Did the New York Times leave money on the table?

November 6, 2013

The New York Times Co.’s purchase of the Boston Globe for more than $1 billion 20 years ago has turned out to be among the worst single newspaper acquisitions in history. But guess what? It’s even worse than it looks.

How is that possible? Because the company not only made a disastrous, overpriced purchase but also used a tax structure that assumed that it would own the Globe forever. As a result, the Times, which unloaded the Globe for a pittance last month, is missing out on a tax break that would have been worth almost as much as the “approximately $70 million” that Boston Red Sox owner John Henry paid it for the Globe and its other financially disastrous Massachusetts purchase, the Worcester Telegram & Gazette.

It’s really kind of funny. Unless you’re a Times shareholder, in which case it’s no laughing matter.

If you’re not a tax techie, you probably don’t know anything about the money the Times left on the table. That’s because the situation is complicated, and understanding it requires you to look at transactions that took place in three different decades.

Let me show you what’s going on. Back in 1993, when newspapers were still desirable properties, the Times bought the Globe’s parent company, Affiliated Publications, for $1.028 billion, paying $160 million in cash and $868 million in Times stock.

Had the Times done the deal by using a corporate structure that goes by the marvelous name of “horizontal double dummy,” it would have been able to add the $160 million cash portion of the price to its “tax basis” in the Globe: the value it placed on the Globe for tax purposes. But for reasons that aren’t clear — the company declined comment — it used a different technique. As a result, its tax basis in the Globe was the same as Affiliated Publications’ basis rather than being $160 million greater.

In 2000, the Times bought the Worcester paper for $296 million of cash, and combined it with the Globe to form the New England Media Group.

Enter the newspaper business’s existential crisis. Starting in 2006, the Times wrote down the value of the Globe-Worcester operation five separate times by a total of about $1.04 billion, or about 80 percent of what it paid for the papers.

These write downs — totaling about $900 million after taxes — have run through the company’s profit and loss statement, reducing its reported income and its stated net worth. But the company confirmed to me that none of these write downs have been run through its income tax returns.

When it files its 2013 corporate tax return, the Times will presumably recognize a loss on the sale of the New England Media Group. But the loss will be $160 million less than it would have been had it used the double dummy in 1993. A bigger loss for tax purposes wouldn’t make any difference to the company’s reported profits, but it would make a whopping difference in its dealings with the Internal Revenue Service.

At a 35 percent federal corporate tax rate, the Times will pay the IRS $56 million more in taxes than if it had used the double dummy. Throw in state, and possibly local, income taxes, and the cost is north of $60 million. Not all that far from the $70 million or so that John Henry paid for the Globe and Worcester.

“Buyers don’t think much about the tax basis they’ll have in the acquired asset because they don’t expect to ever sell it, and therefore think the basis will not be relevant,” tax expert Bob Willens of Robert Willens LLC told me. Because sellers generally don’t care how cash-and-stock acquisitions are done, “it should be standard operating procedure for a cash-and-stock transaction to be structured as a double dummy,” he said.

The bottom line: When acquirers buy a shiny new toy, they usually fail to structure the deal with a possible future sale in mind. Which, I suppose, makes them . . . double dummies.

Sloan is Fortune magazine’s senior editor at large.

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