Will the Scandal Tame Murdoch?

When Rupert Murdoch faced inquisitors from a British Parliamentary committee on July 19, the public Murdoch was on display: monosyllabic, defiant, and unwilling to accept full responsibility for the corruption that has ensnarled his media empire. “A lot of people had different agendas in trying to build this hysteria,” Murdoch said when asked who he blamed for the sizeable business setbacks of News Corp. in the U.K., due to the phone hacking scandal. “All our competitors in this country formally announced a consortium to try and stop us. They caught us with dirty hands and built hysteria around it.”

It was a characteristic performance from a mogul who’s perfected the art of the grand escape during a career in which he has stared down competitors, outmaneuvered rivals, and solidified his command over a media empire built from a single family-owned newspaper.

The question now is whether Murdoch will be able to continue to run his company exactly as he pleases. Government investigators in London and Washington are looking at possible misdeeds involving phone hacking. Shareholders have shaved more than $5 billion off the company’s market value. Even its directors, largely silent in recent weeks except for a few murmurs of support for Murdoch, seem to have taken notice. They’ve hired Michael B. Mukasey, a former U.S. Attorney General, and Mary Jo White, a former U.S. Attorney in New York, to advise them on governance issues.

What they are likely to find is that Murdoch’s shareholders haven’t always prospered under his iron-fisted control. News Corp.’s stock performance has trailed that of its largest rivals, including Walt Disney, Viacom, and Time Warner, over the last five years. (Bloomberg Businessweek’s owner, Bloomberg LP, is a competitor of News Corp.) “There’s just sort of this generic Murdoch discount, which encompasses the concern that he will make decisions that are not consistent with other shareholder interests,” says Michael Morris, an analyst at Davenport & Co. in Richmond, Va. Mario J. Gabelli, chairman of Gamco Investors, which owns 6.7 million shares of News Corp. nonvoting stock, acknowledges that some investors don’t trust Murdoch. “There has always been the perception that he would go off and buy something—that he might change direction,” Gabelli says. “This is a great collection of assets, however,” he adds.

Those assets, some shareholders complain, have for decades been operated at the whim of Murdoch, who along with a family trust owns 39.7 percent of the company’s voting stock. When family control was threatened in 2004 by cable billionaire John C. Malone, who had assembled 16 percent of News Corp.’s shares, Murdoch swapped News Corp.’s stake in the fast-growing satellite company DirecTV to recapture the stock. Critics call the deal embarrassingly one-sided. To get Malone’s $11.3 billion stake, Murdoch anted up $12.3 billion in News Corp. assets, including $465 million in cash, three regional sports cable channels in the U.S., and a 41 percent stake in DirecTV. Three years after the deal closed, the value of DirecTV had doubled, while News Corp.’s had fallen by 5 percent—even before the hacking scandal. “This is a company where no one could say no to Rupert Murdoch,” says Murdoch biographer Michael Wolff, author of The Man Who Owns the News. “And it has only gotten more so as he has gotten older and more focused on the line of succession.”

The company’s executive ranks have thinned further since 2007, when Murdoch named his 38-year-old son, James, chairman of News International, which operates the parent’s British newspapers. News Corp. President Peter Chernin, a 20-year employee, left in 2009 as Murdoch increasingly turned to his son for counsel. Chernin now produces TV shows and movies under a production deal with the company.

Chernin was followed out the door by media strategist Gary Ginsberg, a former aide to Bill Clinton, who had helped soften Murdoch’s image in the press and on Capitol Hill after joining the company in 1999. Ginsberg was pressured to leave by James Murdoch, according to Wolff. More recently, General Counsel Lawrence “Lon” Jacobs left in June to “pursue new opportunities,” the company said. “These are the exact kinds of people Murdoch would need in the kind of situation he finds himself right now,” says Wolff. “They were the kinds of people he needed to keep him in check.”

Left to his own devices, Murdoch can pursue pet projects without being challenged. In 2007 he spent months wooing the Bancroft family to persuade them to sell their controlling interest in Dow Jones, publisher of the Wall Street Journal—against the advice of Chernin and others. Intent on taking on the New York Times, Murdoch finally sealed the deal with a rich $5.6 billion purchase price. Four months later, News Corp. wrote down its value by $2.8 billion.

Murdoch also hasn’t been shy about mixing the interests of his publicly held company and those of his family. He gave both his sons, James and the older Lachlan, positions of authority at early ages. The husband of daughter Elisabeth has done public-relations work for News Corp. And his wife, Wendi Deng, has served in the past as a strategic advisor on Myspace’s business interests in China.

Murdoch’s all-in-the-family dealings reached a new level in February, when News Corp. said it would pay $673 million to buy Shine Group, a London-based production company owned by his daughter Elisabeth, that produced NBC’s The Office, The Biggest Loser, and other shows. “Murdoch did not even pretend there was a valid strategic purpose for News Corp. to buy Shine,” Amalgamated Bank and pension funds said in a lawsuit brought on Mar. 16 in Delaware state court. “The transaction is a naked and selfish endeavor by Murdoch to further infuse the upper ranks of News Corp. with his offspring.” News Corp. President Chase Carey told investors in March that the Shine deal was valid because of the company’s string of hits and that Elisabeth’s family connection “had nothing to do with it.”

The shareholder suit alleges that Murdoch overpaid for Shine, calculating that News Corp. paid 13.1 times Shine’s $45.6 million in Ebitda (earnings before interest, taxes, depreciation, and amortization, a metric of cash-earning capacity) for 2009. That compares with the $510 million purchase in June by Apollo Global Management of American Idol owner CKx, a deal valued at 8.5 times CKx’s $60.23 million in Ebitda. “The problem is that this is a company that has no real independent board to provide oversight,” says Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance. “When Rupert Murdoch controls the votes of this company, he can elect a new board anytime he wants, so who is going to disagree with him?”

The Delaware lawsuit claims that few of News Corp.’s independent directors are truly independent, including Roderick Eddington, chairman of the audit committee and the company’s lead independent director. Eddington is also nonexecutive chairman of JPMorgan Australia Group, a unit of the investment company that advised Elisabeth Murdoch on the Shine transaction. He did not respond to e-mails. In a statement last week, director Tom Perkins said “the board honestly thinks Rupert is a genius.” News Corp. has denied the allegations, and the directors have moved to dismiss the case.

Company finances are affected when problems arise. In 2002, for example, Canal+, the pay TV company owned by Vivendi, filed a suit in California, alleging that its competitor NDS, at the time a 79 percent-owned subsidiary of News Corp., had deliberately hacked the company’s encryption system and then leaked the code onto the Internet. NDS denied wrongdoing and moved to have the suit dismissed. In April 2002, however, a former NDS contractor gave a deposition in the case, testifying to firsthand knowledge of the hacking. Six months later, News Corp. agreed to the $985 million purchase of an Italian pay-TV operator, Telepiu, from Canal+’s parent company Vivendi. Shortly after, Canal+ dropped its suit. Vivendi didn’t comment by press time. News Corp. had no comment.

Allegations of News Corp. misbehavior on the elder Murdoch’s watch haven’t just come from rivals. In 2007 publisher Judith Regan sued her former employers at News Corp., alleging to be the victim of a “deliberate smear campaign” after her departure. The company eventually settled the suit for $10.75 million. That was a relative bargain compared with the $500 million News Corp. agreed in February to pay to Valassis Communications to settle lawsuits alleging that employees at News Corp.’s supermarket coupon unit had made threats against competitors and hacked into rivals’ computers.

All this, plus the hacking furor, has raised questions about whether Murdoch will need outside help to better-manage his embattled company. At Tuesday’s Parliamentary hearing, Conservative Party member Damian Collins asked whether “you think you have a cultural problem within your organization that people only tell you things that they think you want to hear?” Murdoch maintained that his trusted advisers don’t hold back. “I’m sure there may be people who try to please me. That would be human nature. It’s up to me to see through that.”


    The bottom line: Shareholders, who have lost more than $5 billion in market value in about two weeks, hope the scandal brings tightened oversight.

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