Slate: The Road to Zell
Thursday, December 11, 2008; 12:00 PM
"What's the difference between Smart Money and Dumb Money? Twelve months, the popping of a credit bubble, and about $800 million."
Slate Moneybox columnist Daniel Gross was online Thursday, Dec. 11 at noon ET to discuss his his story about how billionaire Sam Zell's purchase of the Tribune Co. is a classic example of "dumb money," and why the company filed for bankruptcy this week.
The transcript follows.
Archive: Past discussions with Slate authors
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek, and the author of "Pop! Why Bubbles Are Great for the Economy."
Tokyo, Japan: It's Bill Ackman, not Dan Ackman.
Daniel Gross: correct you are. We will fix.
Brooklyn, N.Y.: Would this have been a less awful move had the credit crisis not hit? Or was it that dumb money was always gonna come back to show us just how dumb everyone was?
Daniel Gross: In theory, yes, it would have been less awful. A year ago, to think that he could get, say, $1 billion for the Chicago Cubs, which is a great franchise and would attract lots of bidders, was perhaps not entirely unrealistic. And he could have taken those proceeds a decent sized chunk of debt -- not to make it in the long-term, but perhaps to get through this year.
I think, though, in the end, it was a question of "when" not "if" for Tribune, given the underlying businesses. It's one thing to have a company with relatively stable revenues and profits, like a manufacturer of soup, supporting big debt. It's quite another thing for a bunch of newspapers, whose revenues have been unstable and whose profits have been tough to come by, to support a massive amount of debt.
Not anyone from The Post, honest: Do you think the future of newspapers are their online versions? How do you judge (at the risk of an appearance of conflict of interest) washingtonpost.com and its online newspaper? Personally, I find The Post far ahead of most other newspapers in developing an online site.
Daniel Gross: So, while I work for the Washington Post Company (my salary comes from Newsweek & Slate), I don't work directly for the Washington Post. So no big conflict of interest. And it's how I read the Post (it's not on the newsstand where I live). I think it's very good. The New York Times has been doing an excellent job, and so has the WSJ, except you have to pay for that.
That said, in answer to your question, I think it's likely that, say, 30 years from now, newspapers in their current form may not be with us. However, for the near future, I think the newspapers' future will be in a combination of print and online. When things are going well in the economy at large, newspapers have proven they can be profitable businesses, and the revenues from online only aren't enough to support the newsgathering and all the other resources that make the online publications great.
New York, N.Y.: Who would you compare the situation with the Tribune to the situation with the New York Times? I know the Times has its troubles but--are am I wrong---there seeems to be a family ownership that has kept the paper in check and is fighting to see that the Times survives.
Daniel Gross: The situation with the Times is very different than that with the Tribune. For one, the level of debt at the Times Co. is much more manageable -- it's a challenge for the Times to manage, but nothing on the scale of what was piled on the Tribune.
Family ownership at publicly held companies (the washington post co. falls into this category) can be a double-edged sword at times. On the one hand, it encourages long-term thinking, preservation of capital, and guards against things like the Zell takeover. On the other hand, it sometimes means there are other interest at work. Take, for example, the New York Times and its dividend.
Right now, the Times's main operating businesses -- the New York Times and the Boston Globe -- don't seem to be making money. About.com seems to be generating some cash. And it has some valuable assets -- its building, a chunk of the Boston Red Sox -- but it can only monetize those by selling. In an environment where cash is king and access to credit is difficult, you would think a company in the Times' situation would be doing everything it can to preserve capital. Eliminating your dividend would seem to be a no-brainer.
And yet in recent years, the Times increased its dividend -- only to cut it sharply (but not eliminate it). One of the reasons, of course, is that there are a few generations of Sulzbergers who depend on the Times Co.'s dividends to support themselves in comfort. So there are times when family control can influence corporate policies in ways that are not always optimal.
On the whole, however, in this climate, companies are frequently off under family control than under the control of highly indebted private equity types.
Texas: How likely is it that the Cubs would be sold by the Tribune Company and for how much? Based on past interest, do you have any ideas as which parties would be interested buyers of the franchise?
Daniel Gross: Interesting questions. So, a year ago, it was common to hear people say that the Cubs could go for $1 billion, which is a lot of money. And of course, there's more to the Cubs (in terms of what Tribune owns) than the team. I believe they might have owned the stadium, as well as all or part of WGN, the tv station that carries the cubs' games.
Lots of names have been floated. Mark Cuban, owner of the Dallas Mavericks, various Chicago-based financiers. But pretty much all the names floated have seen their net worths hacked significantly in the past year. I'd say it's likely to be a consortium rather than a single individual.
Dunn Loring, Va.: You and others commenting on the Tribune's failure have focused on Sam Zell's incompetent management, but since most newspapers are slumping, aren't there other factors (such as the lack of objective reporting) that greatly contribute to the overall decline?
Daniel Gross: Newspapers' decline stems from two factors. One is secular (i.e. it's a long-term trend) -- and that is that advertising dollars, resources, and eyeballs are moving away from printed newspapers to tv, online, mobile, etc. Also, classified ads, which were a big moneymaker for newspapers, have basically gone to Craigslist.
The second factor is more cyclical -- namely the recession, and the fact that advertising always shrinks during recessions acros the board. Virtually every form of media is finding reduced advertising spending. .
Philadelphia: There was a sense of some that a few years ago, a partisan political operator with little newspaper experience got a group of investors to buy the Philadelphia Inquirer and Philadelphia Daily News at an overvalued price. These company is declining in value, I am not sure how readership is (they proclaimed in an ad that it is up). So I wonder: Do you have any sense on what the future may hold for the Philadelphia dailies?
Daniel Gross: Hi Philly -- I don't know much about the situation with the Inquirer and Daily News. But it's quite similar to that of the Tribune -- a leveraged play by non newspaper people.
Baltimore: So Sam Zell has ruined a huge media company, but he managed to put up only $315 million out of his many billions to do it. Yes, it was rapacious and unconscionable, but if you have to do something rapacious and unconscionable, at least he picked a smart way to do it.
Now I hope that maybe my hometown paper, the Baltimore Sun, can fall under local ownership and not be the piece of trash it's become.
Daniel Gross: "only $315 million."? Even for Zell, that's real money.
re: future ownership. That's the big question. Will the papers be sold off individually or in groups? Will someone come in and try to run the whole company. We don't have any answers yet.
Reston, Va.: There is a Web site which lists Tribune's acquisitions from 1924 forward. You can look at the acquisitions year by year.
Eventually you get to 2007, and there it is: Zell buys Tribune. And whoosh, only one year passes and the whole enterprise files for bankruptcy.
It seems to me something is off-base. This company made acquisition decisions going back 80 plus years, then suddenly Zell appears, buys it, and they go bankrupt. Is it possible that this was orchestrated by the U.S. Chamber of Commerce, or perhaps an investment group (hedge fund in particular) with very influential members?
Daniel Gross: i don't think the u.s. chamber of commerce had anything to do with this.
This deal was thought up by someone whom the world had dubbed to be an investing genius, it was backed and advised by all the blue-chip investment banks, and name-brand banks lent tons of money to the company. The net worth -- and reputation -- of all involved has taken a signficant hit.
It was just a miracle of poor timing.
Your blog: After reading your book, "Pop!," I went to your Web site.
Do you not update that anymore?
Daniel Gross: First, thanks so much for reading. And, yes, when I joined the staff of Newsweek in the summer of '07 I stopped updating the blog. Basically, you can see all my work on Slate or on Newsweek.com
Baltimore: What happens to all the people who took the Tribune buyout during the last year? Do they still get paid, or are they now unsecured creditors?
Seems pretty slimy if they get rid of workers with the promise of severance, even while knowing they're about to declare bankruptcy and not make good on those obligations.
Daniel Gross: That's a good question. To a degree, it depends where the buyout money came from. Sometimes, if companies' pension funds are overfunded, they can use those assets to fund buyouts and severance. And in that case, a bankruptcy wouldn't mean the workers were out of look. I know one of the big creditors of Tribune Co. is Mark Willes, who was a former CEO and is owed several million in retirement money. oh well.
Washington, D.C.: It's been my understanding that many (most?) newspapers are still profitable -- there just isn't any growth, which isn't good enough for shareholders. Incorrect?
Daniel Gross: I think many newspapers are profitable, although this year -- and this quarter in particularly -- I would guess that not all that many are. Newspapers are really tied to the economic cycle -- when a recession hits, people cut back on discretionary spending, like newspaper subscriptions, and advertisers pull back.
You could check out the quarterly results of Gannett Co.
Seems like they made a pretty decent profit on newspaper operations in the most recent quarter
Hartford, Conn.: From where I sit the Zell strategy seems to be to cheapen the product so its inherent value to the consumer (news) is even less so, in the hopes that it can shrink its way back to profitability, the regain its lost luster in some way. The next industry to successfully pull off that business model will be the first.
Daniel Gross: that might be a simplification. I don't think he really had a strategy to deal with the newspapers per se. This was a guy who probably hadn't thought for more than a few minutes about how to run a newspaper before taking control of the companies. Basically, he saw a financial opportunity -- acquire control of Tribune with very little down and lots of debt and hope to flip pieces of it.
New York Times: I had to look with one eye closed when the New York Times company mortgaged their building to fund current operations.
If real estate has not hit a bottom, won't this endanger the company long term.
Didn't anyone read your book, "Pop"?
Daniel Gross: The Times basically took out a home equity line of credit on its new home in New York. It wants to borrow about $225 million, I believe, which is probably only about 1/3 of the value of the building. So it's a pretty conservative move. And they're not using the proceeds to fund current operations. They want to use it to pay down some debt and have cash on hand in case they have difficulty rolling over existnig credit lines.
I know that some people did read my book, Pop.
Evanston, Ill.: Hey Dan, you wrote a provocative book about why bubbles are good for the economy. Of course there are beneficial side effects but I think the questions is what is the net effect of a given bubble. Is it safe to conclude that the housing bubbles benefits are outweighed by fallout we are now living through?
Daniel Gross: Hi Evanston -- I don't want to give away the whole book here. It's still available for sale, after all. But basically, the argument is that bubbles are good when they leave behind a new commercial infrastructure that others can use -- like the telegraph, the railroad, or the Internet. In other words, without Web bubble 1.0, we don't get Google. Without the telegraph bubble of the 1840s and 1850s, we wouldn't have got the associated press and Western Union. When the bubble is in something like paper (credit, stocks) or in something that doesn't really create a new commercial infrastructure (housing), we don't get the same benefits.
Toronto: How do the sellers of the Tribune Co. feel about their sale to Zell now?
Do they feel as though they erred in selling to a person who used other peoples money and saddled the company with large debts, as opposed to selling parts of the Co. piecemeal to people like David Geffen, or do you think they simply do not care, because they made a lot of money in the sale?
Daniel Gross: I think the people who sold the Tribune Co. actually feel pretty good. They got a good cash price for their stock at what turned out to be the top of the market. Had they said no, and held on, that stock would probably be cut in half, just like every other media stock.
Miami, Fla.: Any idea why they took on additional $3B in debt? Seems they paid for business with $300 million from Zell and $9B from banks to pay off family, Wall St and Fitzsimmons. After this transaction Zell was able to add $3B additional debt -- seems like straight forward corporate looting, especially when the business reported $100M-plus profits each quarter in 2007 and 1st 1/2 of '08.
Daniel Gross: I think -- not sure, though - that the $3 b may have been existing debt. In other words, when you buy a company you assume all its assets and liabilities. That's why it's sometimes confusing when we report about the size of deals. If you put $1 billion cash down, and borrow $9 billion to pay $10 billion for a company that has $5 billion in debt, the price of the deal is $10 billion, but the value of it may be $15 billion, since the new entity is assuming that existing debt.
Washington, D.C.: In the early '90s, when my cousin used to connive to me about terrorists hijacking jets with box knives, I used to tell him that Communism was coming to America through the federal bankruptcy courts, not through firebombs in the streets. Then his younger brother would chime in that the government was going to provide us all with the cure for anthrax after a bioweapon attack -- in exchange for our guns.
How much power does the federal court's overseer have in deciding which Tribune creditors get paid and which do not? That would be the most powerful job in the company, wouldn't it?
Daniel Gross: Bankruptcy court isn't supposed to be a place where the judge decides who gets paid and who doesn't. It's supposed to be a place where the creditors and debtors get together and work out deals under the supervision. There's a lot of negotiations, threats, discussions, and sometimes litigation in bankruptcy court. But in a typical bankruptcy, the parties work out deals without massive intervention from the judge.
Daniel Gross: Looks like the hour is coming to a close.
Thanks for all the great questions.
See you next time
Editor's Note: washingtonpost.com moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.