Times's historic journalistic mission, Mr Galloway warned. "Our nominees bring deep expertise in capital allocation, internet media and brand strategy."

The Ochs-Sulzberger family has controlled The New York Times for 112 years, since flotation in 1969 through a special class of shares that allows them to elect nine of the company's 13 directors. Firebrand and Harbinger are seeking to name nominees for the other four directors, which are elected by holders of the company's publicly traded shares.

Their candidates are Allen Morgan, managing director of venture capital firm Mayfield Fund, former AOL executive Gregory Shove, and James Kohlberg, son of the private equity pioneer Jerome Kohlberg. Firebrand's Mr Galloway, an associate professor at The Stern School of Business at New York University, was also nominated.

The nominations set up yet another stressful annual shareholder meeting for Mr Sulzberger in the spring. Last year, an infuriated Mr Elmasry orchestrated one of the year's biggest investor revolts, when 42 per cent of shareholders withheld support for the re-election of directors in protest at the Ochs-Sulzbergers' refusal to give up control of the company.

Mr Sulzberger has insisted that family control is vital as a bulwark against Wall Street's desire to put short-term share price performance ahead of investment in journalism. It is simply not possible to change the structure from without, as Mr Elmasry found, and the family has no intention of switching tack.

So this year's thorns were playing very nice yesterday on the question of family control. The plan to usurp four board seats was being offered in a "spirit of co-operation that moves beyond the old dichotomy of 'hostile' and 'friendly'", Mr Galloway cooed in his letter. We have no intention of challenging the family's stewardship, he said.

Make no mistake, though, the hedge funds' plans once again put The New York Times at the centre of a battle for the future of the newspaper industry. The company itself, particularly its internet-savvy chief executive, Janet Robinson, argues that it is investing heavily already in digital media – and that the investment is showing results.

NYTimes.com was the most visited newspaper website in December with 17.2 million unique visitors, nigh on double its nearest rival, according to Nielsen Online. Revenue from internet businesses comprised 10.6 per cent of The New York Times's revenue in its most recently reported quarterly results, up from 8.5 per cent a year earlier. However, even with robust growth at the About.com expert guides business, which the company bought for $410m three years ago, analysts are currently forecasting less than 8 per cent earnings growth this year, and that could be revised lower as recession fears mount.

The New York Times's ownership of a group of smaller, regional papers and a stake in the Boston Red Sox baseball team suddenly looks up for debate – and Harbinger and Firebrand hope to start that debate in the meeting with management that they requested over the weekend. If Mr Sulzberger proves as recalcitrant this year as he did on more fundamental questions last year, the shareholder meeting in April promises to be a fiery one.

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