Parting the Veil at Hearst
It was a gala on a grand scale, even for New York. On the Friday night before Memorial Day, 500 guests streamed into a white tent at Lincoln Center to honor Frank A. Bennack Jr., retiring after nearly 24 years as CEO of Hearst Corp. Mingling among the glitterati were Bennack's successor, Victor F. Ganzi; legendary Cosmopolitan editor Helen Gurley Brown; and the most famous of all William Randolph Hearst's progeny, a bejeweled Patricia Hearst, accompanied by her husband, Bernard Shaw, Hearst's security chief. The New York Philharmonic played, as did country duo Brooks & Dunn, favorites of San Antonio native Bennack. Applause was warm when execs announced a $1 million chair in Bennack's name at the journalism school at the University of Texas. Bennack's other gifts included a Frederic Remington sculpture and a 1940s woody station wagon for his 1,500-acre Texas ranch, Eagle Bluff.
Most remarkable, though, was the total blackout of the bash in the New York press. No mention in the Styles section of The New York Times. No gossip in the tabloids. Nothing. It was vintage Hearst, a private company whose growth has exploded but that remains largely under the radar. That no word of the party leaked out speaks volumes about how 69-year-old Bennack has protected and managed the closely held media empire that William Randolph Hearst (WRH) founded 115 years ago. "It doesn't surprise me the party didn't get any ink. That's just how Frank wanted it," says Phil Bronstein, executive editor of Hearst's San Francisco Chronicle, who flew in for the event.
Bennack's retirement would be noteworthy if only for his longevity as CEO in the fickle media world. But he is also the man who built up and transformed the company over the past two decades. "Before Frank took over, Hearst had a reputation as a sleepy publishing company," says Steven Rattner, a managing director of Quadrangle Group, a media and communications investment firm. "Today, he has assembled a tremendous group of media assets."
Indeed, intolerant of debt and with a knack for striking savvy partnerships, Bennack has gone multimedia--with newspapers, magazines, TV stations, cable channels, Internet businesses, and real estate (table). The company generates an estimated $5.2 billion a year in revenues--a 600% increase since 1979, when Bennack became CEO. Estimated net income topped $500 million last year. Nearly 80% of Hearst's more than 100 businesses were created or purchased under Bennack, everything from the Houston Chronicle to stakes in the ESPN and Lifetime cable networks. When he became CEO, Hearst hadn't bought a newspaper in a new city in 50 years. "He has quietly and smartly created a great company, all the while with ego in check," says Robert A. Iger, president of Walt Disney Co., which is a cable partner with Hearst.
Incoming CEO Ganzi inherits a stellar portfolio of assets, but he arrives at a critical time. Hearst derives 60% of its revenue from ads--and the worst advertising recession in decades still lingers. The likelihood of further media deregulation, too, has players scrambling to reevaluate how big they need to be. Can Ganzi, 55, a former tax lawyer who was Bennack's deputy for 12 years, guide Hearst through this tough terrain? He will be just the fifth Hearst CEO since WRH died in 1951 at 88.
At the same time, Ganzi faces the task of keeping the ever-growing Hearst family happy. WRH's five sons have spawned a brood of 61 direct descendants, scattered across the world and all with varying interests. And Ganzi will eventually need to appoint a No. 2, a choice that is stirring much speculation. In a gesture to a new era at Hearst, plans are under way to construct a 42-floor glass-and-steel tower atop Hearst's six-story Midtown Manhattan art deco headquarters. The tower will allow Hearst to consolidate its businesses, now scattered at five New York locations, but at a hefty price, possibly $500 million or more.
In a rare interview in late June in a dark-paneled library at Hearst's offices, Ganzi and Bennack, who remains vice-chairman of the board, pulled back the veil on their storied company. Both executives say they know Hearst will have to get bigger and will do so, initially at least, by buying more TV stations and expanding its magazine group. The executives did not rule out getting back into the cable-operating business, which Hearst left in the late 1980s when it sold a small Bay area cable system to John C. Malone. "We want to make bets that are reasonable, instead of betting the ranch on any given project," says Ganzi.
He's already showing he can ante up. In several weeks, Hearst is expected to announce the launch of Lifetime magazine, a bimonthly targeted at women, an extension of the top-rated cable network, of which Hearst owns 50%. On May 31, Hearst snapped up interior design magazine Veranda, an Atlanta bimonthly, for an estimated $50 million. And back in April, Hearst's smashing two-year-old partnership with Oprah Winfrey, O, The Oprah Magazine, introduced its first overseas edition, in South Africa.
Now that regulators are expected to loosen rules on how many TV stations a company may own, Hearst, through its 66% stake in public company Hearst-Argyle Television Inc. (HTV ), has begun scouting for acquisitions, especially in the 12 cities where it publishes its dailies. Hearst made an unusual foray into public markets back in 1997 by merging its TV stations with Argyle. "The only way to grow was with the public currency," explains Bennack. A year later, it would buy the TV and radio station holdings of Pulitzer Inc. for $1.7 billion, expanding its number of stations by 40%, to 24. "We joked with the Pulitzer executives that all was forgiven from the days of the Hearst-Pulitzer newspaper wars in New York," says Bennack, who became publisher of Hearst's San Antonio Light at 34. Even though Hearst-Argyle, which now has 27 stations, was hard-hit by the ad recession last year--revenues fell 14%, to $642 million--Wall Street is still bullish about the company's prospects.
Hearst may be known best for newspapers and magazines. But today about 40% of aftertax cash flow comes from its entertainment and syndication business, mostly its cable channels. In 1981, Bennack made a shrewd move: launching the precursors to today's Lifetime and A&E Networks, both in partnership with ABC. The channels lost $50 million between them in the first years but now are some of the hottest properties on TV. Hearst's 50% stake in No. 1-rated Lifetime is estimated at more than $2.5 billion, and its 37.5% stake in the A&E is valued at more than $1.8 billion, according to consultancy Kagan World Media.
Bennack's best bet in cable turned out to be his 1990 purchase of RJR Nabisco's 20% stake in ESPN--at the time still a fledgling cable sports channel. Bennack paid about $160 million for the stake. Today, it's worth an estimated $4 billion. "Frank Bennack made a lot of Hearsts even wealthier. Think about that," says Disney board member Thomas S. Murphy, the retired chairman of then-Capital Cities/ABC Inc. (ABC owns 80% of ESPN.) Hearst still has the cable bug: On July 1, it plans to launch Cosmopolitan channel, tied to the popular women's magazine, in Latin America, with 5 million households signed on. The U.S. could be next.
Still, for all its dynamic launches and deals, Hearst--whose name was once synonymous with Big Media--is small compared with today's giants. Its $5 billion in annual revenues is slightly higher than those of just the music unit of $38 billion AOL Time Warner Inc. (AOL ) Would Ganzi ever do a whopper deal to give Hearst that kind of heft? Ganzi says he sees no need to do so currently but adds that nothing in WRH's will prohibits the sale of the company. "We debate this issue a lot: Do you have to get bigger or get out?" says Austin Hearst, a Hearst executive, board member, and WRH's grandson. "The answer is probably yes, but, remember, the dinosaurs were around for 200 million years."
A Stone Age fossil, certainly not, but Hearst has a reputation for sometimes being too plodding. "Let's put it this way," says one publishing executive. "Hearst is the U.S. Post Office, and [Newhouse family-owned magazine publisher] Condé Nast is FedEx. Hearst licks that stamp, and sooner or later it'll get there." On the other hand, Condé Nast is far less profitable. Another executive says Hearst has missed opportunities by being overly conservative. "It tests a product, tests it again, and then tests one more time," he says. "Then it decides it's a business it should not go into."
Some dismiss the criticisms, particularly those about size. "Hearst is definitely a scale player in the magazine, newspaper, and TV-station businesses," says Quadrangle's Rattner. "Besides, every day we have seen that the issues of scale are overblown." And unlike most media companies, which are public, Hearst's private ownership status gives it flexibility. Says Cathleen P. Black, 58, president of Hearst Magazines Div.: "We can look at businesses that public companies can't because they'd just get too beat up on Wall Street."
Perhaps Hearst's most idiosyncratic feature is its structure. The corporation is owned by the Hearst Family Trust, overseen by a 13-member board of trustees. In his will, WRH stipulated that only five family members should serve as trustees, who are appointed for life. Bennack and Ganzi are both trustees. Hearst Corp. has its own board, overseeing the day-to-day operations of its units. Seven family members now serve on the 20-person corporate board. The trust will expire with the death of the last family member born before WRH died. That could take 40 more years. At that time, Hearst heirs will own the company's shares outright.
The boards meet quarterly and often more frequently, depending on deals or business decisions. Family members over 18, who reap the profits, get financial information on a quarterly basis, and Bennack and Ganzi say they stay in touch regularly to answer any questions. The oldest living heir, WRH's grandson George Randolph Hearst Jr., 74, is the board chairman. Only six family members work in Hearst businesses. They include George's son, George III, 46, associate publisher of the Albany (N.Y.) Times Union; his brother, Stephen, 45, who oversees Hearst's real estate operations from California; and one of Patty's sisters, Anne Randolph Hearst, 47, a contributor to Town & Country.
The Hearst CEO is as accountable to the heirs as a chief executive of a public company is to its shareholders. And Bennack knows every family member, spouse, kid, and piece of lore. "We spend the time we might be talking to analysts talking to the family," says the press-shy Bennack. Even for a private company, Hearst has been extraordinarily guarded about releasing financial information. "I can't even get a courtesy return phone call," says Ed Atorino, an analyst at Blaylock & Partners who covers Hearst's public competitors.
Things haven't always been simpatico with all the heirs. Following the spinout of the TV stations, three grandchildren went to court in 1998 to determine if they could be disinherited if they filed a lawsuit complaining about certain procedures at the company. William Randolph Hearst II and his sisters Deborah Hearst Gay and Joanne Hearst Castro complained they weren't given enough access to financial records or enough say in decision-making. A judge ruled they could lodge only certain kinds of complaints without being disinherited. The three never sued. Their lawyer, John A. Sturgeon, declined to comment but did say Hearst subsequently increased its payments to heirs. A Hearst spokeswoman says dividends have been raised for years. Says William "Will" Randolph Hearst III, 53, a board member and partner at venture-capital firm Kleiner Perkins Caufield & Byers: "These very public complaints were vexing for Frank. It hurt him. This was squeaky-wheel activity from one part of the family."
A more troubling chapter in Bennack's career was Hearst's purchase of the San Francisco Chronicle. Its rival, the San Francisco Examiner, had been the company's flagship. But Hearst wanted either to sell or shutter the Examiner and buy the larger Chronicle instead. By 1999, it had a deal, but an antitrust suit led to a trial and embarrassing revelations that Examiner publisher Timothy White promised San Francisco Mayor Willie L. Brown Jr. favorable coverage if he supported the Chronicle's sale to Hearst. The company ended up having to subsidize local publishers to the tune of $66 million over three years to run the Examiner, effectively raising the Chronicle's price to $726 million.
One high-profile project Bennack refused to prop up: Talk, the celebrity magazine edited by Tina Brown. Hearst's decision to pull out of its 50-50 Talk partnership with Disney's Miramax Films Inc. unit led to the title's demise in January after 2 1/2 years of losses, estimated to be about $20 million for Hearst. "Not everything works," says Bennack. "I have great respect for Tina and our partners at Miramax, and we don't like stopping publications--but there were no cost benefits to continue." Bennack blames Talk's troubles on a combination of factors, including the advertising recession that got worse after September 11.
Another money-loser for Hearst has been the Internet, although the company wasn't nearly as zealous about cyberspace as some of its media brethren. Bennack says Hearst's Internet investments are still running a loss, but it did make several good bets, buying big stakes in Netscape Communications, broadcast.com, and Exodus Communications, and selling before the Net bubble burst. Ganzi says the Internet will still be an "essential piece of our business."
Who helps Ganzi with those businesses--with his choice for deputy still undecided? Names emerging so far include magazine division chief Black, who is a former publisher of Gannett's USA Today, and newspaper division exec Steven Swartz, 40, ex-editor/CEO of SmartMoney magazine. Ganzi says he's in no rush, noting that Bennack was in his CEO job for six years before he appointed a chief operating officer. "For people that have a chip down on this, they are going to have lots of time to chat in the hallways," says Black.
So what would legendary William Randolph Hearst think of his company today? It was always WRH's goal to be more than just a newspaper company, and Bennack "followed in that direction by believing information should be conveyed in a variety of formats," says David Nasaw, a historian and author of the biography The Chief: The Life of William Randolph Hearst, published in 2000. "The Chief created a media company like a wheel, where the center was print and spokes branched off in a variety of directions and formats. Frank didn't betray that direction a bit." Now it falls to Victor Ganzi to navigate between the demands of the past and the pull of the future.
By Tom Lowry