To Win the Lady
Outsider Fights for a Voice On the N.Y. Times Co. Board

By Frank Ahrens
Washington Post Staff Writer
Friday, February 22, 2008

Who is this muscleman with the sword who wants to fight his way onto the board of the New York Times Co.?

His name is Scott Galloway, he's 43, and he was unknown to the Times Co. two weeks before Christmas. Since then, he has purchased more than 15 percent of the company's stock and proposed a slate of four directors -- including himself -- that was effectively shot down by the company yesterday.

He now appears girded for battle. In fewer than three months, Galloway and his hedge fund partners have become the largest non-family shareholders of Times Co. stock. Yesterday, they said they would file a rival proxy for their spurned director nominees next week, setting up an election showdown at the company's April 22 shareholders meeting.

Galloway has done all of this while teaching a course at New York University's Leonard N. Stern School of Business, raising a 5-month-old son with his fianc¿, mixing it up in an exclusive New York club for high-powered alphas and watching the company he founded a decade ago run out of money.

As for the sword, Galloway, a Scot by descent, allowed himself to be dressed as a character from Mel Gibson's "Braveheart" for a charity fashion show in 2006. Thanks to the Internet, the one-time appearance lives forever. And it is not exactly an image that screams "Gray Lady."

Despite the tartan, the blue face paint and the sword, Galloway had been trying to persuade the family-controlled Times Co. that he is no barbarian at the gate. In a January letter to the company, Galloway was almost deferential, saying it should retain family ownership but put some new blood on its board -- directors with Internet and capital allocation experience.

But yesterday, the Times Co. dealt Galloway's efforts a blow. In a preliminary proxy filed at the Securities and Exchange Commission, the Times Co. listed its four nominees for the board in preparation for the shareholders meeting. None of Galloway's slate was among them. In a statement yesterday, Galloway's spokesman called the Times Co.'s move "disappointing," and noted that the company did not interview any of his candidates.

Galloway's bid marks the first time a non-Ochs-Sulzberger family shareholder has proposed a slate of directors.

Galloway has not publicly commented on the Times Co. himself. The information in this article was gathered from people who have worked with Galloway, are familiar with his thinking and are close to situation at the Times Co. Most spoke on the condition of anonymity because they may work with Galloway in the future and do not want to harm their relationship with him, or are commenting on details that have not been made public.

With his hedge fund partner -- Harbinger Capital Partners, a division of Harbert Management and a buyer of distressed properties -- Galloway's Firebrand Partners saw a Times Co. with a sagging stock price and what they believed was an inadequate digital strategy.

Indeed, with a market capitalization of $2.8 billion, the single most valuable asset the Times Co. owns, some analysts say, is its new midtown Manhattan headquarters, which may be worth as much as $1 billion. Some have caustically remarked that the Times Co. is now a REIT -- a real estate investment trust -- with a newspaper attached.

Like almost all newspapers, the Times has lost readers and advertising revenue to numerous rivals, particularly the Internet. Its New England papers -- the Boston Globe and the Worcester (Mass.) Telegram & Gazette -- have been especially hard-hit. The company was forced to take a staggering $814 million write-down on their diminished value in 2006. Last week, Times Executive Editor Bill Keller said that 100 of 1,332 Times newsroom positions would be cut through early retirement buyouts, attrition and possibly layoffs.

More critically, the Times Co. has little to fall back on as its newspapers struggle. Though it owns the About.com Web properties, which had revenue growth of 27 percent last year, the company derived 97 percent of its 2007 revenue from its news group division; chiefly, the Times, the Globe and other papers. Over the past several years, the company sold off cash-producing magazines such as Family Circle and Golf Digest to concentrate on its Times brand. Last year, the company sold its television stations to pay down debt.

Despite a recent run-up in stock price -- Times Co. shares closed at $19.69 yesterday, up more than $4 since mid-January -- the company's stock has lost more than 60 percent of its value in the past six years, down from a high of more than $50 in 2002.

By December, Times Co. stock was approaching a longtime low.

Enter Galloway and his hedge fund backers, smelling value.

Firebrand and Harbinger bought their first shares late last year. By January, their stake was 4.9 percent; by early this month, it stood at 9.96 percent and was growing seemingly by the day. As of Tuesday, the Firebrand-Harbinger stake had reached 11.82 percent.

And according to an SEC filing yesterday, Galloway and his hedge fund partners now own 15.61 percent of outstanding Times Co. shares, eclipsing T. Rowe Price for the top spot.

Galloway likes the Times newspaper but has no particular attraction to journalism or its mission. He targeted the Times Co. by using a mathematical ratio he employs to identify undervalued properties.

In his ratio, the number on top is the sum of a company's brand attributes -- how aware consumers are of the brand, how relevant it is, what people associate with the brand and how they feel when using the brand. Galloway assigns a value from 0 to 10 for each category. In his formula -- non-scientific and fungible as it may be -- the Times Co. gets a 9.5 for awareness, but a 4 for relevance because it's a newspaper, a declining medium.

The number on the bottom of Galloway's ratio is the sum of the company's financials -- its free cash flow, its earnings multiples, how it compares to other companies in its sector and so on.

If the top number is much larger than the bottom one -- in other words, if a company has a very strong, very positive brand but weaker financial performance, as with the Times Co. -- Galloway targets the company to determine "if there's some active intervention that can bring the ratio into equilibrium," said a source familiar with Galloway's thinking.

It was while getting his MBA at the University of California at Berkeley that Galloway learned the semi-science of branding, starting with his own.

He jokes that he has read the Economist on airplanes so passengers will think he's smarter than he is, as he has told people. At 6 feet 2, with the well-maintained physique of a college rower and an impressive patter about retail, Web strategies and return on investment, he makes a memorable first impression.

Former NYU student Jessica LeMay Willey said Galloway effectively managed his own hipster image as a brand -- sometimes teaching in jeans, trendy sneakers and a skull cap -- and threw an end-of-semester party for the class at a SoHo loft.

The Times Co. is only the most recent proxy battle Galloway has waged. His impact on previously targeted companies has ranged from divisive to minimal and helpful.

The first came against the company he founded in 1997, an online gift business eventually named RedEnvelope.

In 2000, Galloway's board seat was eliminated by chief executive Michael Mortiz after the two battled bitterly over the direction of the company. Mortiz would not comment for this article.

At the time, Galloway had moved to Las Vegas to be with his terminally ill mother. He was "very bored and very angry" and "way too aggressive," according to the source, and decided to wage a hostile battle for his company. Now, Galloway looks back on his battle with RedEnvelope with some regret, calling it his "learning proxy fight."

Galloway bought enough shares to get back on the RedEnvelope board in 2006, though he now believes his return was too late to help the flagging company. In its third-quarter earnings report last week, the company said it has enough cash and loans in-hand to last only through June.

Some who have worked with Galloway are bitter about their interaction with him. They describe him as a gifted self-promoter who believes his range of skills is wider than it is.

Galloway has made proxy incursions at United Retail, a plus-sized women's clothing company; luxury gift retailer Sharper Image; and computer-maker Gateway.

At United Retail, Galloway and his investors thought the company had a poor Web site and believed online shopping might be more appealing for plus-sized women. Once he and his investors got inside the company, however, he found a digital strategy was underway and "stayed the hell out of the way," according to the source.

Galloway found his Sharper Image experience to be a fiasco and cashed out his shares after about eight months, realizing a $2-per-share gain on investment. In that case, Galloway "had to get the hell out of Dodge." The Sharper Image did not return a call for comment.

At Gateway, "he was a hard-working, constructive and well-respected member of the board," said former chief executive Ed Coleman.

And as for the two branding classes Galloway teaches at NYU, the Braveheart sword might be an appropriate prop.

"His course enrollments are very high, and he gets very high marks from students," said marketing professor Russell S. Winer, Galloway's boss at NYU.

"However, he's tough with very high expectations so some students can't take that," said Winer -- and he locks out students who are late to class.