advertisement TODAY'S MOST POPULAR 1. Before You Heed a Spouse's Advice … 2. Pain From Free Trade Spurs Second Thoughts 3. Netflix vs. Naysayers 4. Stocks Slip on Weak Housing Data 5. U.S. to Probe Outsourcing After ITT Case MORE

PAPER CHASE
How a Money Manager
Battled New York Times

(See Corrections & Amplifications item below.)

In late June 2005, Arthur O. Sulzberger Jr., chairman of New York Times Co., received a letter from a little-known London-based portfolio manager at Morgan Stanley named Hassan Elmasry. It began mildly. "I read my first copy of the New York Times nearly 30 years ago in my high-school library in suburban Chicago," wrote Mr. Elmasry, whose fund then owned a 5% stake in Times Co. "The Times formed my view of the world."

The letter then went on to criticize the company's performance and its management. Mr. Elmasry closed by asking to talk to Mr. Sulzberger directly. In Mr. Sulzberger's five-page response, defending the Times's financial performance, he didn't directly acknowledge the request.

That rebuff set off months of heated exchanges between Mr. Elmasry and Mr. Sulzberger, culminating in an extraordinary assault by a major Wall Street bank on a pre-eminent newspaper company. The more he was spurned, the more Mr. Elmasry escalated his attack.

Companies across the U.S. are learning how to handle persistent and critical shareholders, a type they once safely ignored. At the Times, amid a historic downturn for the newspaper industry, top executives, and Mr. Sulzberger in particular, are getting a crash course.

After Mr. Elmasry went public with his campaign, Morgan Stanley Chief Executive John Mack fielded calls about the Times from former General Electric Co. CEO Jack Welch and former American International Group Inc. CEO Maurice "Hank" Greenberg. Mr. Welch is leading an investor group seeking to buy the Times's Boston Globe. Mr. Greenberg casually suggested he and Mr. Mack work together to take over the whole company, according to a person familiar with the conversation.

Late last month, for the first time, Mr. Elmasry walked into the New York Times boardroom and addressed its full board, including Mr. Sulzberger. That day, the company also heard from another major shareholder, T. Rowe Price Group Inc. In his presentation, Mr. Elmasry criticized the Times's planned new headquarters, its acquisition strategy and Mr. Sulzberger's ill-fated choice of Howell Raines as New York Times executive editor. But his main grievance was the complex structure by which the Sulzberger family maintains control over the public company.

Dislodging that setup might be an unattainable goal for Mr. Elmasry, but his campaign has nonetheless forced the board to embark on some difficult discussions. It even pushed the family to consider -- briefly -- taking the publisher private. James M. Kilts, a former Gillette Co. chairman and an accomplished deal maker, joined the Times board in 2005 and has taken an active role advising Mr. Sulzberger, according to people familiar with the matter. In particular, he has pushed the company to cut costs.

Over time, the Times has made some changes -- not, it insists, in response to Mr. Elmasry's pressure -- including selling TV stations and cutting options grants that would have been given to top executives.

Catherine Mathis, a company spokeswoman, says the Times has taken many steps to improve its business performance, such as launching new products, finding ways to cut costs and selling assets. The company has also regularly increased its dividend and bought back stock, she says. Playing down Mr. Elmasry's influence, she says "the initiatives we've taken on are just sound business practices."

In addition, Ms. Mathis says, the Times talks often to shareholders. Since March 1999, Morgan Stanley has met with Times executives 40 times, the publisher says. Mr. Elmasry or someone from his fund has been present for at least 10 of those meetings, the Times says.

The Ochs-Sulzberger family, one of the country's great newspaper dynasties, has owned the Times since 1896. After the publisher went public in the 1960s, the family continued to exert control through its ownership of the vast majority of Class B voting shares. Class A shareholders such as Mr. Elmasry aren't allowed to vote on many important matters relating to the company.

Dual-class structures caught on in the mid-20th century as families such as the Grahams of Washington Post Co. sought to gain access to public capital without losing control. Dow Jones & Co., publisher of The Wall Street Journal, has a similar structure and is controlled by the Bancroft family. Many regard family ownership as a way to promote journalistic excellence by insulating newsroom decisions from short-term pressures.

Under Assault

But today, newspapers are under direct assault as never before, mostly from the Internet, which presents a challenge to the industry's creaky business model. As newspapers struggle to maintain circulation and advertising, investor confidence has plummeted.

So far, the greatest pressure has been felt by publishers not protected by dual-class structures. Last year, an activist money manager forced Knight Ridder, then the nation's second-largest publisher, to put itself up for sale. It was eventually acquired by McClatchy Co. Meanwhile, Tribune Co., owner of the Chicago Tribune and Los Angeles Times, has hung out a 'For Sale' sign following pressure from the Chandler family, a big minority shareholder.

Mr. Elmasry, 44 years old, the son of Middle Eastern immigrants to the U.S., went to business school at night while working at First Chicago Investment Advisors. In 1996 he joined Morgan Stanley's investment management division after the Wall Street firm acquired his then-employer, a firm in Philadelphia. Two years later, he moved to London and started managing the Global Franchise fund. Described by colleagues as mild-mannered but intense, he normally likes to keep a low profile. Mr. Elmasry's fund has registered an 18.6% compound annual growth rate over the past decade; in the same period, the S&P 500 Index chalked up an 8.4% growth rate, based on total returns. Mr. Elmasry's fund currently manages $12 billion.

Mr. Sulzberger, 55, is known for his youthful demeanor, enthusiasm for digital media and sympathies for the newsroom, as well as his penchant for management advice books. Appointed chairman in 1997, Mr. Sulzberger has worked through bouts of turmoil on the editorial side of the company. Some acquaintances who have seen him in recent weeks say he seems frustrated with the renewed attacks on the company -- this time on the business side.

Mr. Elmasry's fund focuses on companies with well-known, household brands or patents, including other family-controlled companies such as cosmetics maker Estée Lauder Cos. and Brown-Forman Corp., the owner of Jack Daniels whiskey. The fund began acquiring New York Times stock in the mid-1990s, even before Mr. Elmasry took over in 1998.

At the time, the Times was expanding its circulation nationally, a strategy Mr. Elmasry supported. He felt the Times's brand was strong enough to enter new markets at relatively low cost. Further, he saw the 1997 introduction of color into the main part of the paper as an opportunity to boost ad revenue.

In October 2002, the Times bought the half of the International Herald Tribune it didn't own from a reluctant Washington Post. The Times gained control of the money-losing paper not long before the downturn in the newspaper industry. Ms. Mathis says the paper's "performance has improved."

By 2003, Mr. Elmasry was beginning to question the company's direction. It was investing in a new headquarters, which he saw as a vanity project. His concerns escalated in 2005 when the company announced the $410 million acquisition of About.com, a huge database of advice and information. According to a person familiar with his thinking, Mr. Elmasry worried that About.com, lacking an established brand, could easily be surpassed by a rival product from Google Inc. or Yahoo Inc.

Weeks after the deal was announced, Mr. Elmasry called the Times's vice president of corporate communications, Ms. Mathis, and asked to meet with Mr. Sulzberger, according to a person familiar with the call. The chairman hadn't been available on the company's quarterly earnings conference calls -- the usual forum for investors to talk to company executives -- since 2003.

Ms. Mathis responded, according to this person, that Mr. Sulzberger doesn't usually meet with shareholders. Ms. Mathis says she doesn't recall the exact words she used. She says the primary responsibility for meeting shareholders lies with her and the company's CFO and CEO.

Six Areas of Concern

Infuriated, Mr. Elmasry wrote to the chairman directly. After its benign opening, his letter outlined six specific areas of concern, including the Times's declining circulation in the New York region and what Mr. Elmasry called the company's weak and unfocused Internet strategy; capital misallocation and overly liberal option grants.

Mr. Sulzberger responded about two weeks later, rebutting Mr. Elmasry's arguments point by point without addressing the investor's request for a meeting.

Responding to Mr. Elmasry's criticism that the company had neglected its newsroom, Mr. Sulzberger wrote: "While overall staffing has declined in the business and production departments, both the size of the Times staff and the newsroom budget have increased as we have invested in our journalism." He listed editors and reporters recruited from other high-profile newsrooms, cited the Times's 11-part series on class in America, its coverage of Iraq, "where we have more reporters than any other American newspaper," its Washington bureau, "where we have the largest staff in the bureau's history," and the year's prizes.

As for the Times's Web strategy, Mr. Sulzberger favorably compared it to that of The Wall Street Journal, where he said 2004 online revenues "were 25% below those of NYTimes.com." About.com "will prove to be a very good acquisition," the chairman wrote. Indeed, About.com's revenues increased an estimated 50% in 2006 compared with the year earlier, the Times says.

(A Dow Jones spokeswoman says: "We don't know the basis for the revenue comparison," but online advertising revenue has grown at "very strong rates" in recent years, as has online circulation revenue.)

Mr. Sulzberger defended the planned new headquarters, noting that the Times's existing headquarters was built in 1913 as a printing facility. The costs of renovating the building for future use "were high relative to the cost of a new facility." The company had a development partner and expected to be in the new headquarters "for the next 100 years."

The only complaint Mr. Sulzberger didn't parry related to the Times's stock-option grants, which the chairman said "is something we will carefully evaluate."

After the exchange, Mr. Elmasry and his associates contacted current and former Times employees and competitors to check the fund's assumptions about the Times, according to people who took part in some of those conversations. Mr. Elmasry seriously considered selling the fund's stake, but didn't, hopeful he could have more influence if he got through to Mr. Sulzberger.

Mr. Elmasry had met with the company's CEO, Janet Robinson, and then-CFO Leonard Forman. But he wanted to see the chairman, believing it was the Sulzberger family that was driving the company's investment decisions.

In a second letter dated Nov. 1, 2005, Mr. Elmasry told Mr. Sulzberger he was "baffled" by his inability to get a meeting. "In over 20 years of investing we have not yet encountered a chairman of a public company who has declined to meet with us as long-standing and substantial institutional shareholders, particularly after such a lengthy period of poor business and stock market performance," the letter said.

He raised for the first time his concern about the company's dual-class share structure, suggesting Mr. Sulzberger would have had a different attitude "if we held seven million voting shares instead of non-voting shares." Hoping to get the board's attention, Mr. Elmasry sent the letter to every director.

Once again, Mr. Elmasry got a response in two weeks from Mr. Sulzberger -- who this time struck a frustrated tone: "As you know from having met or spoken with [other executives] a half dozen times or so over the course of the last 18 months, we take investor communications very seriously." Mr. Sulzberger said he and his team are happy to meet with shareholders "when we believe there will be a useful dialogue," adding that Times directors represent all shareholders.

He closed the letter by saying: "Our executives remain willing to continue the discussion we have had with you." He again didn't offer to meet Mr. Elmasry personally.

Three months later, in February 2006, Mr. Elmasry got the response he wanted. After he sent a third letter -- this time to Class A directors, copying top executives -- the board decided the chairman should sit down with the money manager, according to a letter written to Mr. Elmasry by the Times's corporate governance officer. In mid-March, Mr. Elmasry and an associate met Mr. Sulzberger, Ms. Robinson and the communications chief, Ms. Mathis, in the chairman's office.

'Speculative Investments'

Over coffee, Mr. Elmasry said he and other investors worried that the company would have little spare cash because of "speculative investments" like About.com, according to a person who was there. On the Times's side, Mr. Sulzberger did most of the talking, occasionally handing over a question to Ms. Robinson.

At one point, Mr. Elmasry picked up a copy of the company's 2005 annual report, which noted the company's ownership of two TV stations in Oklahoma City. "Why is it important to this company?" asked Mr. Elmasry, according to someone who was there. The question prompted a lengthy back-and-forth. The Times executives didn't understand why Mr. Elmasry seemed so focused on a matter they considered relatively trivial.

Mr. Elmasry left dissatisfied, according to a person familiar with his thinking. Two weeks later, he wrote a fourth letter, again to the board, again suggesting it rethink the company's share structure, which he said was being "used solely to entrench family control and employment."

Soon after, he decided to withhold his fund's votes for directors at the Times's annual shareholder meeting. He wanted the move to be a rebuke and decided to go public.

He informed Morgan Stanley's corporate office of his plans. Morgan Stanley is a pillar of the New York establishment, as is the Times. The bank urged him to hire an outside public-relations adviser to reduce "franchise risk," say people familiar with the matter. Mr. Elmasry's fund tapped Joele Frank, Wilkinson Brimmer Katcher, a 50-person New York firm that specializes in mergers and investor relations.

The day of the company's annual meeting, Morgan Stanley Investment Management issued a news release saying it had withheld votes for directors. The release also noted that the Times's market value had fallen 52% since its peak in June 2002.

Mr. Elmasry had some investor company in other parts of the newspaper business. Leading the way was money manager Bruce Sherman of Legg Mason Inc.'s Private Capital Management, who had accumulated stakes in a number of publishers. While Mr. Elmasry was pressing Mr. Sulzberger, Mr. Sherman successfully pushed Knight Ridder to put itself up for sale four months after he addressed its board. While Knight Ridder didn't have a dual-class structure, it had long been associated with the Ridder family.

Mr. Sherman had also taken a stake in the Times. That spring, he lodged his own complaints, some of which echoed those of Mr. Elmasry, in several conversations with top executives, although none with Mr. Sulzberger directly.

Facing this sudden pressure, Mr. Sulzberger asked a longtime friend, investment banker and former Times reporter Steven Rattner, to advise the family on possible moves. After hearing a strategic review prepared by Mr. Sulzberger's staff, Mr. Rattner presented several ideas to the board of the family trust over the summer. The most drastic was taking the company private. That idea wasn't welcomed. Mr. Sulzberger and some other members of the family didn't want to be beholden to one large shareholder such as a private-equity group, according to people familiar with the matter.

Instead, the company's board took less dramatic actions. In mid-September, the Times said it would sell its nine TV stations -- the business Mr. Sulzberger had defended to the investor just six months earlier. It also announced Mr. Sulzberger and his cousin, Vice Chairman Michael Golden, would give up their 2006 and 2007 grants of stock and stock options, another focus of Mr. Elmasry's criticism.

Accelerating the Campaign

Mr. Elmasry accelerated his campaign for reform of the company's dual-class share structure. In September, he commissioned a report from Davis Global Advisors, an advisory firm for institutional investors, which criticized the Times's corporate governance. The Times commissioned its own report, from the law firm Wachtell Lipton Rosen & Katz, which concluded the opposite.

In November, Mr. Elmasry submitted three resolutions to the Times's 2007 shareholder meeting: eliminate the dual-class structure, separate the roles of chairman and publisher -- both titles are held by Mr. Sulzberger -- and increase the power of Class A directors. The company rebuffed him, saying that as a Class A shareholder, he didn't have the standing to submit those kinds of resolutions.

In January, Mr. Elmasry wrote a fifth letter, addressed to directors, expressing his disappointment. He was invited to make a presentation, which he did last month.

Times executives say the Sulzbergers won't give up the dual-class structure, Mr. Elmasry's key demand. Such a move would have to be approved by six out of eight board members of the Sulzberger family trust. In a largely symbolic move, the Times says the Sulzberger family has moved assets held in custody by Morgan Stanley, consisting largely of Times stock, to another institution.

The family "has no intention of opening our doors to the kind of action that is tearing at the heart of some of the other great journalistic institutions in our country," CEO Ms. Robinson told investors in December.

Nonetheless, the Times is considering further moves to appease shareholders. It is negotiating to lease five floors of its new headquarters, which would provide annual income of more than $10 million, says Ms. Mathis. The Times is also bracing for a rough shareholders meeting on April 24, according to people familiar with the matter.

Mr. Elmasry is almost sure to withhold his votes for directors. Last year he was joined by two other big holders, T. Rowe Price and Private Capital Management, according to people familiar with the matter, who together withheld about 30% of the Class A votes. A spokesman for Private Capital declines to comment. Brian C. Rogers, chairman of T. Rowe Price, wouldn't comment on last year's vote, and says of this year's: "We'll make up our own mind in due course."

How hard Mr. Elmasry tries to rally other shareholders will depend in part on how the Times reacts to his proposals. In his February board presentation, Mr. Elmasry advocated making a sweeping review of all the company's assets. Ms. Mathis says that the Times examines acquisitions and divestitures all the time.

Write to Sarah Ellison at sarah.ellison@wsj.com

Corrections & Amplifications:

Morgan Stanley money manager Hassan Elmasry joined the Global Franchise Fund in 1998 but didn't take it over until 2002. This article incorrectly says he took it over in 1998.

	Sponsored by