Pain and Profit at U.S. News
On December 14, 1983, employees of U.S. News & World Report gazed in puzzlement at a one-page memorandum that had been posted on bulletin boards in the magazine’s Washington, D.C., headquarters. “Employees should be aware,” the notice said, “that within the last two weeks an offer has been submitted to purchase all of the stock of the company at a price significantly higher than the current appraised value.”
As U.S. News employees gathered in small huddles around the bulletin boards, their attention zeroed in on one of the memo’s sentences: “This offer will be carefully evaluated, as well as other alternatives that may be available.” They kept rereading the sentence, searching for some hidden meaning.
As it turned out, there was a hidden meaning. Within a matter of months, the publisher of the nation’s third-largest weekly newsmagazine would find itself, more or less, on the auction block. Even more surprising was that all but a handful of the company’s actual owners — several hundred U.S. News employees who, largely through a profit-sharing trust established for them by the magazine’s founder, held virtually all of its stock — would not know exactly why.
Over the years, U.S. News executives had been sounded out by at least 17 potential buyers of the magazine, ranging from wealthy individuals to media conglomerates. When word of such overtures trickled down to rank-and-file employees, they were assured that all would-be purchasers heard the longstanding, and presumably permanent, company line: U.S. News is not interested.
U.S. News staffers, therefore, found the December 14 memo peculiarly cryptic. Why was the company’s board of directors considering this offer, when other expressions of interest always had been rejected out of hand? Who was the bidder — the memo gave no clue — and how much money had been offered? What were the “alternatives” the U.S. News board had in mind?
Five days later, these and other questions momentarily receded when U.S. News moved into its impressive new headquarters in Washington’s West End, near Georgetown. The eight-story, 155,000-square-foot building was the most visible symbol of what many employees hoped would be a new era for U.S. News & World Report. It represented part of the company’s biggest business deal ever: a joint venture with Boston real-estate developer and Atlantic magazine owner Mortimer B. Zuckerman to turn three and a half acres of land owned by U.S. News, Inc. (much of it acquired by founder and original editor David Lawrence in the 1950s for $1 million) into a $200 million complex of office buildings, condominium apartments, townhouses, and a luxury hotel.
Like so much else on the business side of U.S. News, however, the real-estate deal reflected the company’s underlying cash-flow problems and history of conservative, risk-averse management. From a long-term profit standpoint, U.S. News stood to gain much more by developing its property as a sole owner, not as a partner in a joint venture. (“We’re sitting on a gold mine,” former U.S. News chairman John Sweet once told the company’s independent appraiser.) But attorneys at Arnold & Porter, the Washington law firm retained by U.S. News, advised it in 1981 against trying to develop the real estate as sole owner “because of the high risks involved.” The board of directors ultimately agreed, and took the low-risk route by signing the deal with Zuckerman.
In recent years, the cash position of U.S. News & World Report, Inc., the parent company of the magazine and several allied enterprises, has rarely been as healthy as outsiders have assumed. (As a privately owned company U.S. News is not required to disclose even routine financial information.) Although U.S. News traditionally has run a distant third to its principal competitors, it has done quite well in the magazine marketplace. According to the Audit Bureau of Circulations, its paid circulation at the end of 1983 was 2.1 million, compared with Time’s 4.6 million and Newsweek’s 3 million. Its advertising revenue, according to Publishers Information Bureau, grew from $83.8 million in 1982 to $93.9 million last year (a 12 percent increase), ranking it 13th among all the nation’s magazines.
Yet, the company’s profits, at least in 1983, were anemic. U.S. News earned only $1.3 million on revenue of $144 million, following a net loss of $2.2 million in 1982. Industry analysts had expected the company’s income for 1983 to fall somewhere between $5 million and $8 million. The benchmark for financial success in the magazine industry is a net profit figure of 20 percent of sales; U.S. News was way below that.
Who, then, would want to buy U.S. News, and pay a substantial premium for the privilege? Employees had plenty of theories — including one, later accepted as untrue, that Zuckerman himself had made the mystery bid — but few facts. It was much more than idle curiosity on their part, because the financial stakes were so staggering: A high enough sale price could mean potential payoffs to individual shareholders in five, six, and even seven figures.
From the beginning, the silence at the top of U.S. News — the seven members of the company’s board of directors — was virtually absolute. “A lot of employees felt the secrecy was unnecessary,” says one U.S. News editor, “and whenever concern was voiced the reaction at the top was often outrage at being questioned.”
Even when the magazine’s employees turned to other publications for answers, not many could be found. “You are not an employee,” U.S. News President James H. McIlhenny was quoted as telling a reporter for the Washington Post. “You have no right to have knowledge of our affairs because this is a private corporation.”
Reactions to the initial announcement ranged from mild concern to shock; later on, for many employees, the frustration of being kept in the dark turned to resentment. “My God, was somebody trying to sell the company?” one U.S. News editor remembers thinking. “They didn’t present it to us. They did not ask our okay on this. They notified us, and then a lot of people said, ‘What the hell is going on? We have been a good family here.’”
Within the U.S. News headquarters, rumors about potential buyers—and every other imaginable aspect of the magazine’s future—had raced through the building with astonishing speed. Employees caucused in the hallways, circulated photocopies of newspaper and magazine clippings, and passed on what came to be called, only half-jokingly, the ‘Rumor of the Day.’ “I think the average time for a rumor to get completely around the building was about three minutes,” one U.S. News editor says. “A very, very efficient grapevine developed.”
The grapevine was efficient, but not always accurate. “Everybody had stories,” another editor says. “You would begin to think, ‘Gee, so-and-so is going to pay $300 million.’ And then you would hear [Rupert] Murdoch was going to buy it and we would all be out on our ass. It was a series of great ups and downs.”
In the eyes of many U.S. News reporters and editors, the most frightening prospect was that Murdoch could acquire the magazine. A correspondent in one of the eight U.S. News domestic bureaus remembers thinking, “Am I going to have to leave a national newsmagazine because we’ll start running ‘UFO chasing Ronald Reagan down 16th Street’ stories?” But a U.S. News editor in Washington says the company’s board of directors lifted the top-secret stamp a bit, when Murdoch’s name was mentioned, to reassure an already jittery staff. “There was a code worked out,” he says, “and signals went out from the board that Murdoch was not in.”
There also were leaks, many of them inadvertent, from members of the board. “I think people can only keep so much secret for so long,” says one U.S. News editor. “They started to let little things slip out here and there, and then they kind of whirled around the building like a cyclone.”
Most of the rumors concerned money — big money. At the time of the anonymous bid, each share of U.S. News stock was valued at $425. The appraised value for 1984, determined just two weeks after disclosure of the bid, jumped to $625. The implications were clear: The more the company was worth, the more its stock was worth — and the more each shareholder was worth — and, at times, the sky seemed to be the limit. When Clay Felker, former publisher of New York magazine, quoted an investor’s guess that U.S. News might fetch $350 million, employees rushed to calculators to figure out their own potential windfalls. Inside the building, the magazine’s employees joked about what they called the “greed factor.”
By early this year, most U.S. News employees had come to believe the sale of the magazine was inevitable. Those who hoped otherwise were not heartened by the posting on January 25 of another memorandum from management, this one only three paragraphs long, notifying employees that Morgan Stanley & Co., the New York investment banking firm, had been authorized to solicit bids for the magazine and its other properties. On February 17, McIlhenny issued a statement that said: “It continues to be apparent that further investigation of the potential sale of the company to a third party could well be the best available alternative for U.S. News and its people. We have agreed that [Morgan Stanley] be permitted to formally solicit indications of interest by third parties.”
Morgan Stanley had been hired in January to help the U.S. News board weigh its options, which, in addition to an outright sale, included offering stock to the public and selling a typesetting subsidiary or selling valuable real estate. A between-the-lines reading of McIlhenny’s February 17 memo, however, suggested that alternatives to a sale already had been ruled out.
Morgan Stanley reportedly sent detailed financial data about U.S. News to roughly 40 potential buyers, but only after securing signed agreements that the information would be kept confidential and determining that the recipients were financially capable of buying the company (a minimum bid of $100 million was required). Even as copies of the company’s prospectus were being mailed, however, U.S. News employees still did not clearly understand — and had not been clearly told — exactly why their company was up for sale.
Originally, employees were led to believe the reason was rooted in their own profit-sharing plan, which required them to sell back their accumulated shares of stock when they retired or otherwise left the company. Until 1982, they were paid in cash for their shares. In that year, however, when the appraised value of U.S. News stock more than tripled (rising from $152 to $470 per share), the profit-sharing trust ran short of cash to meet the sharply escalating payouts. Management warned the payments threatened a $6.6 million cash drain for 1982. The only money flowing into the profit-sharing trust came from company contributions and dividends, and that, apparently, was not enough. Consequently, the company decided that obligations to some departing shareholders would be paid through annuities rather than in lump sums.
With time, the liquidity crisis faded into the background as the reason U.S. News was being put up for sale. Word went out from the company’s board that the December 14 offer was the first formal bid, backed up by a letter of credit, in the company’s history. That, members of the board told employees, put them in a delicate legal position. Beyond serving as directors of the company, they also were trustees of the profit-sharing fund, and federal law required such trustees to act in the best interests of fund participants. If U.S. News managers did not act to maximize the assets of shareholders, they conceivably could be sued later on for breaching their duties as trustees. This fiduciary responsibility soon overshadowed the liquidity crisis as an explanation for the sale and the accompanying secrecy.
By the time of the company’s annual shareholders meeting on May 7, U.S. News employees had been working for nearly five months under clouds of gossip, misinformation, and rumor. “There was a great deal of tension,” one recalls, “because everyone knew the deal wasn’t going to be consummated by then. The big question was how forthcoming the board members were going to be.”
The U.S. News directors steadfastly maintained that secrecy was needed to preserve the integrity of the bidding process and to secure the best possible deal for shareholders. Although most employees appear to have accepted that rationale, the board became the object of considerable cynicism. “Around the building, the joking expression became ‘Trust the Board,’” one U.S. News reporter says. “We’d be talking among ourselves, complaining about something, and someone would say: ‘Don’t forget . . . Trust the Board. They’ll do the right thing.’ ”
Shareholders heard the trust-us message at the annual meeting, held in Washington’s Four Seasons Hotel, several blocks away from the magazine’s headquarters. To some of them, a minor incident gave the four-hour meeting something of a sour note. After spotting a reporter for Newsweek lingering outside the meeting, an assistant to one of the U.S. News directors ordered a security guard to usher the reporter away from the area. A board member then relayed news of the ejection to the assembled shareholders, some of whom were rankled at what one calls the “semi-humorous” tone of the announcement. “Here we are, a news organization,” he says, “and yet some people were chuckling about throwing a reporter out of the vicinity.”
The meeting allowed the management of U.S. News to diffuse, for the moment, the two overriding concerns of employees — as one puts it, “Did we have any say in this, and would we get our money?”
On the first count, some feared that the board, through its control of the company, could approve any sale, even if a majority of employees disagreed. (Nearly all U.S. News employees routinely transferred their voting rights to management.) And if Rupert Murdoch or Reader’s Digest made an offer substantially higher than others, some employees wondered, would the board’s “fiduciary responsibility” compel it to accept the bid?
On the second count, some shareholders — particularly those with substantial stock holdings — worried that a sale agreement might not involve liquidation of the profit-sharing trust, presumably leaving them unable to collect their share of the sale proceeds.
The U.S. News directors appeared to address effectively these concerns at the shareholders meeting by announcing that employees would have the power to ratify, or reject, any proposed sale, and by promising they would do everything possible to ensure that shareholders would have immediate access to their money after the sale of the company was closed.
If U.S. News shareholders left the annual meeting feeling somewhat satisfied, the events of the next week only widened the chasm between employees and management. A transcript of the meeting was placed in the U.S. News library where employees were allowed, after signing a register, to review it. (They were not permitted, however, to take notes from the transcript or to remove it from the library.) One eagle-eyed staffer noticed that words never spoken at the meeting showed up in the transcript. The new passage dealt with a particularly sensitive issue: whether deferred-compensation packages, held by the seven board members and one other employee in the form of “stock equivalents,” would be fully paid off as part of any eventual sale of U.S. News.
Even the name given these nonvoting shares — “phantom stock” — incited suspicion on the part of employees, and evoked the imagery of “golden parachutes” for corporate executives. Some employees also feared that potential payments for the phantom stock would unfairly reduce the amounts they would receive from the sale of U.S. News. “At the time, some people were saying the company might be sold for as much as $200 million, and there was some figure floating around that the phantom stock could amount to $48 million — all going to eight people,” one U.S. News reporter says. “Well, this caused a big uproar. And there were not many satisfactory answers.”
To some U.S. News employees, the phantom-stock episode only underscored the secrecy and the occasional arrogance with which the board of directors ruled the company. That, at least, was nothing new. “I remember at a stockholders meeting four or five years ago, somebody asked John Sweet, the former chairman of the board, about something,” one editor recalls. “After a couple of minutes of silence, he said, ‘What do you think this is, a democracy?’ ”
Many U.S. News employees believe the bungling of the deferred-compensation issue only fueled fears that members of the board of directors were seeking the best deals for themselves. Employees say they understood the need for some secrecy, but felt that if the board had helped them understand the process — not necessarily the details — it would have slowed the debilitating spread of rumors. “Strictly from a public relations standpoint,” one says, “the whole thing was botched very badly.”
The rumors reached a peak in May and early June, as the bidding process set up by Morgan Stanley neared a close. Following the first deadline for proposals, May 11, U.S. News narrowed the field of prospective purchasers to nine. The next deadline, May 29, brought five offers for the entire company and one for the magazine only. Three of the bids, for substantially larger amounts than the others, emerged as finalists. “Toward the end, when it was looking like it was getting right down to the wire, the rumors were just rampant,” one U.S. News reporter says. “They went wildly all over the building. Any kind of rumor, whether it was true or not, just spread like wildfire.”
“Everyone was sort of holding their breath,” another says. “It was as if we were all in suspended animation.” One reporter told colleagues he would be writing a story on his video display terminal and turn to look out the window for a few moments, contemplating his — and his magazine’s — future; then, he said, he’d glance at his watch and realize a half-hour or more had passed.
U.S. News employees organized their own meeting for May 22, partly to vent their own frustrations and partly to extract from members of the board whatever information they could. More than 100 employees showed up. It was an emotional and sometimes angry session. “It was just like ‘them’ and ‘us,’ ” one reporter who was at the meeting says. “And not much information coming out.”
On occasion, there were even tensions between groups of employees with different ranks and tenures. Younger employees, it was said, cared more about job security and the editorial philosophy of potential owners; older employees more about how much money they would receive and when. “The feeling was,” says one U.S. News reporter, “that a lot of the old-timers just wanted to take their money and leave. They didn’t care if we were sold to Donald Duck.”
In the week and a half before the proposed sale to Zuckerman was formally announced, employees worked in an atmosphere of tension and dreariness. They knew the sale would be closed soon. Some of them discovered that from one office in the news department they could peer into the room in which the board of directors was meeting. “Right there toward the end, when we felt that the sale was imminent — Is it today? Is it today? Is it today? — you could see the board people walking back and forth, their hands going up and down,” one reporter says. “People were trying to look and see if they could read sign language. It was hilarious. But that just shows how dire it was.”
On June 11, the U.S. News board of directors approved the sale of the company to Mortimer Zuckerman. Under the final agreement, Zuckerman will pay $153.3 million for the company — $2,681 for each of 57,178 outstanding shares — and assume liability for deferred-compensation packages held by eight top managers, valued at $22.7 million and payable in installments over 15 years.
Many employees first learned about the sale in the pages of the Washington Post. “It was unfortunate,” says one of the magazine’s reporters. “It left kind of a bad feeling to hear it elsewhere and not from your own people.”
That way of doing business had not always been the case at U.S. News: Founder David Lawrence believed employees came first. In 1962, Lawrence arranged to give ownership — but not control — of the company to its employees. He hoped to preserve a paternalistic, happy-family atmosphere nearly unique among Washington news organizations. The profit-sharing trust he created was intended to encourage “standards of excellence and initiative” among U.S. News employees while maintaining “stability and continuity in management and other personnel.”
After Lawrence died in 1973, U.S. News entered a new era of corporate expansion, which was not without its growing pains. The company realized huge profits on a $350,000 equity investment in Atex, a small Massachusetts firm pioneering new techniques of electronic photocomposition, when Eastman Kodak paid more than $8.5 million for its stake in 1981. A year later, however, U.S. News abandoned an ill-conceived entry into the book publishing business after dumping at least $8 million into it.
As for U.S. News’ subsidiaries — Publishers Services International (PSI), an electronic publishing firm, and Parkway Communications, a recent entry into public affairs broadcasting — no reliable financial figures are available. But one U.S. News editor says the ventures have been savaging the company’s bottom line. “PSI has drained millions and millions,” he says. “Parkway has never earned a dime.”
Even though they stand to make hundreds of thousands of dollars from the sale of the company, some U.S. News employees are still bitter over what they see as the management mistakes of the past. “I am not dumping on my company,” one editor says. “The only thing I berate this company for in the past was the philosophy that it wasn’t up to us to make a whole lot of money. There were so many reasons to make it. But they were always trying to figure out what Mr. Lawrence would have done.”
The resolution of the six-month drama, for many U.S. News employees, is bittersweet. Thirty or 40 of them, and perhaps more, will become “instant” millionaires by virtue of their extensive stock holdings. A vastly larger number, generally those who have worked at U.S. News for five years or more, will receive six-figure payouts. (Even some who left the company before the mystery bid triggered the sale of U.S. News will, through an odd twist of fate, receive comparable sums. Because some departing employees chose not to “cash out” their holdings in the company’s profit-sharing trust, they still own the bulk of the shares they had accumulated.)
The exhilaration within U.S. News over the impending bonanza sometimes was the only emotion to punctuate an air of tension. “People who have been here a few years are going to get over a hundred thousand dollars,” says one U.S. News reporter. “For a journalist, that’s a large amount of money. And to all of a sudden have this kind of money drop into your lap — it was exciting. You felt like you hit a lottery.”
“It was like 1849 a sort of ‘gold lust’ swept the building,” says a U.S. News editor. “And that’s practically all anybody talked about around here, for weeks on end.”
Despite the unexpected windfalls, however, many employees fear the humane working atmosphere that has characterized U.S. News will evaporate when Zuckerman takes charge. “I’ve never heard anybody get chewed out very badly, at least in front of others,” says one editor. “There’s less politicking than anywhere else I’ve worked, and very little backbiting over stories or bad-mouthing of other employees. There was very little meanness in that building.”
Even after the agreement with Zuckerman was announced on June 11, there were flies in the ointment. Among them was a lawsuit, brought in February by employee-shareholders who had retired before the sharp escalation in stock values, accusing U.S. News executives of fraudulently undervaluing the company’s stock. As a result, their attorneys say, they “were compelled to redeem or sell their shares at less than the fair market value.” (Documents in the case show that the company’s independent appraisal firm created two “fair market values” for U.S. News stock: one representing a “minority stockholder position” and the other representing “controlling interest.” The gap between the two valuations was large. In 1978, for example, it ranged from a low of $7.2 million to a high of $31.9 million.)
U.S. News employees knew what they would gain from a sale; the unanswered question, and for many a troubling one, was what they might lose. “There won’t be a feeling of certainty about the future here,” says one editor, “until Zuckerman is on deck and has been here for a number of months. We play this daily guessing game.”
Years from now, the magazine’s employees may still be wondering about another question: Was U.S. News & World Report a victim of its own success, or a victim of its own failure?
Sidebar: ‘Dear Morgan Stanley’
This article originally appeared in the September 1984 issue of Washington Journalism Review.
Bill Hogan