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Pinch Gets Punched

By Thomas Lifson

Arthur Ochs "Pinch" Sulzberger, Jr., the scion of a family dynasty founded by his great grandfather, is well into the process of destroying the patrimony handed to him on a silver platter. Even worse, the whole world is starting to notice, something which will make other family members distinctly unhappy. And because the family controls the election of a majority of the board of directors of the New York Times Company, despite owning a tiny fraction of the actual equity (thanks to a two class system of shares), this unhappiness could affect Pinch's tenure in office.

No less an authority on corporate governance than Arianna Huffington, whose credentials are impeccable in matters of marriage, family fortunes, inheritance, and society soirees, noted on her eponymous website:

I hear the Sulzberger clan is also getting an earful from friends on the dinner party circuit from New York to Paris

Wall Street is Not Pleased

Quite a bit of ink, and billions of pixels have been expended over the open challenge launched against Pinch's reign or error by the company's fourth largest investor, Morgan Stanley Investment Management. At the company's annual meeting Tuesday, holders of 28% of the company's equity voted against the management slate of directors, effectively saying in public that they want to dump Pinch and his cronies, as would happen in almost any publicly-held company performing as dismally as the Times.

There is delicious irony aplenty in the spectacle of a self-righteous lefty like Pinch, whose editorial page imperiously advises other companies on the fairness and morality of their corporate governance, clinging to power on the basis of a stock ownership scheme which disenfranchises the owners of the vast majority of equity, allowing them to elect only 30% of the board of directors. But as securities law professor and blogger Steven Bainbridge authoritatively points out:

Morgan Stanley bought Class A shares in the Times knowing that the Sulzbergers were in charge and would remain so by virtue of the dual class stock structure. Morgan Stanley knew or should have known that dual class stock presents a serious agency cost problem because incumbents who cannot be voted out of office are almost impossible to discipline. Morgan Stanley accepted whatever trade-offs the deal entailed as appropriate compensation for that risk.

He's absolutely correct that no legal case can be successfully waged against the dual class shareholder arrangement. Moreover, The American Thinker has been warning shareholders in the New York Times Company for at least two years that Pinch Sulzberger's management team has been dissipating the company's formidable assets, and driving the company in the wrong direction. Smart investors like Morgan Stanley and other institutions and individuals should have noticed that the company doubled-down on newsprint operations through the expensive purchase of properties like the Boston Globe in negative growth New England, just as the internet was eating away at the newspaper industry, that the company has held onto local television stations as the market values have declined in the face of cable and internet competition, and that the company paid lavishly for its first acquisition in the internet industry.

And if any of the MBAs on Wall Street took the time to tease the underlying data out of the company's 10-K reports (as Jack Risko and I did), where it was carefully buried, they would find that the core cash cow business, the metropolitan print edition of the New York Times, has been in a steep decline, milked to support the national edition's growth, which has leveled off and not achieved profitability anything like the declining metro edition.

Given the impossibility of a Class A shareholder revolt actually ousting Pinch and his family-elected directors, either through elections or the courts, why did Morgan Stanley publicly stand against the management slate, even leaking word of its vote in advance?

The answer lies in the company's balance sheet. The New York Times Company has been taking on debt to finance itself. In 2001, the company's debt-to-equity ratio was 1 part debt to 1.51 parts equity. By 2005, the ratio was close to 1 to 1 (1.08, to be exact). The company is still generating cash from operations, but it must also invest considerable sums, and so depends on the financial markets to sell commercial paper and other debt instruments.

Pinch's Palace

Most notably, the company is in the process of developing a lavish new headquarters building in New York City (taking advantage, by the way, of public money incentives aimed at helping to rebuild New York in the wake of 9/11). The project is currently expected to cost over a billion dollars, though the company shares this cost with its developer-partner.

But the New York Times Company (and its shareholders) will still need to come up with almost 400 million dollars more to complete the Taj Mahal it is erecting as Pinch's monument to himself. That's quite a palace for company whose shares are down 40-some percent in the last year, and whose assets are deployed mostly in declining businesses like newspapers and broadcast television stations.

As the company's 10-K blandly notes:

We have funded, and will continue to fund, our share of capital contributions from cash from operations and external financing sources.

Those external financing sources are now officially on notice from Morgan Stanley and several other major institutions that management is not, in their opinion, to be entrusted with the stewardship of the company's assets.

And also on notice are members of the extended Sulzberger clan. If the company needs to cut its dividend to throw "cash from operations" into Pinch's palace because "external financing sources" won't throw in their bucks at an acceptable price, then some of those Class B shareholders might become very unhappy campers.

The next family reunion of the Sulzbergers ought to be interesting.

Thomas Lifson is the editor and publisher of American Thinker.

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