From AJR, November 1999 issue
A bitter rift among the owners of the San Francisco Chronicle played a major role in their decision to sell the independent newspaper to longtime rival Hearst.
By Alicia C. Shepard
Alicia C. Shepard is a former AJR senior writer and NPR ombudsman.
NAN TUCKER MCEVOY, 80, is known for her blunt style. When asked in the mid-1990s if the family-held San Francisco Chronicle was for sale, she'd reply: "Over my dead body."
On the morning of August 6, McEvoy--very much alive--received devastating news. The board of directors of Chronicle Publishing Co. had ratified the sale of the 134-year-old paper to Hearst, owner of the afternoon San Francisco Examiner.
The war was over. The enemy had won.
The newspaper her grandfather M.H. de Young founded with his two brothers and a $20 gold piece as a theater publication would no longer belong to his heirs.
For more than 100 years, blue-blooded members of San Francisco's elite de Young family controlled the paper and its editorial voice. For many of those years, it fought against William Randolph Hearst's original newspaper in a vicious circulation war.
And now, without even as much as a rowdy proxy fight, the 24 family shareholders--with only McEvoy and one other dissenting--were willing to sell the paper for $660 million, 66 times what the family asked for when it tried to sell it in 1932. Even McEvoy's son, Nion, voted affirmatively. The highly quotable McEvoy, who once hired a public relations firm to handle press coverage of the Chronicle family feud, would utter nothing after the sale.
She talked to potential investors in an effort to buy the paper from other family members. But no deal materialized, and with so much rancor between the McEvoy branch of the de Youngs and the other two branches, it was doubtful they'd even approve such a sale. Instead of talking publicly, McEvoy took her family to Venice in late August to absorb the loss.
"It's sad," says Nion McEvoy, 47, associate publisher and editor in chief of Chronicle Books. "It's very hard to see the sale with anything but ambivalence."
There were certainly financial incentives to make a deal. For starters, Hearst was offering a whopping sum. What's more, if it held on, the family faced shelling out $60 million to $300 million for recommended capital improvements. And as of the beginning of this year, the de Young heirs were free of a burdensome tax situation that would have eaten up much of the sale price.
There were underlying reasons as well. For one, while it was the city's dominant newspaper, the Chronicle was locked into a joint operating agreement that gave the far smaller Examiner half the combined profits.
And, perhaps most serious of all, as had happened before with newspaper families in Wichita, Louisville and Des Moines, the de Young heirs had fallen victim to a bitter family rift that made continued ownership of the Chronicle both unpleasant and untenable. With no family members actively involved in running the newspaper, the time had come to cash out.
IN TODAY'S WORLD, members of the de Young family enjoy a vaunted social status in San Francisco, often mentioned in the society pages and praised for their generous patronage of the arts. But it wasn't always that way.
Charles de Young and his brother Michael were scrappy teens when they created a new newspaper in 1865 during the rough-and-tumble days of California's Gold Rush. They called it the Daily Dramatic Chronicle, filled it with news of the theater and passed it out for free in salons and reading rooms. As the little paper grew, its contributors included Mark Twain and Bret Harte.
After three years, the brothers converted their theater paper into the Morning Chronicle, tackling the day's events without any of the restraint of modern newspapers.
After the paper ran an expos¨¦ on a local minister running for mayor, the minister turned around and insulted the de Youngs' mother, insinuating that she might earn money running a house of prostitution. A furious Charles de Young defended the family honor by shooting and wounding the minister. Charles never spent any time in jail for the crime. In 1880, the minister's son sought revenge and burst into the Chronicle newsroom, killing Charles.
At age 31, M.H. de Young (as Michael took to calling himself), an ardent Republican, assumed the helm of the paper, running it until his death in 1925.
When M.H. died, he left the paper in an irrevocable trust that could not be broken until the last of his four daughters died. From that point forward, a male member of the family, either by marriage or birth, ran the Chronicle and, later, Chronicle Publishing Co., which today is a $1.5 billion company with three television stations, two publishing companies and two other daily newspapers. It employs about 3,200 people.
De Young's oldest daughter, Helen, married George T. Cameron, a more socially prominent businessman than her father, and Cameron took over the paper after de Young's death. "Uncle George," as many of the staff called him to his face, was a courtly man prone to wearing bow ties and assuming everyone lived as did the fortunate members of his social stratum. One day, while sharing an elevator with a copy boy, Cameron asked the man, "May I give you a ride to your club?"
"George had an office in the building, but these people are very patrician," says William German, 80, the Chronicle's editor, who joined the paper at age 21.
Cameron made what turned out to be a critical personnel decision in 1932 when he hired a smart, arrogant 24-year-old named Paul C. Smith as business editor. Three years later, after the paper had tumbled into last place in a field of six, Uncle George named the enormously ambitious Smith executive editor and gave him a mandate to shake the place up. He did, firing many older writers and making every effort to morph the paper into the New York Times of the West.
"By the 1930s, the paper was very stodgy and old-fashioned," says Carl Nolte, a Chronicle reporter for 38 years. "Herb Caen [the renowned Chronicle columnist] used to say that Smith came in and swept out the Victorian cobwebs."
Smith also hired Scott Newhall, a legendary editor who defined the Chronicle in the 1950s and who one day would replace Smith after family members tired of him. (See "The Battle of the Bay," January/February.)
But before he quit, Smith made a brilliant move: He encouraged the family to buy KRON-TV, San Francisco's first commercial television station and what would prove to be a huge moneymaker for the family.
After Smith left in 1951, Uncle George gave Newhall the top job. Newhall quickly made his mark on the paper by offering readers treasure hunts. He will forever be remembered as the editor who ran a front-page crusade to clothe naked animals at the zoo. But Newhall wasn't just about gimmicks. Believing that a newspaper should be more a literary product than a news digest, he hired first-rate writers and columnists.
But it was William Randolph Hearst--through his two papers, the Examiner and the News-Call Bulletin--who dominated the town journalistically. "Scott Newhall told me Hearst was so powerful that if Hearst told the police chief not to tell the Chronicle, he didn't," says longtime media critic Ben H. Bagdikian.
The Hearst hegemony wasn't to be permanent. In 1963, with Newhall at the helm, the Chronicle pulled ahead of the Examiner in revenue and circulation.
After Uncle George died of a heart attack in 1955, the mantle was passed to Charles de Young Thieriot, 40, the shy son of M.H. de Young's third daughter, Kathleen. His younger brother Peter became circulation manager. "Charlie Thieriot was there every goddamn day," recalls Nolte. "He wouldn't interfere exactly, but he was always a presence. He let Scott do whatever stunts he wanted."
From 1955 until his death in 1977, Thieriot was editor and publisher of the paper and president of Chronicle Publishing Co. "Charlie was interested in small details of the paper, like the weather agate, shipping news and the number of news stories every day," German says. "He'd always tell you how to print temperatures."
German recalls a time in 1952 when the arch-Republican Thieriot attempted to impose his views on the news. After German sent Thieriot a page-one dummy, the publisher stopped by his desk. "I see you put a story about Republican vice presidential candidate [Richard] Nixon's slush fund on the front page," German recalls Thieriot saying. "I don't think it's that important. Bill, I hope you know what you are doing."
MANY QUESTION NOW if Charles Thieriot knew what he was doing in the early 1960s, when his paper was winning the circulation war but draining the family bank account in the process. KRON's profits were propping up the Chronicle.
Newhall was sure if the Chronicle held tight and continued its winning run, Hearst would fold. The more conservative Thieriot thought otherwise. He knew both papers were losing so much money that either might be forced out of business. Hearst alone, it was reported, was losing $2 million annually with its two San Francisco papers. And according to a 1987 article in San Francisco magazine, the Chronicle lost $3 million between 1958 and 1965.
Rather than continue fighting, Thieriot and William Randolph Hearst Jr. began meeting secretly in the early 1960s to discuss the possibility of an alliance. Thus, in the quiet of the Clift Hotel, Hearst and Thieriot hatched a plan that ultimately hurt the Chronicle while keeping the Examiner on life support. They drew up a 30-year joint operating agreement, or JOA, to end in 1995 with an option for either side to renew for 10 years. (Hearst renewed in 1995.) The two men agreed to kill off the Hearst-owned News-Call Bulletin and make the Examiner an afternoon paper. The papers would put out a joint Sunday edition. The agreement was signed September 19, 1965.
"In what was a stunningly bad decision, Hearst decided to take the afternoon," Bagdikian says. "The JOA kept them alive. It meant that gradually over time, though, the Examiner got weaker and weaker." But what was most remarkable was that the two ownerships agreed to split the profits 50-50. The newly created San Francisco Newspaper Agency would handle sales, circulation, marketing, advertising and strategic planning for both papers. They'd share trucks, printing presses and sales staff. Only the editorial departments would be separate.
It seemed to make sense at the time, with both papers hemorrhaging money and their circulations neck and neck. Initially the deal benefited both papers, but that would change over time. "In 1965, the circulation was about equal," says Steven Falk, president of the San Francisco Newspaper Agency. "At the time, Hearst owned the Los Angeles Herald Examiner, the largest afternoon paper in the country, and afternoon papers were growing. No one envisioned in 1965 there would be anything wrong in being an afternoon paper."
But by the late 1960s afternoon papers began dying off throughout the country, victims of television and changing lifestyles, and the Examiner's circulation began to lag. But the de Young family had signed a deal that would eventually stunt the Chronicle's growth and provide little encouragement for either paper to try harder.
"The incentives were perverse," says Chronicle Executive Editor Matthew Wilson. "The reality was that we'd launch a Friday section and take on all the editorial expenses. The Examiner would share in newsprint costs. But by doing nothing other than that, the Examiner would get more money for doing nothing than we would by doing something."
By the 1990s, the Chronicle had four times the circulation of the Examiner. Today the Chronicle's circulation is 475,244, compared with the Examiner's 111,018.
"I wish to hell we had never done the JOA," German says. But at the time, he adds, "to a careful business type like Charlie Thieriot, confronted by Hearst's money and being assured of 50 percent of the revenue and not having to put up a lot of dough to win, the JOA must have looked pretty good."
IN 1977, THIERIOT died of cancer at 62. His son Richard became the Chronicle's fifth publisher and assumed his father's other titles. Some say Dick, who was working his way through various jobs at the paper and company, wasn't ready to assume control. "Dick became publisher sooner than he planned," German says.
By this time, the publishing company had branched out into cable and other areas. Dick's cousin Peter Thieriot was head of the real-estate division, and Dick's brother Charles "Kip" Thieriot ran the cable division. Francis "Rani" Martin III, son of M.H. de Young's granddaughter Consuelo, was president of Chronicle Broadcasting. But it was Dick Thieriot who wielded much of the power, earning him the nickname "King Richard." And it was upon him family members depended for generous dividends.
It was also Dick who took the entire company from a $200 million enterprise to one valued at more than $1 billion, Thieriot, who didn't return phone calls from AJR, told Editor & Publisher in 1993. But some say there was not a lot of investment or long-range planning for the paper during his regime.
The company entered a period of profound and dramatic change in 1988 when M.H. de Young's youngest daughter, Phyllis de Young Tucker, died at 96. The trust dissolved upon her death. Suddenly, there were shares to be divided among family members and power to be claimed depending on one's genealogy.
The assets were to be distributed among the children and grandchildren of Tucker and her three sisters, Helen Cameron, Constance Tobin and Kathleen Thieriot. Since Helen Cameron had no children, the family shares were divided among three branches: the Tuckers, the Tobins and the Thieriots. The family joke among the Tobins, at least, was that the Thieriots would probably keep "Aunt Phyllis" on ice rather than admit she was dead because as long as she was alive, the trust owned the newspaper. "As long as it was a trust, you couldn't have a proxy fight," says one family member, who, like most others reached for this article, refused to talk or would do so only without being named. "Once you have shares, they can borrow against them, lose them in a divorce, give them to their children."
And so when Phyllis Tucker died, the power shifted. Her only living child, Nan Tucker McEvoy, inherited 26.3 percent of the company shares and her son, Nion, received 7 percent. Together they constituted the company's largest voting bloc. Meanwhile, the Thieriot clan had to spread shares among nine members and the Tobins among 11 descendants.
The two-person McEvoy voting bloc wielded considerable power, a situation that would ultimately trigger a serious schism among family members.
The rift exploded into public view in 1992. Newspaper ad revenues were down, and the San Francisco economy was dipping into a recession. Family members, by now the fourth and fifth generations, were getting lower returns than they had become accustomed to. Some were dissatisfied, and they questioned how well the company was being run.
The dissident family members, among them Nan McEvoy, called in the investment banking firm of Hellman and Friedman to audit the company. The report contained plenty of bad news. It found there was little strategic planning, a large amount of debt and not much growth in cash flow. The recommendation was succinct: bring in outside help, and soon. "Dick [Thieriot] was furious when he realized the study would evaluate him," says a family member. "Hellman's results were that the current team had done a lousy job."
The family member says Thieriot had always been careful to keep McEvoy posted on developments in the company. But the McEvoy-Thieriot alliance eroded in 1993 when the board, with Nan McEvoy as chairman, voted to purge family managers and bring in new blood to run Chronicle Publishing. Dick, Kip and Peter Thieriot and Rani Martin all lost their jobs, although each received a $1 million severance package. "It was humiliating for Dick," says one family member.
"Always in the background was Nan, our Kay Graham," German says. "They had a palace coup at a board meeting. No more Dick. Nan moves into the office. If you strike at the king, you've got to kill him. After that, Nan took a lot of interest in the paper."
Two years later, King Richard would strike back.
THE OUTSIDER Chronicle Publishing turned to for deliverance was John Sias, then 66, a former executive vice president of Capital Cities/ABC hired in April 1993. It was the first time in the company's history that the family replaced one of its own with a professional carrying no ties to the de Youngs. Sias soon brought in James Hale, then also 66, who had been publisher of the Kansas City Star for 16 years, to run the San Francisco Newspaper Agency.
President and CEO Sias literally cleaned the place out, encouraging voluntary buyouts in the Chronicle newsroom (54 members of the editorial staff left) and encouraging Hearst executives to let him thin out the newspaper agency, which to his mind had become top-heavy.
"Over the years, the agency had become very cumbersome," says Falk, its president since 1996. "You can blame it on management or that anyone would find himself bogged down by two owners who did not get along." And so Sias reorganized the agency, slashing 45 jobs from what had been a 250-person management force. Sias had discovered executives with no real responsibilities, a fleet of expensive cars and a Nob Hill apartment for company use, according to a 1994 Forbes magazine article. "It might have been a little bloated when I arrived," says Hale, who retired in 1996. "I cleaned it up the best I could."
Rather quickly, say many, Sias, now 72, turned the place around. "Sias was great for all three companies--the Chronicle, the Examiner and the agency--because he brought focus," Falk says. "He brought a mission. Everyone could stop inwardly pointing fingers and start running the company like a business. He sort of cleared the slate of all the previous baggage between these two companies."
For many inside the newsroom, Sias brought a welcome air of professionalism.
Jerry Roberts, then working as the Chronicle's political editor, recalls that in 1986 he proposed creating a zoned edition for Contra Costa County, a fast-developing area east of San Francisco. The idea went nowhere.
A decade later, Roberts, by now the paper's city editor, offered a similar proposal to Sias. "Ten years later, $1.3 million was quickly given to start zoning and set up a bureau with 10 people," Roberts says. "Later we asked Sias for more money for business and sports when I became managing editor, and we got it. Once the agency was better managed, there was more money to invest in the product and still have money for the shareholders."
In August 1993, Sias hired Alan H. Nichols Jr. as the company's executive vice president and chief financial officer. "When we got there," says Nichols, who left Chronicle Publishing in June, "the company had a messed-up capital structure. Too much money was being dividended out to shareholders. There was too much debt. The shareholders had even been allowed to borrow money through the company against future dividends. We set about fixing the debt problems." It was soon decided the family would sell its cable division to reduce the debt. (The cable company was sold in 1996 to TCI for $580 million.)
But as the housecleaning proceeded, there was ferment beneath the surface. A number of shareholders, bitter over the ouster of family members from key positions, began exploring the possibility of selling the company.
"When I arrived," says Nichols, now president of an Internet start-up, Geocast, "certain branches had wanted to sell the company. But Nan [with her one-third voting bloc] was not willing to go along, and everyone else was in the middle and happy with management and happy to see real improvement in the value of the company." To sell would require the support of those holding 51 percent of the voting shares. At that time, McEvoy possessed the clout with other family members to prevent a sale.
In family history, there had been tension between Dick Thieriot and Rani Martin. But once they were unceremoniously tossed out, they joined forces and launched an intense effort to sell the company. The split between the Thieriot/Martin alliance and the McEvoys only worsened when talk turned to selling the cash cow, KRON-TV. But the McEvoys and their supporters refused to unload the lucrative station.
Some of the pressure to get rid of KRON came from those who wanted to take advantage of a capital gains tax break that would expire in March 1995. Selling the station after that date would bring larger tax consequences. Now was the time to act. But McEvoy, with her large holdings, demurred.
The tension was escalating. But rather than do anything, the anti-Nan faction, many of whom disliked her liberal Democratic politics and her efforts to impose them on what had once been a conservative editorial page, decided to wait. McEvoy had indicated she would step down at the end of 1994 as chairman of the board. But she decided not to do so.
That was when the king struck back.
Eleven days before the 1995 annual shareholders' meeting, McEvoy received notice that a special shareholders' meeting had been scheduled for 9 a.m. on Wednesday, April 19, 1995, on the 61st floor of the Bank of America building. The purpose: voting on a proposed bylaw that would effectively force her out.
McEvoy had been blindsided. Her relatives imposed a mandatory retirement age for directors--no one over age 73 could sit on the board. The measure passed with 20 shareholders representing 52.78 percent of the shares supporting it. McEvoy, then 75, was out.
Only one shareholder spoke in favor of the age requirement: staunch Republican Michael "Mickey" H. Tobin, then 72. "Tobin said that he supported the proposed bylaw because he believed that under Mrs. McEvoy's leadership and influence, the editorial policy of the San Francisco Chronicle had become too liberal," said Daniel Mosley in a deposition. Mosley is considered a shareholder because he manages Nion McEvoy's trust. A week after the meeting, Nan McEvoy sued 18 cousins, charging, among other things, age discrimination. Some relatives were "resentful and envious" of her "professional and financial stature and success," her suit said. McEvoy even accused her first cousin Nini Martin of threatening to disinherit two daughters if they didn't vote to oust McEvoy.
The ousted chairwoman had some support outside the boardroom. Ninety-seven Chronicle staffers signed a petition demanding the board reinstate the popular McEvoy. "We are dedicated journalists, and since McEvoy's assumption of leadership in the direction of the Chronicle, we have been proud of the increasing professionalism that our newspaper has demonstrated in its news coverage, its features and its opinion pages," read the petition. But in the end, a judge threw out McEvoy's suit, and the board prevailed.
AS THE INTERNECINE warfare played itself out, some shareholders were still contemplating a sale of the company. They were waiting for the right time.
Until December 31, 1998, the sale of KRON, the Chronicle or any of the company's other media properties would have encountered an onerous tax burden.
After "Aunt Phyllis" died in 1988 and the trust dissolved, the family formed what is known in tax parlance as a subchapter S corporation, under a provision that enables corporations with fewer than 35 shareholders to avoid paying corporate taxes. Instead, shareholders are taxed on the corporate profits they receive. This way, they only pay taxes once. A traditional corporation pays corporate taxes and then passes dividends on to shareholders, who are in turn taxed on their dividends.
When Congress created subchapter S corporations, it worried that small companies might take advantage of the tax structure for a few years and then put themselves up for sale. So it required that if the corporations were sold in less than 10 years, the double tax would be imposed.
"That's the real reason they are selling it now," says Chronicle in-house attorney Ronald Ingram. "Up to now, it would have been too costly." Once the 10-year period expired, Ingram says, those who had been resistant to selling for sentimental or even financial reasons--aside from McEvoy--saw the time to deal had arrived. "The subchapter S was an important trigger," says Nion McEvoy. "While I would have preferred to keep the paper, it's very difficult to do with family members who don't have the appetite to do it."
The market for the paper was hot. The Chronicle would have to spend millions after the JOA ended in 2005 to stay in business.
And when the opportunity arose, Hearst was ready. For years the company had wanted to acquire the Chronicle and re-establish dominance in the San Francisco market. It saw its chances soar as the dysfunctional de Young media aristocracy battled bitterly. "That family is really a steamy §äFalcon Crest' story," says Examiner reporter Larry Hatfield, who has been with the paper 30 years. "Somebody has to be interested in it as a movie."
Under the terms of the JOA, if the Chronicle went on the block, Hearst had the right of first refusal. When the board voted 9-0 in June to put Chronicle Publishing up for sale, Hearst moved quickly. Rather than wait to see what bids materialized by the August 10 deadline, Hearst offered $660 million for the paper, a preemptive strike the family found irresistible.
On August 6, the 10-person board--including family members Helen Martin Spaulding, Patricia Tobin Kubal, Peter D. Stent, Richard Thieriot and Nion McEvoy--met to ratify what the shareholders had already approved by proxy: to sell the venerable family crown jewel to the foe it had fought fiercely for 112 years.
Says Nion McEvoy: "It was my feeling as a board member that the majority of the family didn't want to be in the newspaper business anymore, and I felt I had a fiduciary responsibility to them. That wasn't the same as I felt about it, but it was what the majority wanted."
And so, after the Justice Department's expected approval of the sale, the prized paper of the de Young family patriarch will be in the hands of the family's longtime nemesis, Hearst.
The war was over. The enemy had won.