How Sulzberger beat the hedge funds at their own game

Date: Wednesday, March 19, 2008
Author: Devin Leonard, CNN Money.com

The New York Times chairman may have neutralized his hedge fund critics by giving them board seats.

NEW YORK (Fortune) -- It seemed too easy. Two months ago, a pair of little-known hedge funds informed the New York Times that they were mounting a campaign to elect four directors to the company's board. Monday, the nation's most powerful newspaper publisher capitulated and agreed to support two of the insurgent nominees at its annual meeting next month.

How could the Times be so easily bought to its knees? The dissidents - Harbinger Capital Partners and Firebrand Partners - amassed a nearly 20% stake in the Times (NYT). The company's controlling shareholders, the Sulzberger/Ochs clan, couldn't brush off them off as they did a Morgan Stanley (MS, Fortune 500) fund manager who tried to shake things up at the company last year.

The hedge funds have declared victory. But perhaps they are being a little hasty. The truth is, Arthur Sulzberger Jr., the company's chairman, may have been the true winner for avoiding a bitter proxy war that might have raised questions about his leadership and damaged the Times.

The New York Times, after all, is no ordinary public company. Presidents quake before Times' op-ed columnists like Maureen Dowd. Wall Street isn't as easily cowed - not when the company's stock has fallen nearly 60% in the last five years. But even deep-pocketed hedge fund managers can't play too roughly with the Paper of Record.

Harbinger and Firebrand grasped this far better than Morgan Stanley. Hassan Elmasry, one of the investment bank's fund managers, tried to force the Sulzberger/Ochs family to do away with the company's sacrosanct two-tiered stock structure. It's easy to see why. The clan owns shares that have super-voting rights, making the Times impervious to hostile takeovers.

If the family lost that veto power, a Rupert Murdoch could swoop in and add the Times to his empire. That would have been great for Elmasry's fund. But it would have threatened the quality of the company's flagship paper.

Elmasry ended up looking like a stereotypical Wall Street barbarian interested in nothing but a quick buck. The Sulzbergers came across as principled guardians of journalistic independence by standing up to him.

The new dissidents didn't make the same mistake. They bought up shares like typical green-mailers. But publicly, Harbinger and Firebrand offered the Times nothing but olive branches. "I want to assure you that we are not pursing a change in the dual class shareholder structure," Firebrand Partners founder Scott Galloway wrote Times chairman Arthur Sulzberger Jr., on Jan. 27.

Sulzberger, however, demonstrated that he had also learned something from his tussle with Morgan Stanley. He beat back Elmasry, but looked as if he was turning a deaf ear to the fund manager's legitimate complaints about the company's poor financial performance. That didn't sit well with the investors. At last year's annual meeting, half of the non-family shareholders withheld their votes in protest.

Now Sulzberger is wisely casting himself as a conciliator. Instead of ignoring the hedge funds, he agreed to enlarge the company's 13-member board to make room for two of the candidates proposed by the hedge funds: Scott Galloway and James Kohlberg, co-founder of private equity firm Kohlberg & Company.

In doing so, the Times chairman may have may have effectively neutralized the dissidents - at least, for a while. The hedge funds can't complain that he is ignoring them, but they don't have enough votes to sway the board either.

Perhaps Harbinger and Firebrand might have done better if they had a chance to fight it out with the Times over board seats. That way, they might have rattled the company's controlling shareholders and forced them to sell some non-core assets like the company's stake in the Boston Red Sox to boost shareholder value. Now the hedge funds have to play nice - even with nearly 20% of the company's shares.

Oh, and about those shares. In the end, Harbinger and Firebrand want a sizable return on their investment. They are likely to discover there are no miracle cures for newspaper publishers. Isn't that what Times CEO Janet Robinson has been saying for a while? Well, nobody can say that Harbinger and Firebrand haven't been warned.