Friday, April 13, 2007

Smoke signals

Some thoughtful commentators (here and here) have asked what would possess guys like Mark Potts and me to speculate that growing investor pressures may – repeat, may – force structural changes at the New York Times Co.

That’s a good question. And the answer, which Mark penned more succinctly than I, is this: “Where there’s smoke, there’s fire.”

The effort to force the NYT Co. to give its public stockholders more control over the company was launched publicly a year ago by the manager of a major Morgan Stanley investment fund. Hassan Elmasry, managing director of Morgan Stanley Investment Management Ltd., rounded up the votes of 30% of the company’s shareholders to oppose the slate of directors proposed by the controlling Ochs-Sulzberger family. He is reprising the effort this year.

Now, why would Mr. Elmasry do that?

With literally a world of investment alternatives available to him, why would a sophisticated fund manager bother to pick a public fight with one of his portfolio companies – especially when it would be far easier to quietly sell the shares and deploy the assets more effectively someplace else? And why would he pick a fight with a family who until earlier this year had left $675 million in assets in his firm’s care?

Although NYT stock has fallen by 5% to $24.10 in the year since Mr. Elmasry launched the vote boycott, he could have sold his shares within the last 60 days for as much as $26.90. If he has kept his shares (public records are not sufficiently up to date to confirm whether he did), why would he be doing so? If Mr. Elmasry were inclined to divest his holdings, why would be conducting a high-profile campaign criticizing the management and board structure of the company?

With the family controlling 9 of the company’s 13 board seats and the newspaper M&A market depressed, it must be clear to Mr. Elmasry that NYT is not likely to be forced to the auction block in the way that Tribune Co. and Knight Ridder were. Why would he continue hanging on to the shares?

When Mr. Elmasry launched his campaign a year ago, his fund owned approximately 5% of the company’s outstanding stock. As of Dec. 31, his firm held 7% of its shares. Why did he accumulate more shares?

If you presume Mr. Elmasry and his firm are rational investors, which I do, then you can’t help but conclude, as I do, that they have a carefully conceived strategy to shake things up at NYT Co.

I don’t profess to know whether or how it might happen. But I smell smoke.