Destroying Dow Jones to Save It

By JOE NOCERA
TALKING BUSINESS
The New York Times
May 19, 2007

So let’s see. We’re now into week No. 3 of the business world’s favorite new soap opera, “Mr. Murdoch Lusts After Dow Jones.” And what a strange week it’s been.

You’d think that when someone offers $60 a share for a stock that has been stuck in the $30s, as the News Corporation’s chairman, Rupert Murdoch, did, the controlling shareholders would, at the very least, want to really grapple with it. But in this case, the controlling shareholders are the three dozen or so adult members of the Bancroft family — and grappling with things related to Dow Jones has never been their style. Nor is it the sort of thing that their supposed advisers, the trustees at the small Boston law firm of Hemenway & Barnes, tend to encourage. Indeed, family members who dare raise legitimate questions about the asset that forms the bulk of their wealth tend to be ostracized by their elders, and cut out of the loop by the trustees.

The week began with family members receiving a copy of a letter that Mr. Murdoch had sent a few days before, asking for a meeting to discuss his bid for Dow Jones, and laying out the steps he would take to ensure the independence of its crown jewel, The Wall Street Journal.

On Monday afternoon, after they had a little time to absorb the letter, the family and its trustees held a conference call. Merrill Lynch, which has been retained by the trustees, made a presentation, outlining Mr. Murdoch’s offer, as well as the competitive pressures the company is under. From what I hear, questions weren’t encouraged, and the issue of whether the family should meet with Mr. Murdoch wasn’t even broached. In other words, nothing happened.

Two days later, the Dow Jones board met to discuss Mr. Murdoch’s offer. More presentations, including one from Clare Hart, who runs the division that includes Dow Jones Newswires, a profitable part of the company that could soon become much less profitable if two of its biggest rivals, Thomson and Reuters, wind up merging, as they plan to. The board concluded that so long as the majority of the Bancrofts oppose it (and currently the family members who stand in opposition control 52 percent of the company’s voting shares) it should do — you guessed it! — nothing.

Meanwhile, various Bancrofts have been talking to each other pretty much nonstop, though mostly to their allies within the family. Those who want to consider the Murdoch offer are chafing at those who rejected it, which they did, please recall, with incredible haste, the very afternoon it became public. Those who oppose the offer are angry that Mr. Murdoch has put them in such an awkward spot, and caused the family to become such an object of public scrutiny. The Bancrofts hate public scrutiny.

A kind of paralysis has settled over the family. No one seems to be able to take charge of the situation, or get everybody together to air the issues straightforwardly. Nor are the trustees showing much leadership; they seem as adrift as the family itself. (They are not returning calls from the media either, including mine.)

It’s a heck of a way to run a company, isn’t it? But, of course, the Bancrofts don’t actually run Dow Jones. All they do is own it. Although there are four Bancroft board members (including one trustee), none work for the company. Few of them understand much about the industry they’re in; the family largely lacks business acumen. For decades, they have passively accepted whatever steps Dow Jones management has chosen to take, believing that in doing so, they’ve been ensuring the independence of The Wall Street Journal. After all, that’s what Dow Jones management has been telling them all these years. So has Roy Hammer, their longtime (and since retired) lead trustee.

It is great that The Journal has not been Gannett-ified — or Rupert-ized, for that matter. It really is. But the family’s passivity has come at a steep price. For a long time now, Dow Jones has been the worst-run media company in the country. It has missed one opportunity after another to transform itself from a small newspaper company to a diversified financial information company, something Thomson did so successfully. And the efforts it has made at diversifying have largely backfired, mainly because Dow Jones management didn’t know what to do with the assets it purchased. The Bancrofts’ neglect — their unwillingness to hold Dow Jones management accountable for its mistakes — has not only hurt them and their heirs, it has hurt the company they all profess to love. And it has made Mr. Murdoch’s bid possible.

I HAVE a theory as to why Dow Jones management has been so inept over the years. It is a company that has long prided itself on being run by journalists. That was also part of preserving the integrity of The Wall Street Journal. Journalists, after all, would be less likely to damage the paper or cater to advertisers. But journalists tend to be terrible businessmen; they lack the risk-taking mindset that marks a good chief executive. Making the kind of big, bold bets that C.E.O.’s have to make all the time in industries undergoing wrenching change, like the newspaper business, just does not play to their strengths, which are observing, critiquing and finding out things.

The most legendary of the journalists-turned-chief-executives at Dow Jones was Barney Kilgore, who, as managing editor of the paper in the 1940s, effectively invented the modern Wall Street Journal. But he was the exception to the rule: during the 20 years he ran the company, he transformed The Journal into the country’s first truly national newspaper.

In 1975, however, a former Journal foreign correspondent, Warren Phillips, became the chief executive; his protégé, and eventual successor, was a Pulitzer Prize winner, Peter Kann, who ran Dow Jones from 1991 until the beginning of 2006. It is not an overstatement to describe their combined tenures as one giant disaster. They were newspapermen in love with ink and paper, who could never fully commit to the idea that newspapers were becoming an increasingly outmoded way of distributing financial information and data. Thus, even as they held title to one of the greatest brands in the world, they were lapped by upstarts like Bloomberg and lesser-known names like Thomson (which, by the way, is also a family-controlled company). “They have been very slow at the switch and very risk-averse,” a former Dow Jones executive named Bill Dunn told me many years ago.

In the 1980s, for instance, Dow Jones passed on a chance to own 50 percent of Comcast — and sold a 25 percent stake in Cablevision for peanuts. It decided not to allow options pegged to the Dow Jones industrial average — on the theory that options were beneath the dignity of Dow Jones. It is now in the options business, but most of its thunder was stolen by McGraw-Hill’s Standard & Poor’s unit, which makes a small fortune with its options business. Dow Jones negotiated to buy the Financial News Network for $90 million, but did the deal without investment bankers and neglected to include a lock-up provision, allowing NBC to come in and outbid it. That purchase became the backbone of CNBC, which makes hundreds of millions of dollars annually for its parent company, General Electric.

And then there was the biggest debacle of all, Dow Jones’s purchase in the late 1980s of a financial data company called Telerate, for $1.6 billion. The Telerate acquisition was supposed to be Dow Jones’s way of becoming a more broadly based financial information company. But Mr. Kann never understood the business and put the wrong people in charge of it. And every year, it slipped further behind Bloomberg, whose technology was vastly superior. Dow Jones spent an additional $650 million to turn it around, but that didn’t help. In 1998, it sold Telerate for just $510 million.

The one thing Mr. Phillips and Mr. Kann were good at — indeed, great at — was placating the Bancroft family. They did so, in part, by paying an enormous dividend — more than the company could really afford. But they also did so by telling the family, again and again, what a great thing they were doing in protecting the independence of The Wall Street Journal. Indeed, it was Mr. Phillips who came up with the idea of two classes of stock, which would allow the family to sell some shares and still retain control. An inept chief executive couldn’t hope for a better deal. No matter what move Mr. Phillips made, neither the family nor the trustees were ever going to question him. It just wasn’t their style.

Even in the midst of the Telerate disaster, most family members continued to back the people running Dow Jones. “They have a plan, and a good one,” Christopher Bancroft told me in early 1997, referring specifically to Telerate, which was then losing buckets of money. “I support Dow Jones management 100 percent,” said another family member, William Cox Jr. Both men were Dow Jones board members. Mr. Bancroft is still on the board, and is among those opposed to selling the company to Mr. Murdoch.

But Telerate was so obviously a mess that it also caused the first public rupture in the family, when Elisabeth Goth (she now uses her married name, Chelberg) and William Cox III, the last family member to work for Dow Jones, began publicly agitating for some management accountability. On the one hand, their efforts probably caused Mr. Kann to get rid of Telerate. On the other hand, Ms. Chelberg and Mr. Cox discovered what happens to any Bancroft who dares to criticize Dow Jones management. It took them years to get the rest of the family to talk to them again. Neither has been out front in dealing with the Murdoch bid.

To the Bancroft family, Rupert Murdoch has always been the devil — the epitome of the meddling down-market mogul who would wreck the paper if given half a chance. Or at least that’s what they’ve been taught to believe all these years by Mr. Phillips and Mr. Kann. And no matter how many promises Mr. Murdoch makes, their opinion is not likely to change. If they do wind up selling to him, they will do so holding their noses. There was a time, not so many years ago, when they could have sold to Bloomberg or the Washington Post Company or possibly even The New York Times Company. But Mr. Kann wouldn’t pursue those deals, and now those buyers are on record as saying they are no longer interested. It’s Rupert or nothing.

Even now, Mr. Kann and Mr. Phillips are trying to persuade the family, one last time, that it’s all about The Journal’s independence — and not their own incompetence or the family’s unwillingness to act as a true steward over its asset. Last week, Mr. Kann, who did not respond to my phone call, was quoted in The Wall Street Journal as saying how much he admired the family “for taking the position of maintaining Dow Jones as an independent public company.”

On Thursday, I did get Mr. Phillips on the phone. “If they are as determined in their support of The Journal’s independence as they have been in the past, then I think the paper is in good hands,” he said.

Would that it were so. But it’s not. “We had to destroy the village in order to save it,” was the famous phrase that came out of the Vietnam War. With the path they’ve been on, the Bancroft family seems intent on destroying Dow Jones in order to save it.