Times Deal a Tale of 2 Executives

The proposed takeover of Times Mirror Co. by Tribune Co. is more than a story of the relinquishing of a Los Angeles family heirloom to a hard-charging corporation from the Midwest.

At its core is something more personal and fundamental: a vehement, at times bitter, disagreement over the strategic direction of the company between two strong-willed executives equally confident that his way was best.

One was Mark Willes, who since his appointment five years ago as chairman and chief executive had deliberately restored the company’s newspapers, including The Times, to their traditional place as the focus of Times Mirror after a series of what he considered ill-considered investments by the previous management in new technologies and other ventures.

The other was Thomas Unterman, the company’s former general counsel and chief financial officer, a fervent believer that the company’s future lay in high technology and new media.

Unterman’s ambitions were thwarted at Times Mirror, where he gave up his executive position Jan. 1, but in the end he prevailed.

As the Chandler family advisor who played a key behind-the-scenes role in bringing the family together with Tribune, Unterman will receive not only a coveted seat on the Tribune board as a Chandler nominee, but an investment advisory fee of more than $2 million.

That fee has triggered recriminations in the corporate suites of Times Mirror, whose executives are dumbfounded that a longtime colleague could have enriched himself while playing such a major role in selling off the company. Unterman said his actions were entirely proper.

But that is only one of the ironies behind the merger. There is also the story of the Chandler trusts. For decades these family documents were viewed as ironclad directives prohibiting the family from selling their legacy, the West’s most powerful newspaper. But it turned out they prohibited nothing of the kind, and Willes’ mistaken assumption left him almost powerless to halt a deal that was presented to him scarcely two weeks ago as a fait accompli.

Tribune, a Chicago-based media company whose assets include the Chicago Tribune and KTLA Channel 5, announced Monday it was acquiring Times Mirror in a stock and cash deal. Based on Tuesday’s closing prices, the deal is valued at $6.1 billion.

Tribune Made First Overture to Willes

The path to Times Mirror’s sale began one day last May, when Willes received a call from Tribune Chairman John Madigan proposing that the two men chat during an upcoming newspaper industry conference in San Diego.

“We’ve been looking at Times Mirror,” Madigan said, according to sources, “and we think there are some interesting things we can do together.”

Willes ordered up a corporate analysis of Tribune’s businesses but “couldn’t find much that looked exciting,” he recalled. When he communicated that finding to Madigan, he added, “we got a very strange response.”

The response was a letter offering to buy Times Mirror outright.

Willes characterized Tribune’s overture as an informal inquiry. But Tribune sources say the company made a firm offer. A letter from Tribune to Willes proposed a price of $82.50 a share, half in cash and half in stock. Tribune also sent financial models showing the synergies the company thought would make the combination powerful.

“You cannot characterize it as an inquiry. To the Tribune, it was a proposal,” said a Tribune source.

But Willes said it was “completely out of the context in terms of the conversations we were having.”

In any event, Willes assumed the Chandler family trusts made a sale out of the question. “Let’s shut these conversations down,” he said to his chief financial officer, Unterman. Together they drafted a letter rejecting the overture and mentioning, as though in passing, that the terms of the trusts would block a sale.

Whether Willes notified Times directors of the overture is the subject of some disagreement. He says he mentioned it to the board, but it appears that he may not have made clear the determination behind the bid and certainly did not invite the family’s reaction.

“We weren’t brought into the loop on that first contact,” said Camilla Chandler Frost, one of seven trustees of the two Chandler trusts that control about 65% of Times Mirror stock. Frost is also the sister of former Times Publisher Otis Chandler.

The next time, Tribune wouldn’t bother to approach Willes at all.

After Willes spurned the Tribune bid, the issue effectively died--for a few months.

In that time, Tribune executives and investment bankers were getting to know Unterman.

A 55-year-old Chicago native, Unterman was hired in 1992 as general counsel and was named CFO in 1995, the year Willes arrived. As the Times executive overseeing the company’s business partnerships, Unterman had worked with Tribune on several joint ventures. A wizard at structuring financial deals, he had earned the Chandlers’ admiration for transactions in which their holdings in the company were recapitalized. The deals freed up some of their money without seriously diluting their control or imposing tax liabilities, a major concern of the family.

He was also highly regarded at the corporation, which had given him a $1-million bonus in 1998 for completing the divestiture of three Times Mirror assets, including Matthew Bender legal publications.

Tribune was the model for Unterman’s vision of a remade Times Mirror. It had invested aggressively in broadcasting and new media. Its management seemed focused on a strategy in which newspaper cash flow would finance its entry into a new technological world.

As he gained the ear of the Chandlers, Unterman gradually persuaded them that Times Mirror’s future lay along the path being pioneered by Tribune.

“Tom was really the most informed and most interested in expanding new media of anyone on the sixth floor [in the corporate headquarters],” recalled Harry Chandler, a former Times executive and a son of Otis Chandler’s.

Unterman stood in contrast to Willes, who was fazed by what he saw as the dim prospects for profit from new-media ventures. Willes considered newspapers, especially The Times, to be a corporate franchise to be nurtured and grown and spoke ardently of expanding the Times’ circulation by a half-million copies--a 50% growth goal others considered implausible.

“I found Mark skeptical [about new media],” said Harry Chandler, who now works at Internet company GoTo.com, “whereas Tom saw the sea change, like the rest of us.”

In fact it appears that Willes may have been unaware that the family was becoming disenchanted with his strategy. Even though they had formally approved his newspaper-oriented moves and the family-dominated board rewarded him with generous bonuses every year, over the course of 1999 they began to desire more diversification.

Times Mirror executives detected increasing tension between Willes and Unterman, and some ascribed it to Unterman’s supposedly thwarted ambitions to be named to the board or as Willes’ heir apparent.

The two men themselves downplay these reports of antagonism.

“One of the things I appreciated about Tom as CFO was that he didn’t think the way I think,” Willes said. “I’m a lot more confident about the future of newspapers than he was. But when you feel strongly about something, you want to have people around you who will challenge you.”

Unterman says he was “discouraged by the fact that we couldn’t be more effective in pursuing new media than we were” and admits he was “probably the most persistent questioner of the return on our investment in the circulation area.”

But he says he never asked for a seat on the board. “[I] reached the point in my career where I wanted to be in the investment business and the deal business.”

Unterman Takes On New Role With Family

That chance arose last year, when the Chandler family asked him to become an advisor on new-media and other ventures. The family asked Willes for permission to have Unterman share company data with them and provide advice as part of a plan to diversify its assets. Unterman ultimately became the architect of a new investment trust, known as TMCT II, designed to marshal the family’s holdings in high technology.

Between September and Dec. 31, Unterman served in a dual role--CFO of Times Mirror and financial advisor to the company’s largest shareholders. On Jan. 1, he relinquished the corporate job, although technically he remains a Times Mirror employee on leave long enough for his stock options to vest.

By then, Merrill Lynch investment bankers had revived the Tribune’s takeover proposal. This time they put out feelers directly to the trusts.

Unterman said he had no conversations with Tribune about a deal until sometime in late December, when he spoke with Jack Fuller, president of the Tribune’s publishing unit, at a board meeting of Classified Ventures, a joint venture in Internet classified advertising that includes The Times and the Tribune.

Fuller, Unterman recalls, asked him if he thought the trusts would be interested in a deal. Unterman said he told Fuller they might.

Unterman said he believed Fuller’s comment was small talk and therefore did not rise to the level of information he was obligated, as a corporate officer, to pass along to Willes.

In any event, he said, no firm contacts were made until January, when William Stinehart Jr., a Chandler family lawyer and board member; board member Warren B. Williamson, a family member; and Unterman met with Fuller and Madigan for lunch at the private California Club in downtown Los Angeles.

Stinehart, Unterman and family members Jeff Chandler and Roger Goodan, also a board member, followed up with a trip to Chicago on Feb. 8.

Throughout these talks, one significant question remained unsettled: Did the Chandlers even have the right to sell their stock?

The question arose because of the Chandler trusts, which were created in 1938 by family patriarch Harry Chandler to govern the family’s holdings in the company. Ever since it had been an article of faith in the community and company that the trusts’ provisions prohibited the sale of Times Mirror until their dissolution upon the death of the last Chandler heir who had been living in 1938. (That individual is Bruce Chandler, now 63.)

But matters were not that simple.

Remarkably, given that the trusts had been cited for decades as the bulwark preventing Times Mirror from being sold, few persons outside the family--or even within it--had ever seen the document itself. That includes both Tom Unterman and Mark Willes, who said in an interview that “it was my absolute conviction that the company could never be sold. . . . But I have never seen the trust document.”

Even Otis Chandler, the company’s chairman until 1986, says he is not sure he ever saw the trust instrument. But he has told friends that when he briefly communicated a merger overture from German publishing conglomerate Bertelsmann about 10 years ago, family lawyers informed him that the trusts were a heavy obstacle to such deals.

This widespread perception of the trusts’ inviolability worked in the family’s favor as long as any threat to Times Mirror’s independence might arise from a hostile takeover bid by an outsider.

But in truth there was little in its terms to prevent the trustees from actively shopping their stock. For one thing, the document merely required that any such move be unanimously approved by all seven trustees, all of whom are family members or trusted retainers and that the family retain a “significant interest” in the Los Angeles Times or its parent, sources said.

The Chandler stake in Tribune after the merger will be about 13% and the family will be granted four out of 16 seats on the company’s board. Moreover, a separate board will be established to oversee The Times, with four of its 10 seats assigned to Chandler designees, who will have veto power over the selection of a Times publisher.

The document may also have had what is known as a “safe harbor” provision absolving the trustees of liability for maintaining an undiversified stock portfolio as long as that portfolio was Times Mirror stock. The provision would mean that the proceeds of any sale would have to be spread among numerous other holdings, a move that could incur heavy tax penalties.

But the family’s establishment of the TMCT ventures meant that its assets were already diversified, so that Times Mirror shares could be converted into Tribune shares without putting the trustees at risk.

In any event, the notion that the trusts prevented the sale proved to be a chimera and may always have been.

“I don’t know where that understanding came from,” said Robert A. Denham, the Munger, Tolles & Olson attorney who delivered a formal opinion that the shares could be sold. “The trustees had the clear power to do what they did.”

Denham declined to describe in further detail the advice he gave the trustees, citing the confidentiality of the attorney-client relationship.

Talks between the family and Tribune continued through February, unbeknownst to Willes. That month he hosted a regular meeting for the board of directors in which he proclaimed that the company’s 1999 financial results demonstrated that his strategy of pushing for strong growth in its newspaper group was finally bearing fruit.

Among other things, Willes had doubled the value of the stock during his first three years at the company, started a national edition of The Times, increased circulation and pushed for stronger coverage of the Latino community. But he had also become a lightning rod for criticism in the newspaper industry as he pushed to break down walls separating advertising and editorial employees, culminating in an embarrassing revenue-sharing agreement with Staples Center.

As he recalls the meeting, no one in attendance challenged his strategy; and in fact the board approved his new annual budget and a continuation of his strategy.

Soon after that, however, Stinehart, the Chandler family lawyer and board member, called Willes to say he wanted to drop by for a chat. Suspecting nothing out of the ordinary, Willes obligingly penciled him in for 10 a.m. on Feb. 28.

Willes Hears of Merger Talks for First Time

Sitting on the black leather couch in Willes’ corner office, Stinehart got right to business. He informed the chairman of the board that the Chandler family had held extensive conversations with Tribune, and now wished Willes to complete the deal to sell Times Mirror.

Willes listened in a state of shock to this revelation that his largest shareholders had bargained the company out from under him, just as he thought he was nearing triumph. Weeks later, he was still almost unable to put into words his emotion at hearing the news.

As for whether the family had acted inappropriately in making a deal without informing Times Mirror’s top executive, a source close to the Chandlers remarked that there had been no deal until several days earlier, and no legal opinion on whether the trusts allowed the sale until the day before Stinehart’s meeting with Willes.

There was another reaction among the corporate executives as word of the deal wafted across the sixth floor. “The moment I heard about it,” one remarked, “I thought of Unterman.”

Bitterness about Unterman’s role on the sixth floor of Times Mirror Square, where more than 150 corporate executives and other employees may lose their jobs in the merger’s wake, only heightened last Saturday, when the word of his advisory fee surfaced as the final merger details were being worked out.

The disclosure, which came from an inadvertent remark by another investment banker, stunned several Times Mirror corporate officers, who questioned that a former top executive would represent the interests of one set of shareholders rather than the corporation as a whole.

Unterman, however, defended the fee, which will be paid to Rustic Canyon Group, his private investment partnership, as well-deserved for his service to the family. “I did consult with counsel to make sure it wasn’t inappropriate.” His severance agreement with Times Mirror, he added, explicitly contemplated that he would be providing advice to the trusts, which will pay the fee.

After his meeting with Stinehart, sources on the Tribune side of the merger negotiation say, Willes engaged in what one called a “guerrilla campaign” to scuttle the sale, assiduously lobbying the company’s independent directors--those unconnected to the company or the family--to vote it down.

Said Willes: “No. I did not resist it. I was disappointed, but I never did one thing to torpedo it.”

Times Mirror executives meanwhile also worked day and night to improve on its terms, eventually winning a $5-a-share improvement in the price, to $95. Another sticking point was the family’s traditional aversion to paying taxes; Tribune had fashioned its offer so that the family would receive stock for their shares, which made the transaction tax-free for them.

That structure saddled all other shareholders with a taxable all-cash deal, a disadvantage that would not pass a fairness test. The final deal, announced Sunday night, distributed the tax advantage more evenly.

“I never thought it was conceivable that you could sell this company,” Willes said this week, sitting exhausted in the same black leather seat he had occupied the morning he heard Stinehart’s words.

Then, recalling the years of vilification he had endured as he tried to slash costs, restructure the relationship between the business and editorial staffs and press for more circulation, he remarked: “Why go through all the agony I’ve been through if all you’re going to do is shine it up and sell it?”

Times staff writer David Shaw contributed to this report.

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