Out of the frying pan, into the soup?

Going private, like chicken soup, couldn’t hurt the Tribune Co., but restructuring won’t matter if the company can't solve the fundamental problems facing its newspaper and broadcast units.

Unlike chicken soup, whose palliative properties have been verified by medical science, private ownership, per se, isn't necessarily as soothing as a steaming bowl of matzo balls.

For it to work, a company has to have a solid plan to build its value by increasing profits through higher sales and tightly controlled expenses.

Tribune has formed a special committee of directors to assess strategic alternatives for maximizing shareholder value. Among the chief alternatives are: (a) auctioning off some or all of the company’s assets; (b) raising billions to buy the company’s stock from public investors so it can be run as a private company; (c) a combination of the above, or (d) something completely different.

The best thing about private ownership is that it lets managers make long-term, strategic business decisions without worrying about the blips in sales or profits that give fits to the public markets. This might give management room, for example, to cut profits for a predetermined period of time to invest in such new projects as specialty print publications or new-media initiatives.

Some analysts question whether Tribune really has the ability to go private at all, citing a formidable load of more than $4.6 billion in debt (its bonds Friday were downgraded to “junk” level) and general angst in the financial community as to the future value of newspaper and TV assets.

Even if Tribune were successful in going private, getting Wall Street off its back wouldn’t get the company off the hook.

When a company goes private, it essentially mortgages itself the way you lever up when you buy a house. But there’s a difference:

In addition to borrowing somewhere in the neighborhood of 75% of the money required to buy its outstanding stock from the public, a company taking itself private has to raise the other 25% of the purchase price in the form of equity contributed by one of the several large private funds that specialize in such transactions.

In so doing, the company trades the oversight of the public markets for the equal, if not greater, scrutiny of its lenders and private equity investors.

While the lenders are happy with the return of their funds plus interest, private equity investors only make money if the company eventually is sold for significantly more than its value when it was taken private. Investors ordinarily seek exit returns of greater than 25% within three to five years after acquiring a business.

The substantial gains targeted by equity investors can be produced only if managers can increase sales and profits at a brisker pace than most media companies have achieved in the last few years.

Media companies aiming to meet the goals of private equity investors will have to implement more effective solutions than they have to date to address eroding audience, decreasing ad market share, sluggish sales growth, rising costs and growing competition from digital media and, in the case of newspapers, lower-cost print alternatives.

Unless there's a plan to soup up Tribune when it flees the frying pan of the public markets, it likely will find itself in hot water under private ownership.

He works hard for his money

Next time you're inclined to cavil about the big bucks earned by CEOs, consider the plight of Dennis J. FitzSimons, who is making peanuts as he labors mightily to hold together the Tribune Co.

Reasonable men may differ as to whether the Chicago-based media giant ought to be held together, with certain of the company’s shareholders chief among them. But that’s what Dennis is trying to do.

And he’s getting bubkes for his efforts. While contending with mounting challenges on several fronts, Dennis is the second-worst paid CEO of any publicly held publishing company.

As illustrated in the table below, the Trib boss makes only 22 cents in annual compensation per $1,000 in sales, as compared with the $6.51-per-thousand collected by Gordon Paris, the soon-to-exit chief of the Chicago Tribune’s cross-town rival, the Sun-Times Media Group.

The only newspaper CEO pocketing less than Dennis is Donald E. Graham, the Washington Post scion, who makes a mere 11 cents per thousand in sales. Unlike Dennis, who owns nary a share of his company’s stock, Donnie has about $400 million of his company’s shares to console him.

This is the thanks Dennis gets for all he is doing? With a potentially pivotal board meeting coming up Thursday to decide his company’s fate, he must:

:: Mollify his second-largest bloc of shareholders, the Chandler family. The Times-Mirror heirs earlier this year publicly castigated Tribune’s management in a campaign to get a better deal on the taxes they might have to pay on $3.5 billion in investment partnerships they own jointly with Tribune Co.

:: Address rising pressure from long-time institutional shareholders to sell some or all of Tribune’s assets. “The fact that the value of the assets of Tribune significantly exceeds the current stock price is indisputable,” Charles Bobrinskoy of Ariel Capital told the Wall Street Journal. “We at Ariel have every confidence that the board will take those steps.”

:: Appease a new cadre of activist investors including Davidson Kempner Capital Management and Nelson Peltz. Mr. Peltz recently waged a successful proxy battle to gain two seats on the H.J. Heinz board, where he said “a little dysfunction” might be needed to get the company moving faster than its famous ketchup flows.

:: Batten down a revolt at his largest paper, the Los Angeles Times, where the publisher and editor are refusing to accede to further corporate-requested budget cuts. Their public protest and a supporting petition from a couple dozen L.A. power brokers caused Dennis to issue an extraordinary four-page letter defending Tribune’s stewardship of the paper.

In his spare time, Dennis is trying to rally a major media company, whose $5.6 billion in sales are flat, whose profits are skidding and whose stock price is barely 10% over its 52-week low.

“What’s not to like about the newspaper business?” observed Nick Shuman, an old colleague from Chicago. “It’s indoor work with no heavy lifting.”

In the case of Tribune’s CEO, Nick would be half right. It’s only indoor work.

Countdown to meltdown in Motown

The hubris that led to the humiliation of the American auto industry was painfully evident 30 years ago, when I took a brief spin on the beat for the Chicago Daily News.

Even at this late date, my Motor City adventure is worth revisiting, because the complacency and self-deception I witnessed then are alive and well today in other industries facing fundamental, disruptive change. Among those that come to mind are – you guessed it – the media business.

As you read this, kindly bear in mind that I visited Detroit just three years after the Organization of Petroleum Exporting Countries had throttled the world’s oil supply, creating frantic gas lines and introducing a taste of the pain we would come to feel when Shell-ing out $50 for a fill-up. Here goes:

To put the press in the mood to write about its new 1977 gas-guzzlers, one auto maker hired Benny Goodman to play at a banquet featuring a booze-rich reception, a seafood appetizer accompanied by a fine white wine, filet mignon accompanied by a fine red wine and baked Alaska accompanied by vintage cognac and fine cigars.

After dinner, a reporter could head for the hospitality suite, where a complimentary hot buffet and fully hosted bar succored the suckers at the marathon poker games.

Some of the reporters (not me) received first-class airline tickets from one or another of the car makers to travel to Detroit. A few enterprising souls downgraded to coach and pocketed the extra cash.

Several of the reporters (not me) scribbled their bylines on a few press releases and handed them, otherwise untouched, to a Teletype operator who wired them – “Collect, night press rate, Honey” – to the correspondent’s waiting paper.

With the gentlemen of the press sufficiently lubricated and sated, I saw my colleagues rise up angry only twice.

The first time was when the newsmen circulated an angry petition to protest the serving of fish, instead of red meat, at a luncheon hosted by one of the Big Three. The PR guy swore it wouldn’t happen again and was promptly forgiven.

The second time my colleagues erupted was when they hooted me down at a press conference for asking Henry Ford II why his company didn’t make safe and fuel-efficient cars. “We tried it once,” responded Hank the Deuce. “That stuff doesn’t sell.”

With that settled, we went to lunch. My colleagues, unfortunately, did not excuse me as readily as they forgave the flack who served them snapper. But they seemed genuinely happy that no halibut would be harmed in the making of our meal.

While everyone partied hearty in Detroit, Toyota, Datsun and Honda were busy, building tinny little clunkers they often upholstered in grotesque, psychedelic plaids. In the intervening years, as we know full well, the newcomers got smarter and more sophisticated. Now, Toyota, a leader in hybrid technology, is poised to overtake Ford as the second-largest seller of cars in the United States.

What went wrong?

:: The auto makers lost touch with their customers. For all the resources potentially available to research and develop new vehicles for the future, the companies were too smug to imagine the market for their products might change, much less recognize that it already was getting away from them. Too comfortable for their own good, they attempted, when challenged, to emulate their historical successes, instead of embracing the risks and potential rewards associated with innovation.

:: The auto makers competed with the wrong guys. Detroit was such an insular fraternity that executives benchmarked their efforts strictly against their peers across town, each matching the other and none daring to differ. As history soon proved, the American auto market was not a zero-sum game to be dominated by a threesome of self-selected players. While the Big Three cozily conducted business as usual, the initiative was seized by efficient, inventive and bold new competitors who weren’t in the club.

:: The auto makers stuck with a failing strategy for too long. Faced with growing competition, declining share and a marketplace they hadn't taken the pains to understand, Detroit fixated on optimizing a rapidly unraveling business model. The Big Three severed workers and closed plants to cut operating costs and offered ever-escalating incentives to reverse sagging sales. The problem is that their fleets are loaded with cars people don’t want to buy. Worse, Detroit doesn’t have many market-pleasing alternatives readily available in the pipeline. Still worse, they wouldn’t know how to build them efficiently.

For the most part, the auto industry’s woes were self-inflicted by decades of insular and unimaginative senior management. The problems are not the fault of the workers, the customers, the suppliers, OPEC or the competition. They result from management’s lack of vision, objectivity, originality and courage.

If everyone hadn’t been in such a rush to go to lunch 30 years ago, maybe Toyota wouldn’t be eating Ford’s sushi.

Sale! Sale! The gang’s all here

Given mainstream media’s sudden urge to spin off “non-strategic” assets, you might be tempted to conclude that divestiture is the better part of creating shareholder value.

Maybe it is. And maybe it isn’t. We won’t know for sure until we see how wisely the sellers spend the proceeds.

In but a few of the planned divestitures recently announced, the New York Times Co. is shedding its nine-station TV group; Time Inc. is selling 18 niche magazines; Dow Jones is shopping six Ottaway newspapers, and Disney and CBS respectively are dumping all or some of their radio holdings.

Coincidence? Not a chance.

The media giants, and others including Tribune Co., Lee Enterprises and Journal Register Co., are pruning their holdings to focus, as they say, on their core businesses.

That means the companies get to unload under-performing or difficult-to-manage assets while simultaneously raising a welcome bit of extra cash. In some cases, the companies noted that they are motivated by accumulated tax losses they want to use before they expire. Tax losses offset capital gains, enabling a seller to pocket more of the upside.

The success of these corporate restructurings will turn on how the proceeds are used after the lawyers and investment bankers take their cuts. If the companies invest in the Internet and mobile media to strengthen and defend their franchises, they likely will prove to have made wise strategic decisions. If the media companies do any less, the sell-a-thon may prove to be a fruitless exercise.

Based on the answers to the following questions, you can, in the fullness of time, evaluate the outcome for yourself:

:: Will cash from a divestiture be used to reduce debt and trim borrowing costs?

Owing to historically high profitability and strong, predictable cash flows, most media companies borrow a lot of money to finance acquisitions and build new plant.

With weak advertising sales and higher operating costs cutting into the earnings of the media companies, their continuing ability to repay those loans has been drawing increasing concern from the financial community. When that happens, corporate credit ratings fall and interest costs rise.

If a company repays enough debt, it may qualify for lower interest rates. All things being equal, this should improve earnings and potentially shore up the stock price. But lower interest rates, while desirable, do little to advance anyone’s new-media strategy.

:: Will spin-off proceeds be used to buy back shares in hopes of lifting sagging stock prices?

Confronted with weakening stock prices for the reasons discussed immediately above, several media companies have been avidly buying their own stock in what appears to be a puzzling effort to make their shares seem scarcer.

As covered in Econ 101, scarcity classically increases prices, assuming demand remains at least constant. Unfortuantely, demand for media shares has been so weak lately that stock repurchases, though often applauded by disenchanted institutional investors eager to dump wilted holdings, seldom buoy a stock very meaningfully for very long.

A company that plows the proceeds of a divestiture into buying its own shares is not making any strategic headway. Or much sense.

:: Will money be spent on a special dividend to mollify shareholders?

When management is faced with a significant bloc of restive shareholders, it sometimes attempts to cheer them with a wad of cash in the form of a special dividend. Although none of the above companies to date has discussed this alternative, each would be well advised to avoid this strategically abysmal idea.

* * *

While acknowledging the anxiety suffered by the thousands of employees who suddenly have found their jobs and lives in play, it must be noted that it is perfectly legitimate for a company from time to time to assess the strengths and relative value of its business units.

If the divestitures reflect a rigorous and thoughtful strategy, then management may be congratulated for making the requisite tough calls. If we are witnessing nothing more than a series of cynical tweaks, the misdeeds, if any, will be manifest.

PhotoShop history

The line between news and entertainment has blurred so thoroughly that we may never again be able tell truth from fiction, faction or friction.

The latest example of PhotoShop history is ABC’s controversial “The Path to 9/11,” which is airing – or erring? – on the most depressing date in the modern calendar.

Though the mini-series purports to be a dramatization of the real-life events leading to the tragedy, the program is unclear about which events are true, which compress reality into dramatic constructs and which elements are entirely fabricated. The result mangles both history and the network’s credibility.

In a key scene reportedly toned down at the eleventh hour after vigorous protests from alumni of the Clinton administration, a proactive strike on Osama bin-Laden’s Afghan redoubt in 1998 was nixed at the threshold of success by the powers that be in D.C.

The show portrays Sandy Berger, the White House national security adviser, as the guy who called off the mission. In a 15-minute special edition of Nightline following the program on Sunday, however, Richard Clarke, the White House anti-terror czar at the time, blamed CIA Director George Tenet for scrubbing it.

What really happened? Who said what to whom? Or, did it happen at all? I still can’t tell.

This isn’t the only place ABC couldn’t get its story straight.

The web page at ABC.Com promoting the show includes a video entitled “Keeping It Honest,” in which director David L. Cunningham and some of the cast members talk about their efforts “to capture life in an honest way” in the production.

Over at ABC News, the network news department posted a squirrelly summary of the controversy over the show, shrugging off the many questions raised and unanswered by it.

“What was fact and what was fiction?” asked ABC News, without endeavoring to find the answers. “Tonight the miniseries focuses on the Bush administration and its failures – whether fact or fiction, or a little bit of both.”

The cavalier disrespect for truth in a case as sensitive as this portends frightening consequences for our democracy.

Growing cynicism and suspicion are eroding confidence in the institutions and values that, whatever their flaws, have made the United States a generally pleasant and respectable place to live.

If this continues, the terrorists will succeed beyond their evilest dreams.