June 12, 2007
Why The New York Times is Not Dow Jones
The latest news on Dow Jones is that the Bancroft family has submitted to News Corp. revised proposals for the post-acquisition editorial independence of the Wall Street Journal. And the street is starting to bet on a deal: Dealbreaker's "Murdoch Meter" measuring chances of a News Corp. takeover of Dow Jones is at 85%. So, in this day of rampant M&A rumor, people are starting to wonder if this puts greater pressure on The N.Y. Times for its own sale.
At first glance they appear to be in similar situations. They both have families who exercise a controlling interest in their company through a dual class voting structure. And that voting interest is much less than their economic interest. Moreover, both companies have come under shareholder pressure to initiate a sale or other significant structural transaction. But there are significant differences.
First, let's look at Dow Jones. The Bancroft family has a controlling voting stake in Dow Jones through Class B shares but own only 25% of the economic interests. More particularly, per Dow Jones' certificate of incorporation, the family's Class B shares are entitled to ten votes each. The family exercises these votes on all shareholder matters, but the Class A shareholders (i.e., the public shareholders), voting separately as a class, elect seven of the directors. Importantly, the Bancroft family own their interests separately through a number of trusts and personally and they have no shareholder agreement among them to govern the voting or sale of their Class B shares.
Next, the New York Times. The Ochs-Sulzberger family own approximately 19% of the Company's equity mostly in the form of Class B shares. Per The New York Times certificate of incorporation, holders of Class A shares (i.e., the public shareholders) are entitled to elect 30% of the N.Y. Times board and to vote, with Class B shareholders (i.e., the Ochs-Sulzberger family), on the reservation of shares for equity grants, certain material acquisitions and the ratification of the selection of auditors. Holders of Class B shares are entitled to elect the remainder of the board and to vote on all other matters.
Accordingly, the Ochs-Sulzbergers and the Bancrofts effectively have the same negative vote on a sale of their family company, though the Ochs-Sulzbergers have a tighter effective control on The N.Y. Times. But here is the big difference; according to the N.Y. Times 2007 proxy statement, the Ochs-Sulzberger family shares are largely held in a single family trust. It holds 88% of the outstanding Class B shares. As a result, the trust has the ability to elect 70% of The N.Y. Times board and to direct the outcome of any matter that does not require a vote of the Class A shares. Under the terms of the trust agreement, trustees are directed to retain the Class B shares held in trust and to vote such stock against any merger, sale of assets or other transaction pursuant to which control of The Times passes from the trustees, unless they determine that the primary objective of the trust can be achieved better by the implementation of such transaction. Moreover, the trust is party to a stockholders agreement which restricts the transfer of Class B stock that is held by the trust by requiring, prior to any sale or transfer, the offering of those shares among the other family stockholders and then to The N.Y. Times itself at the Class A stock market price then prevailing and the conversion into Class A shares upon a sale. Similar conversion provisions apply if the N.Y. Times is acquired via a merger.
The Ochs-Sulzbergers therefore, unlike the Bancrofts, operate as a single unit. Moreover, per the Ochs-Sulzberger family trust instrument, a sale cannot be effected unless it is pursuant to the primary purpose of the trust (I couldn't find disclosure on this but assume it likely has something to do with maintaining the editorial integrity of The N.Y. Times). Finally, the Bancroft's can extract a premium for their sale of control -- something that they can legally do but politically might be hard, while the Ochs-Sulzbergers must always sell their shares at the same price as the Class A shares.
The end result is that the N.Y. Times' destiny is determined by those eight trustees of the Ochs-Sulzberger family trust and they have adamantly stated that they do not want to sell; and even if they did they would still have to determine if the acquiring entity (e.g., News Corp.) was a buyer within the parameters of the trust instrument. Compare this to Dow Jones which is controlled by a fragmented family who are not required to vote or act uniformly and have no requirements in a sale to preserve the editorial integrity of the Wall Street Journal. This is the big difference; The N.Y. Times is more bulletproof, and a sale impossible unless those Ochs-Sulzberger family trustees decide to change their minds. Unfortunately, things are not so certain for the Wall Street Journal.
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