Blethen's Choice

| FROM THE PRINT EDITION |
 
 

Frank BlethenIn the spring of 2001, as the Seattle Times Co. board
settled in for its quarterly meeting, its chairman, Frank Blethen, offered an
overview of the company’s previous 12 months. The year had been “both the most
exhilarating and the most disappointing of my career,” Blethen told the nine
board members gathered in a second-floor conference room in the company’s South
Lake Union headquarters. Along the vertigo-inducing ride, Blethen had brushed
off an offer from minority owner Knight Ridder of about $750 million, including
assumption of the Seattle Times Co. debt, for the Blethens’ 50.5 percent stake
in the Times Co. But the high point was the shift of the flagship Seattle
Times
newspaper from the afternoon to the
morning market, a move that saved the paper from the fate of most other
afternoon dailies, but doomed its smaller and weaker joint operating agreement
partner (JOA), The Seattle Post-Intelligencer. For Blethen, who is also the Times’ publisher, gaining the morning slot and
head-to-head competition with the P-I was a celebratory victory. On the day of the Times’ first morning press run, he paraded through the
newsroom wearing a T-shirt showing the paper’s eagle mascot savaging the P-I’s trademark globe.

Related: The History of The Seattle Times.

But then, with prospects for a bountiful holiday ad season
in sight, things turned sour. A walkout at the Times and P-I
by the Pacific Northwest Newspaper Guild (and supported by the Teamsters) ended
four months of contentious negotiations. The strike was costly for the Times, including $13 million in lost ad revenue that would
never return. The union hadn’t struck the paper in half a century, but when the
confrontation came, Blethen took it personally. He ordered a cyclone fence and
surveillance cameras installed to keep picketers at bay and adopted a combative
bargaining stance. “To me,” he wrote in a note to a striker, “it is a clear
choice between supporting what the Blethen family has created … or choosing to
support a cause led by people who don’t care about The Seattle Times.”

When the strike ended 49 days later, Blethen continued to
rail against the unions. During the April board meeting, he accused them of
having a “targeted and destructive” agenda to ruin the Times Co. and the
Times
. With his cousins John, Bob and Will
Blethen in the boardroom, Frank Blethen announced a new policy. The old
“entitlement mentality” was out, he declared. In its place, a “high performance
mentality.”

In retrospect, that 2001 board meeting probably marked the
start of the Times Co.’s accelerating slide toward insolvency. According to
loan documents and other records, the company now owes more than $100 million
to its pension fund and lenders, with its bankers dictating some of the
company’s major financial decisions, including the decision to put its
subsidiaries in Maine up for sale, which some assert the Times overpaid for three years previously. Other assets
have already been sold or are frozen in the economic slump. The flagship Seattle
Times
, after weathering repeated staff
cutbacks, barely resembles the regional powerhouse that won seven Pulitzer
prizes. When the P-I’s owner,
Hearst Corp., finally shut down that paper last March, instead of a victory
stomp on his rival’s grave, Blethen issued a brief statement warning that the Times might not make it either.

What is remarkable about the Times Co.’s current financial state
is not that it is happening—newspaper companies from the august New York Times
Co. on down are struggling. But while it is true that the Seattle Times Co. has
been hammered by the same forces affecting others, the management performance
of the Blethens themselves during the past decade has contributed significantly
to the Times’ current troubles.

“We asked questions that any one of our own publishers would
have known, and Frank didn’t know the answers,” says Tony Ridder, chief
executive of Knight Ridder, which owned 49.5 percent of the Times Co. from 1929
to 2006. “It was,” Ridder adds, “a weak business leadership.”

 

Tucked away in the 2001 minutes of the Times Co. board are the first signs of cracks in the
company’s financial structure, fissures that now threaten the Times
continued existence. They included warnings that Seattle’s boom economy had
stalled, severely pinching ad revenue. The strike also wiped out the financial
cushion that had sustained the company and newspaper through previous downturns,
and the company still owed $188 million on a loan it had taken out three years
earlier to buy a small newspaper chain in Maine. Frank Blethen had pushed the
purchase through, over Knight Ridder’s objections, to commemorate the family’s
roots in the Pine Tree State, renaming the chain Blethen Maine Newspapers.
Still, he assured the board, the Times Co. would honor its loan commitments and
achieve a comfortable 12.5 percent profit margin on its cash flow for the year.
Blethen even rammed through a $1-million bonus on the Times Co.’s $6-million
annual dividend, again ignoring Knight Ridder’s protests.

“We didn’t think the dividend was prudent, given the Times’ debt and where the economy was going,” says Ridder,
who frequently clashed with Blethen on the Times Co. board.

What the minutes of the meeting do not mention is another
event that foretold the Times Co.’s mounting financial problems. Just a month
earlier, the company had defaulted on the Maine loan, forcing a loan
restructuring that added additional debt. According to Ridder, Blethen tried to
put The Seattle Times up as collateral,
but Ridder blocked the effort by invoking a clause in the original 1929 deal
that had given his grandfather the minority stake in the Times Co. The
agreement, brought about by earlier unwise financial decisions by Blethen
ancestors, prohibited encumbering the newspaper with debt.

“Frank was very upset we wouldn’t go along with handing over
The Seattle Times to the bankers,”
Ridder says.

 

To understand how the Seattle Times Co. went from a cocky newspaper chain with a street value of
$1 billion or more to a troubled company whose worth may now be in negative
territory, it helps to understand the Blethen family’s complex relationship to
the business their great grandfather Alden started 113 years ago.

The Seattle Times
declined to comment for this story. But board meeting minutes, court documents
and other materials show the extent of the company’s financial and personal
troubles. The relationship of the Blethens to their business, for example, is
spelled out in a 2001 Harvard Business School case study entitled “The Blethen
Family and the Seattle Times Company.” The 24-page report is an unusually
detailed discussion of the internal workings of the usually secretive Times Co.
and, more remarkable still, of the Blethens themselves. John Davis, a
small-business expert and senior lecturer at the business school who wrote the
case study, says that Blethen family members, including Frank Blethen, provided
most of the case study’s information. 

“I thought they were extraordinarily forthcoming,” Davis
says, “especially given the sad family history they’ve had.”

According to Davis and Cathy Quinn, a clinical psychologist
based in Beverly Hills, Calif., who did most of the interviewing for the study,
the fourth generation of Blethens currently managing the Times Co.—Frank and
his cousins—set out to use the company as the vehicle to rebuild their own
families from what Davis and Quinn call “the toxic Blethen family atmosphere”
of the past. Previous generations of Blethens “were physically absent and
emotionally remote,” they wrote. Frank Blethen complained that his father,
Frank Sr., who had divorced five times, never sent him a birthday card or
letter, and never called, throughout Frank Jr.’s adolescence.

Blethen took a summer job at The Seattle Times when he was 21, living with his father in a hotel in
Seattle. “During that summer, his father asked Frank what he would like to do
at the newspaper after college graduation,” Davis and Quinn write. “Frank
explained to him that he had no interest in a career at the paper and that he
had only worked there to become acquainted with his father.”

By 2000, when Quinn interviewed Blethen for the case study,
Blethen estimated he was spending 40 percent to 50 percent of his time
“building family cohesion,” communicating with his cousins and what he called
“the fifth edition” of younger family members about Times Co. business.
Blethen, Davis wrote, “felt that the continued independent, private ownership
required family pride in the newspaper and its values, as well as family
inclusion in the affairs of the newspaper, fair dividends and suitable
employment for family members.” One result of that philosophy is a rule that a
“suitable position” is always available at the Times for family members who finish college and have some
work experience. The rule, the study says, is designed to avoid the squabbles
that plagued previous Blethen generations over who would lead the Times Co.

“We developed a strong work ethic and shared a deep need to
be different from our fathers,” Bob Blethen told Quinn.  

Since he took over as Times Co. CEO in 1985, Frank Blethen
has been the family’s patriarch and dominant voice. Tony Ridder, who sat on the
Times Co. board for more than 20 years, says Blethen’s cousins rarely spoke up
during board meetings. “Frank was the only one with the interest and the drive
to run things,” Ridder says, “so they were willing to turn things over to him.”

 

Seattle Times chartDuring Blethen's tenure as the Times Co.’s chairman and CEO, virtually all the company’s major business
decisions have come from the family’s holding company, Blethen Corp. According
to the Harvard case study, the five voting members of the Blethen Corp. board
at the time were Frank Blethen and his four cousins. (One cousin, Alden, died
in 2006. It couldn’t be determined who casts his vote now.) The board also had
five non-voting outsiders who also acted as family advisers. All 10 Blethen
Corp. board members sat and voted on the Times Co. board, which was structured
so that no matter how many total seats there were, the family had a permanent
one-seat majority over Knight Ridder, the minority shareholder until 2006.

“I didn’t sit in on too many board meetings, but my
impression was that most issues were decided before they reached us,” says
Jerry Ceppos, Knight Ridder’s former vice president for news, who was on the
Times’ board from 2000 to 2006. Ceppos, now dean of the Donald W. Reynolds
School of Journalism at the University of Nevada in Reno, says decisions by the
Times Co. board often pitted the Blethen bloc against Knight Ridder.

The two factions got along during the early 1980s, says Tony
Ridder. His contingent supported Frank Blethen’s bid over Blethen’s cousin,
Alden, to be chairman of the Times Co. board in 1985. But relations between the
two board factions deteriorated, Ridder says, after the Knight Ridder group
unsuccessfully voted against the Times’ purchase of the Yakima
Herald-Republic
for about $65 million in
1991. “We didn’t think it was priced right,” Ridder explains.

Both the Yakima paper and the Walla Walla Union-Bulletin, which the Times Co. bought in 1971, have remained
slightly profitable, according to Times insiders, as has another Times Co. operation, Rotary Offset Press in
Kent. But the company’s more recent business decisions under Blethen’s
leadership have not been as successful.  

BLETHEN MAINE

The costliest spending decision, the $230-million Blethen
Maine purchase in 1998, came from a suggestion by Ryan Blethen, Frank’s son,
during a family excursion to visit Maine relatives. In a 1998 column for the American
Journalism Review
, John Morton, an industry
financial analyst, interviewed Frank Blethen about the purchase. According to
Blethen, Morton wrote, “Ryan opined that it would be wonderful if The
Seattle Times
could acquire a newspaper in
the state that had captured the Washington family’s imagination.” When a
three-paper chain owned by the Guy Gannett Co. (no relation to the much larger
Gannett newspaper chain, which publishes USA Today) came up for sale, Blethen outbid at least four
other large newspaper companies, Morton wrote. The chain included Maine’s
largest paper, the Portland Press Herald, with a circulation of 74,500, and two smaller dailies in Augusta and
Waterville.

Ridder, who closely monitored the transaction, both as a
member of the Times’ board and as CEO of Knight Ridder, says that while several
other newspaper companies expressed interest in the Maine chain, none but the
Times Co. actually made a formal bid. Guy Gannett’s investment bankers
convinced the other companies to discuss what they might bid, Ridder says, and
the bankers relayed the information to Blethen. “The Blethens ended up bidding
against themselves,” says Ridder. Knight Ridder’s representatives on the Times
Co. board argued that besides its high purchase price, the chain had little
growth potential and a history of union friction that could make it costly to
operate.

Moreover, Ridder says, Guy Gannett’s bankers also talked the
Times into making the purchase a stock sale rather than an asset sale, which
allowed Guy Gannett to get tax benefits but cost the Times the ability to write
off the chain’s goodwill and other intangibles. Ridder estimates that if the
deal hadn’t been structured as it was, the Times would have saved “tens of
millions of dollars” off the chain’s purchase.

“When the deal came before the Times Co. board, we made all
the arguments to the Blethen Corp. directors why this was not a smart thing to
do,” Ridder says. “But Frank had already made up his mind and the Blethen bloc
outvoted us.”

Last year, when the Maine chain was put up for sale under
pressure from the Times Co.’s bankers, Blethen told the Portland Press
Herald
he hoped to recoup $100 million of
the company’s investment. But in a fund-raising pitch last March to the Maine
Public Employees Retirement System, HM Capital Partners, a Dallas-based
investment group and the only bidder for the chain, said it expected to acquire
the Maine newspapers for the value of their real estate—about $28 million. By
April, HM Capital had still not found investors to put up cash for the deal and
the Maine chain was still hemorrhaging cash.

 

UNION BATTLE

In late 2000, the Times
made another costly decision. A month before the Newspaper Guild struck the Times, Frank Blethen told the company’s board he was
preparing for a confrontation. “The company will hold to its values and will
not capitulate to the unions’ demands or rhetoric,” Blethen promised the board.
(After the strike was settled, Chris Biencourt, the Times’ labor relations director, prepared a PowerPoint
recap for the Blethen Corp., calling the strike “inevitable.”)

The Times kept
Blethen’s promise and didn’t raise its offer. But the showdown cost the Times
$19 million in direct strike expenses, company officials later calculated, plus
the $13 million in lost ad revenue. The losses led directly to a default on the
company’s loan covenants. And the dispute couldn’t have happened at a worse
time for The Seattle Times.

“It came just as dark clouds were gathering on the horizon
and the economy was going soft,” says Ridder. “It was clear we were heading
into tougher times.” Blethen, he adds, may have miscalculated about the depth
of the union’s anger and the cost to the Times of a walkout just before the lucrative holiday season.

Under Blethen, the Times
developed a reputation as a good place to work, with a subsidized daycare
center and other employee perks. “I think Frank thought he was beloved by all
the Times employees,” says
Ridder, noting that once the union did go on strike, “I think he [Blethen]
realized that not everyone thought he was the world’s greatest human being.”
Ridder recalled that the Times
managers had bypassed the board in their decision to fight the unions—Ridder
learned about the walkout from the radio.

But some doubted a strike was coming. Mason Sizemore, the
Times Co.’s president and Blethen’s second-in-command at the time, said in a
court deposition in 2003 that the day before the walkout, Sizemore was still
confident that the labor dispute would be amicably resolved. Sizemore, who has
declined to be interviewed by reporters since he left the Times in October of 2001, told lawyers for the Hearst
Corp., the P-I’s owner, that he
had not increased the Times
bare-bones strike insurance before the walkout “for the simple reason we didn’t
believe we were going to have a strike.” The Times and P-I,
he said, “had worked very hard at creating good relationships with our unions,
so we were not focused on the fact that in the year 2000 we were going to need
more strike insurance.” Ultimately, Sizemore said in his deposition, the Times recovered less than $1 million from its
strike-insurance policy.

Chuck Taylor, a former Times reporter and one of the strike leaders, says the Times “absolutely” could have avoided the showdown if it
had shown a willingness to negotiate. “If this had not been a locally-owned
paper, someone from corporate would have done a cold, cost-benefit analysis and
concluded it wasn’t worth it,” says Taylor, who ended up editing the union’s
strike paper and did not return to his Times job after the strike. “They would have said, ‘Let’s
give them a little and avoid a strike.’ But Frank and others didn’t want to
hear that.”

 

THE JOA

Perhaps the most incendiary of the thousands of documents
made public in the four-year legal fight between Hearst and the Times Co. was a
memo, written by Frank Blethen in January of 2003 and marked “confidential.”
The 30-page paper, which Blethen had prepared for a meeting of the Blethen
Corp., says that eliminating the joint operating agreement that linked the P-I to The Seattle Times—and which would effectively spell the end of the P-I—had been a goal since he became the Times Co.’s CEO
in 1985. By 2003, he said, it was the family’s top priority.

Just three months after setting that goal, Blethen notified
Hearst that The Seattle Times had lost
money under the JOA formula since 2000, triggering a provision that would
eliminate the P-I and the agreement in 18 months. “If we pull this off,”
Blethen wrote in his presentation, “we will take a major step in ensuring the
survival of The Seattle Times as
a private, locally-owned, fiercely independent voice.” Not only that, Blethen
said, but killing the P-I and the
JOA would guarantee the Times
would “thrive as a business and as a news and journalistic enterprise.”

Ridder says that for once he and his contingent on the Times
Co. board backed Blethen. The Times Co. CEO, he says, assured the board that
the assault on the JOA and P-I was
legally sound and that Hearst would capitulate if the three-year-loss clause
was triggered. Not only would the P-I be gone, Ridder says Blethen told the board, but also the Times would no longer be obligated to pay Hearst 32
percent of its profit until 2083.

Instead, the decision to fight Hearst turned into a disaster
for the Times Co. Hearst, which had financial resources that dwarfed those of
the Times, poured millions into a legal
fight that wound its way through the state courts for more than four years.
When Blethen finally settled in 2007, borrowing $24 million to pay off Hearst,
the settlement allowed the P-I
and the JOA to continue at Hearst’s discretion for at least 10 more years. The
JOA died when Hearst shut the paper in March.

Would some or all of that $250 million-plus that was
frittered away over the past decade save the Times Co. today? Probably not.
Newspaper analysts, for the most part, do not believe printed newspaper
revenues will ever rebound, or that readers will return to newspapers,
especially the younger readers the business needs to survive and grow healthy
again. What that extra cash might have done, however, is help the Times bridge the gap into the digital age. “Every
newspaper is in trouble today,” says Alan Mutter, a San Francisco-based media-industry
analyst and former newspaper editor. “Obviously, a company with heavy debt is
suffering more and has less room to maneuver than one without debt.” 

Instead, the Times
must try to stitch together a financial patchwork to make it across the digital
divide—slashing costs and staff still further, hoping the economy will turn
around soon enough to sell its remaining real estate assets and draw down its
debt, holding its bankers at bay, and, in the most ironic twist, trying to keep
most of the 74,000 P-I
subscribers it picked up. Media analysts say it will be a challenge for the
paper to maintain those circulation gains.

 

In the end, it is
hard to avoid using the word “irony” in describing the Times and
the Blethens’ stewardship of the company. In 2005, when the Times was on the ropes in its fight with Hearst, Blethen
asked Tony Ridder, whom he had often characterized as journalism’s archenemy,
to bid for the company. Ridder offered to pay the Blethens about $500 million
and assume the Blethens’ portion of the Times Co. debt, a significantly smaller
offer than from two years before. After the Blethen family failed to take it,
he withdrew the offer. (A year later, when it acquired Knight Ridder, the
McClatchy Co., a leading newspaper and internet publisher, valued the Times
Co.’s minority stake at $102 million, and this year McClatchy wrote the value
of its stake down to zero.) Earlier this year, after the Times had exhausted its ability to raise cash to fend off
its bankers, Blethen turned for help to another old adversary, the company’s
unions. Times’ Guild and Teamster
workers agreed in April to cut their compensation package by 12 percent to help
bail out the company.

But the most poignant example of the irony embedded in this
saga may be Frank Blethen himself. In their case study, Davis and Quinn, the
Harvard researchers, offer repeated examples of Blethen’s efforts to knit
together his family by instilling pride in the Times Co. As far back as the
1970s, they report, Blethen sought out some of Seattle’s best legal
talent—including Bill Gates’ father, William Gates Sr. of Preston Gates &
Ellis—to strengthen the family corporation’s bylaws and to give the Times more adept leadership. In the prosperous ’90s, when
the Times was minting money and
other companies, like Knight Ridder, were setting 25 percent profit goals,
Blethen poured hefty amounts of the company’s revenue back in to The
Seattle Times
, boosting its size and reach
and adding Pulitzer Prizes to its trophy case.

At the same time, Blethen’s pride has
repeatedly driven him into endeavors and to actions that have undercut the Times’ ability to survive and remain the family’s
centerpiece. “Journalistically,” says Tony Ridder, attempting recently to
explain this dichotomy, “The Seattle Times was a good newspaper. But Frank absolutely did not make good business
decisions.”