By DAVID CARRThe New York Times
In January 2008, soon after the venerable Tribune Company was sold for $8.2 billion, Randy Michaels, a new top executive, ran into several other senior colleagues at the InterContinental Hotel next to the Tribune Tower in Chicago.
Mr. Michaels, a former radio executive and disc jockey, had been handpicked by Sam Zell, a billionaire who was the new controlling shareholder, to run much of the media company’s vast collection of properties, including The Chicago Tribune, The Los Angeles Times, WGN America and The Chicago Cubs.
After Mr. Michaels arrived, according to two people at the bar that night, he sat down and said, “watch this,” and offered the waitress $100 to show him her breasts. The group sat dumbfounded.
“Here was this guy, who was responsible for all these people, getting drunk in front of senior people and saying this to a waitress who many of us knew,” said one of the Tribune executives present, who declined to be identified because he had left the company and did not want to be quoted criticizing a former employer. “I have never seen anything like it.”
Mr. Michaels, who otherwise declined to be interviewed, said through a spokesman, “I never made the comment allegedly attributed to me in January 2008 to a waitress at the InterContinental Hotel, and anyone who said I did so is either lying or mistaken.”
It was a preview of what would become a rugged ride under the new ownership. Mr. Zell and Mr. Michaels, who was promoted to chief executive of the Tribune Company in December 2009, arrived with much fanfare, suggesting they were going to breathe innovation and reinvention into the conservative company.
By all accounts, the reinvention did not go well. At a time when the media industry has struggled, the debt-ridden Tribune Company has done even worse.
Less than a year after Mr. Zell bought the company, it tipped into bankruptcy, listing $7.6 billion in assets against a debt of $13 billion, making it the largest bankruptcy in the history of the American media industry. More than 4,200 people have lost jobs since the purchase, while resources for the Tribune newspapers and television stations have been slashed.
The new management did transform the work culture, however. Based on interviews with more than 20 employees and former employees of Tribune, Mr. Michaels’s and his executives’ use of sexual innuendo, poisonous workplace banter and profane invective shocked and offended people throughout the company. Tribune Tower, the architectural symbol of the staid company, came to resemble a frat house, complete with poker parties, juke boxes and pervasive sex talk.
The company said Mr. Michaels had the support of the board.
“Randy is a tremendous motivator, very charismatic, but he is very nontraditional,” said Frank Wood, a member of the Tribune board. “He has the kind of approach that motivates many people and offends others, but we think he’s done a great job.”
The company is now frozen in what seems to be an endless effort to emerge from bankruptcy. (The case entered mediation in September after negotiations failed, and a new agreement between two primary lenders was recently announced.) But even as the company foundered, the tight circle of executives, many with longtime ties to Mr. Michaels, received tens of millions of dollars in bonuses.
Behind the collapse of the Tribune deal and the bankruptcy is a classic example of financial hubris. Mr. Zell, a hard-charging real estate mogul with virtually no experience in the newspaper business, decided that a deal financed with heavy borrowing and followed with aggressive cost-cutting could succeed where the longtime Tribune executives he derided as bureaucrats had failed.
And while many media companies tried cost-cutting and new tactics in the last few years, Tribune was particularly aggressive in planning publicity stunts and in mixing advertising with editorial material. Those efforts alienated longtime employees and audiences in the communities its newspapers served.
“They threw out what Tribune had stood for, quality journalism and a real brand integrity, and in just a year, pushed it down into mud and bankruptcy,” said Ken Doctor, a newspaper analyst with Outsell Inc., a consulting firm. “And it’s been wallowing there for the last 20 months with no end in sight.”
Mr. Zell has acknowledged that the deal has not turned out how he hoped. But noting a recent upturn in results, he said through a spokesman, “Tribune has made significant strides in becoming a current, competitive and sustainable media company. The measure of management’s performance is reflected in the increased profitability of Tribune’s media properties.”
The Purchase: An Innovative Deal for Little Cash
When Mr. Zell purchased the Tribune Company in December 2007, he bought into an industry desperately in need of new ideas. And Mr. Zell, a consummate deal maker, had a barrelful.
Tribune, home to some of the most important newspapers in the country — The Baltimore Sun, The Hartford Courant and The Orlando Sentinel as well as The Chicago Tribune and The Los Angeles Times — had been battered by big drops in advertising and circulation. According to Mr. Zell, the company was also suffering from stodgy thinking and what he called “journalistic arrogance.”
“There’s a new sheriff in town,” he said, in speeches that were peppered with expletives, as he toured the Tribune’s offices.
It was a message that some within the company initially welcomed.
“Sam Zell was sort of a rock star when he went around and toured the various properties,” said Ann Marie Lipinski, the former editor of The Chicago Tribune who left less than a year after the takeover. “People had been living with uncertainty for so long and they hoped something good would come from an owner with a proven track record of success in other businesses.”
Mr. Zell’s first innovation was the deal itself. He used debt in combination with an employee stock ownership plan, called an ESOP, to buy the company, while contributing only $315 million of his own money. Under the plan, the company’s discretionary matching contributions to the 401(k) retirement plan for nonunionized Tribune employees were diverted into an ownership stake. The structure of the deal allowed the Tribune to become an S corporation, which pays no federal taxes, making taxpayers essentially silent partners in the deal. (Very silent, because the "employee owners" got no seat on Tribune's board of directors.-BD)
The $8 billion in new loans used to finance the deal left the company with $13.8 billion in debt. But Mr. Zell was convinced that by quickly selling the Chicago Cubs and other assets while improving operating margins, the company could emerge as a valuable property. It was typical Zell: a risky approach to gain control over a large, distressed asset while minimizing his own exposure, something he acknowledged in a company newsletter:
“I’ve said repeatedly that no matter what happens in this transaction, my lifestyle won’t change,” he wrote to his combination employees/shareholders. “Yours, on the other hand, could change dramatically if we get this right.” (Unless you count losing your pension, wage and benefit cuts, then losing your job. -BD)
His second innovation was bringing in a new management team, largely from the radio business, that, like Mr. Zell, had little newspaper experience, which constituted more than 70 percent of the company’s business.
Mr. Michaels, who was initially in charge of Tribune’s broadcasting and interactive businesses as well as six newspapers, was a former shock jock who made a name for himself — and a lot of money for Mr. Zell — by scooping up radio stations while at the Zell-controlled Jacor Communications. Jacor was later sold to Clear Channel Communications for $4.4 billion.
In turn, Mr. Michaels remade Tribune’s management, installing in major positions more than 20 former associates from the radio business — people he knew from his time running Jacor and Clear Channel — a practice that came to be known as “friends and family” at the company.
One of their first priorities was rewriting the employee handbook.
“Working at Tribune means accepting that you might hear a word that you, personally, might not use,” the new handbook warned. “You might experience an attitude you don’t share. You might hear a joke that you don’t consider funny. That is because a loose, fun, nonlinear atmosphere is important to the creative process.” It then added, “This should be understood, should not be a surprise and not considered harassment.”
The new permissive ethos was quickly on display. When Kim Johnson, who had worked with Mr. Michaels as an executive at Clear Channel, was hired as senior vice president of local sales on June 16, 2008, the news release said she was “a former waitress at Knockers — the Place for Hot Racks and Cold Brews,” a jocular reference to a fictitious restaurant chain.
A woman who used to work at the Tribune Company in a senior position, but did not want to be identified because she now worked at another media company in Chicago, said that Mr. Michaels and Marc Chase, who was brought in to run Tribune Interactive, had a loud conversation on an open balcony above a work area about the sexual suitability of various employees.
“The conversation just wafted down on all of the people who were sitting there.” She also said that she was present at a meeting where a female executive jovially offered to bring in her assistant to perform a sexual act on someone in a meeting who seemed to be in a bad mood.
Staff members who had concerns did not have many options, given the state of the media business in Chicago, the woman said. “Not many people could afford to leave. The people who could leave, did. But it was not in my best interest to have my name connected to an E.E.O.C. suit,” she said, referring to the Equal Employment Opportunity Commission. (Indeed, there are no current E.E.O.C. complaints against the Tribune Company.)
There have been complaints about Mr. Michaels in the past, however. In 1995, Mr. Michaels and Jacor settled a suit brought by Liz Richards, a former talk show host in Florida who filed an E.E.O.C. complaint and a civil suit, saying she had been bitten on the neck by Mr. Michaels and that he walked through the office wearing a sexual device around his neck.
“They were like 14-year-old boys — no boundaries at all — but with money and power,” Ms. Richards said in an interview.
During and immediately after Mr. Michaels’s tenure at Clear Channel, three lawsuits were filed contending sexual harassment at the company. One plaintiff, Karen Childress, a senior executive, said she was fired after complaining about receiving lewd e-mail from senior company executives. In her complaint, Ms. Childress also stated that women who slept with male executives at the firm were promoted. The cases were settled out of court. Clear Channel declined to comment on the lawsuits.
On Dec. 11, 2008, the Tribune board was made aware that not everyone appreciated the new cultural dynamics at the company. The board received an anonymous letter detailing a hostile work environment and a pattern of hiring based on personal relationships and suggested that the company was leaving itself open to “potential litigation risk.”
The letter also suggested that a senior executive and a female employee had been discovered by a security guard engaged in a consensual sexual act on the 22nd-floor balcony. The board took the allegation seriously enough that it hired an independent law firm to investigate it. A company spokesman said the investigation found that the executive and the woman denied the incident and the inquiry could find no evidence that such an incident had occurred or that any harassment had taken place. But a person who worked in security at the time confirmed to The New York Times that a security guard reported seeing the incident. That person declined to be identified because of the sensitivity of the issue.
By September 2008, the historic Tribune Tower had someone new in charge of security: John D. Phillips, a former traffic reporter who had previously worked for Mr. Michaels. In June 2009, a party for management was held in the former office of Col. Robert R. McCormick, the newspaper baron and grandson of the founder, on the 24th floor of the Tribune Tower. Smoke detectors were covered up and poker tables were brought in.
Mr. Phillips posted pictures of the party on his Facebook page, showing Mr. Michaels and Mr. Chase, along with Lee Abrams, a former radio programmer who had joined Tribune earlier that year, playing poker and drinking in the ornate office. The Chicago media writer Robert Feder first reported about the Facebook photographs.
“We are in the office of the guy who ran the company from the 1920s to 1955,” Mr. Phillips wrote on his Facebook page. “It’s normally a shrine. We pretty much desecrated it with gambling, booze and cigars.”
A New Culture: Staff Cutbacks and Promotions
While the new owner and managers went about changing the corporate tone at Tribune, they were also under pressure to service the enormous debt.
In his initial tour of the company, Mr. Zell promised there would be no job cuts. (Unless you count over 4,000 people losing their jobs through layoffs. -BD)
But like other media companies caught in the downdraft of advertising revenue, the company was forced to cut staff and slash budgets. Elsewhere, the company introduced promotions that seemed to have been drawn from the radio playbook. At four of the company’s television stations, an event called “CA$H GRAB,” in which a viewer was led into a bank vault and allowed to scoop up dollar bills, was inserted in the middle of the station’s newscasts. At WPIX-TV in New York, the viewers were cheered on by clapping Hooters waitresses, giving the station the appearance of televised shock radio.
Mr. Abrams, who describes himself as an “economic dunce,” was made Tribune’s chief innovation officer in March 2008. In his new role, he peppered the staff with stream-of-consciousness memos, some of which went on for 5,000 typo-ridden, idiosyncratic words that left some amused and many bewildered.
“Rock n Roll musically is behind us. NEWS & INFORMATION IS THE NEW ROCK N ROLL,” he wrote in one memo, sent in 2008. He expressed surprise that The Los Angeles Times reporters covering the war in Iraq were actually there.
James Warren, the former managing editor and Washington bureau chief of The Chicago Tribune, said: “They wheeled around here doing what they wished, showing a clear contempt for most everyone that was here and used power just because they had it. They used the notion of reinventing the newspapers simply as a cover for cost-cutting.” (As a contributor to the Chicago News Cooperative, Mr. Warren writes a column that appears in the Chicago edition of The New York Times.)
In Chicago, Ms. Lipinski said, it became clear that Mr. Zell was not above using the newspaper as a tool for his other business interests. In June 2008, Mr. Zell approached her at a meeting, saying that The Chicago Tribune should be harder on Gov. Rod Blagojevich. She reminded him that the newspaper had aggressively investigated the governor and that its editorial page had already called for his resignation.
“Don’t be a pussy,” he told her. “You can always be harder on him.”
In a news meeting later the same day, she found out that Mr. Zell was in negotiations to sell Wrigley Field to the state sports authority.
“It was hard to avoid the conclusion that he was trying to use the newspaper to put pressure on Blagojevich.”
Through a spokeswoman, Terry Holt, Mr. Zell denied he used the newspaper to business ends. “From Day 1, Sam vowed never to interfere with the editorial content at any of Tribune’s media properties, and he has always honored that commitment,” Ms. Holt said.
In a criminal complaint, federal authorities accused Mr. Blagojevich of trying to trade public financing of the stadium for the dismissal of some members of the Tribune’s editorial board. An aide to the governor charged with pursuing the matter reported back that Mr. Zell “got the message and is very sensitive to the issue,” according to a criminal complaint filed by the United States attorney’s office for the Northern District of Illinois. (In August, Mr. Blagojevich was convicted on one of the 24 felony counts he faced, lying to F.B.I. agents about his involvement in campaign fund-raising.)
Ms. Lipinski said it was that episode and other conflicts with management that prompted her resignation in July 2008, just one month after Scott Smith, the paper’s longtime publisher, left.
“I was plenty used to crisis, in many ways thrived on it,” said Ms. Lipinski, who had joined the newspaper as an intern in 1978. “But this nonsense was a form of intentional man-made distraction that made the work impossible. I couldn’t protect my staff from what they could see plainly with their own eyes.”
Mr. Zell’s various approaches didn’t slow the company’s decline. In the third quarter of 2008, the company posted a loss of $124 million, and the recession made it difficult to sell the Cubs. His purchase of Tribune became, as even he described it, “the deal from hell” and the company filed for bankruptcy on Dec. 8, 2008.
It wasn’t simply the huge debt that burdened the company; the performance under new management continued to slide. While its television division has since done well in the advertising rebound — over all, the 23 stations are on track in 2010 to pass $1 billion in revenue for the first time since 2007 — Tribune’s newspapers have continued to underperform the rest of the industry.
Advertising has been inserted into The Los Angeles Times in new and unsettling ways. In March, an ad mimicking the front page for Disney’s “Alice in Wonderland” was wrapped around the first section and in July, a fake version of the newspaper’s section for late breaking news, called LATExtra, was wrapped around the real one, promoting Universal Studios’ King Kong attraction, with a lead “story” that read “Universal Studios Partially Destroyed.” In April 2009, an advertisement posing as a news article about NBC’s new show “Southland” appeared on the front page.
In July, the Los Angeles County Board of Supervisors, the governing body of the county of Los Angeles, sent a letter of protest, saying that the use of advertising disguised as news “makes a mockery of the newspaper’s mission.”
The ads do not seem to have helped. The Chicago Tribune’s circulation continues to slide, with weekday circulation down 9.8 percent in the first half of 2010. The Los Angeles Times is in worse shape, having lost 14.7 percent of its weekday circulation in the period. (Over all, the industry lost 8.7 percent weekly circulation in the period.)
Radio, which was the core expertise of the management, has had a mixed record since the takeover. After bringing in many longtime associates of Mr. Michaels, WGN-AM, the company’s well-known talk radio station in Chicago, lost market share in 2009. The station manager sent a note last month to Tribune managers, asking them to call in to one of the new hosts, because few actual listeners were. But a company spokesman said that ratings in the morning were up 20 percent for the month of August.
In an effort to shake up the station, the management jettisoned a sports talk show at night and installed someone with no radio experience, Jim Laski, an Illinois politician who had been convicted of a felony.
Steve Cochran, a longtime midday host who has said he was dismissed as he was walking out of the bathroom this summer, said the changes seemed aimed at destroying WGN.
“This was supposed to be their comfort zone, what they were good at, and they have ruined a radio station that has had an 80-year relationship with its listeners,” he said.
“This is a collection of carnival workers who are only looking after their friends, giving jobs to their buddies. Blagojevich is on trial and you bring in a politician who has done time in jail?”
The Bankruptcy: Creditors Lose, as Do Workers
More than the Tribune’s creditors took a haircut: the shares that about 10,000 nonunion employees received in the ESOP deal are now worthless as a result of the bankruptcy, although at the beginning of this year, the company replaced the ESOP plan with a cash incentive contribution. But if and when the Tribune exits bankruptcy, the value of the company will be worth substantially less than when Mr. Zell bought a controlling interest. Under a proposed settlement filed recently with the court, senior lenders, including the Angelo Gordon hedge fund and Oaktree Capital Management, would receive $5.5 billion, while other lenders with less priority would receive far less. The case is in mediation.
“How can anybody say that they have done a good job?” said Henry Weinstein, a former Los Angeles Times reporter who filed a lawsuit, still pending, that contends that the use of employee pensions to finance the deal was illegal. (Sam Zell thinks they did a good job. Why else would he ask the bankruptcy court to approve $70 million dollars in executive bonuses? -BD)
“Anybody can make money when you are not servicing the debt and cutting people. Zell and the people he brought in had no idea what they were doing.”
And Mr. Zell? On Aug. 13, his lawyers suggested that if other junior creditors were paid, he should get his money back as well.
Until the bankruptcy is resolved, Mr. Zell’s handpicked team will continue to run the company, but it is frozen out of any large strategic alliances or purchases. The issue of who will run the company will remain unsettled until the bankruptcy is resolved. Mr. Zell remains the chairman of the board and is no longer involved in the day-to-day operations of the company.
Despite the company’s problems, the managers have been rewarded handsomely. From May 2009 to February 2010, a total of $57.3 million in bonuses were paid to the current management with the approval of the judge overseeing the bankruptcy. In 2009, the top 10 managers received $5.9 million at a time when cash flow was plummeting.
Mr. Wood, the board member, said, “We think they earned those bonuses. They’ve done a fabulous job in very difficult circumstances.”
At the time, the court-appointed trustee in the bankruptcy case filed an objection, writing that while the current owners argued for “shared sacrifice,” they “fail to understand what the concept means when it comes to compensating their management,” and then added, “now is not the time for yet another round of bonuses.”
Other proposed bonuses on the table for 2010 could bring the figure for management pay enhancements to more than $100 million, and those bonuses are heavily weighted to top management. (Earlier this week, management announced that beginning in 2011, it would begin awarding merit raises to nonunion employees of about 3 percent.)
“You have advertising wrapping around sections and being disguised as news and empty desks all around you, and then you read about these ridiculous bonuses and feathering their nests with severances, you want to scream,” said Steve Lopez, a longtime columnist at The Los Angeles Times.
The creditors, which also include JPMorgan Chase and the Deutsche Bank Trust Company, have acquiesced to the lucrative bonuses in part because they fear that antagonizing management could further hold up the company’s emergence from bankruptcy, according to two lawyers representing creditors who did not want to be quoted publicly during bankruptcy negotiations.
“No one is in charge there,” said an adviser to one of the senior creditors, who declined to speak on the record because it was not in his business interest to be in conflict with the current board or management.
Mr. Michaels suggested in public statements that his current team was very much in charge. According to the company’s monthly statements, cash flow is on the rise and the company has $1.6 billion in cash on hand, about half of it from the sale of the Cubs, which Mr. Zell eventually managed to sell. “We are just getting started,” he said in the announcement.
And management still is confident that the new thinking has Tribune on the right track. The company recently announced the creation of a new local news format in which there would be no on-air anchors and few live reports. The newscasts will rely on narration over a stream of clips, a Web-centric approach that has the added benefit of requiring fewer bodies to produce.
“The TV revolution is upon us — and the new Tribune Company is leading the resistance,” the announcement read. And judging from the job posting for “anti-establishment producer/editors,” the company has some very strong ideas about who those revolutionaries should be: “Don’t sell us on your solid newsroom experience. We don’t care. Or your exclusive, breaking news coverage. We’ll pass.”
Sydney Ember contributed research.
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