Sympathy for the CEO
Sacramento Bee parent McClatchy Company is headed for the bottom. Company head Gary Pruitt aims to stem the tide, or go down with the ship.
One of Gary Pruitt’s favorite hikes is the Half Dome Cables Route in Yosemite National Park. The 52-year-old president, chairman, and chief executive officer of The McClatchy Co. keeps photographs of himself and friends scrabbling up the steep granite incline on the desk in his Q Street office in Midtown Sacramento. Misty, subdued landscapes of Half Dome and Bridalveil Fall adorn an opposite wall, solemn windows looming over the rectangular granite meeting table where Pruitt and company plot the moves of the third largest newspaper chain in the country.
Those moves have taken on a deep sense of urgency as of late. Since Pruitt began engineering the risky, controversial purchase of the Knight Ridder newspaper chain three years ago, McClatchy’s price per share has plummeted nearly 90 percent. It’s as if the company clawed its way up the Cables Route, only to plunge down the 4800-foot precipice on the other side.
As this issue was going to press, Pruitt resigned from four trusts that control 80 percent of McClatchy’s voting stock, sparking speculation that the publicly traded company may go private—a move that would undoubtedly anger shareholders—with Pruitt cast as the fall guy.
Pruitt says that’s nonsense, but everyone’s waiting for the splat. However, Pruitt has defied the odds before. In a decade of industry decline and stiffening competition from the Internet, the boyish, charismatic CEO known to quote Rolling Stones lyrics charted a steady course to the top. Then the bottom fell out of the real-estate market, sucking McClatchy and the entire newspaper industry down with it. They’re already calling 2008 the year the newspaper died.
It is the worst year of Gary Pruitt’s life.
I first learned Pruitt was a Rolling Stones fan while researching a story I was writing about the Knight Ridder purchase. I’m three years younger, and happen to be a pretty big fan myself. I called him and asked a few obvious questions about the purchase, then changed the topic to the Stones. We ended up trading arcane facts about the world’s greatest rock ’n’ roll band for another 20 minutes. Every call after that’s been the same. Our love and knowledge of Stones lore provides a common mythology that transcends the fact that Pruitt heads the third largest newspaper corporation in the country and I work at the local alternative newsweekly.
Sacred though our bond may be, it was the only leverage I had to gain a live audience with the beleaguered chief executive. Wearing black boot-cut stretch jeans and an awesome Rolling Stones shirt I got off the clearance rack at Macy’s, I approached him at a Rotary Club luncheon four months ago. He was the scheduled speaker, standing tall, slim and athletic within a circle of silvery-haired Rotarians. I stepped into the circle and parted my black sport coat to display the shirt.
“Gary, I wore this just for you,” I beamed.
“Hey, that’s a cool shirt!”
How could he turn me down?
Actually, he canceled the first interview, which would have taken place the week after McClatchy ordered a nationwide, 10 percent across-the-board cutback, laying off 1,400 of its 14,000 employees. He thought my concept of setting the drama surrounding the company to the music of the Rolling Stones was interesting, but the timing wasn’t right. When we finally did meet last month, the timing still wasn’t right.
“I thought about the Rolling Stones theme; I enjoyed reading your e-mails,” he said. “But I was afraid if we tied it too closely to that, it may seem to make light of what is obviously a very serious situation. I didn’t want to appear to be taking it lightly, because I don’t.”
Which is a shame, because Pruitt’s Rolling Stones stories are much better than mine.
May the good Lord shine a light on you
Make every song the same,
your favorite tune.
—The Rolling Stones,
“Shine a Light,” Exile on Main Street
Pruitt first saw the Stones on his 15th birthday in 1972, when he camped out overnight to watch the band’s Fourth of July concert at Robert F. Kennedy Memorial Stadium in Washington, D.C.
“In that concert, you felt anything could happen, good or bad,” he recalled. “You did not feel like you or anyone else was in total control, which is thrilling but scary. You never have near that feeling at a concert now.”
Indeed. Nowadays, that thrill has been reserved for newspaper executives.
He caught the Rolling Stones 1975 tour at the Gator Bowl on the night he graduated from the University of Florida at the age of 18. He studied First Amendment law at UC Berkeley, and was hired as McClatchy’s in-house counsel in 1984. He took over the publishing helm at The Fresno Bee in 1991.
McClatchy had purchased a string of three medium-sized South Carolina dailies the previous year, and Pruitt’s fortunes rose with the company. In 1994, he was promoted to chief operating officer; by 1996, he was commanding the fleet as McClatchy’s CEO. Under his leadership, McClatchy’s stock continued to rise, and Wall Street took notice. The fact that Pruitt occasionally threw a little rock ’n’ roll into the mix at shareholder meetings didn’t hurt.
“Hey, at each annual meeting, we show our photography set to a song,” he enthused. “This year we did—they’re not always current!—'(What’s So Funny ’Bout) Peace, Love and Understanding,’ by Elvis Costello. We did Jimmy Eat World, ‘Middle’; the New Radicals, ‘You Get What You Give.’ We did ‘Rockin’ in the Free World,’ Neil Young. Did the original ‘This Land is Your Land’ with Woodie Guthrie. Did some reggae songs. So yeah, our shareholders meetings are different in that respect.”
The industry was already in a decade-long decline, but McClatchy’s circulation and readership continued to climb, validating Pruitt’s belief that a firm commitment to quality journalism was essential to succeed. From the beginning, the company’s strategy had been to acquire newspapers in high-growth markets where no daily competition existed, and it paid off in higher net profits, a steadily rising price per share and more money for newsrooms.
“Our strategy has always been consistent with striving to be and achieving the status of leading local media company,” Pruitt said. “That means having the biggest audience, the most advertising revenue. What it takes to be the leading local media company has certainly changed over time, but our feeling is, if you pick your markets carefully and execute well, you should be able to do well over time.”[page]
Pruitt shocked the newspaper industry in 1998 when he engineered McClatchy’s $1 billion purchase of the Minneapolis Star-Tribune. No one else was investing in newspapers; the endless series of cutbacks, buyouts and layoffs that continues unabated had already begun. Defying conventional wisdom, the gamble succeeded, convincing fickle investors that McClatchy was a safe bet. The Star-Tribune replaced the Bee as McClatchy’s new flagship, and Pruitt was celebrated as the new captain of the industry, the smartest guy in the room.
These were the halcyon days, and on a personal level, Pruitt reached the zenith of his career backstage at a 1999 Rolling Stones concert in Minneapolis, where he met Mick Jagger and Keith Richards, the Glimmer Twins themselves. He could do no wrong. Every song was his favorite tune.
“We are not following the industry’s model of across-the-board layoffs and dramatic cutbacks,” he confidently told a group of Wall Street analysts in 2001.
He kept that promise until 2005, when McClatchy doubled down and bought Knight Ridder.
Rumors of McClatchy’s pending deal to purchase Knight Ridder began circulating in early 2005, right around the same time the company’s stock reached its all-time high of $76.05 on March 22. As is common when a major acquisition is the works, the price per share began falling immediately. It’s been falling ever since.
To say Wall Street had soured on newspapers in the seven years since the purchase of the Minneapolis Star-Tribune is a serious understatement. Outside of McClatchy, few companies faired well through the 2000–2001 recession, particularly the 32-newspaper Knight Ridder chain. Most of the major dailies still enjoyed double-digit profit margins, but the big investment houses like to see cash flow, and between increasing operating costs and declining advertising revenue, the spigots were slowly being squeezed shut.
Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away.
—The Rolling Stones,
“Gimme Shelter,” Let it Bleed
McClatchy’s strategy bucked the industry’s downward cyclical trend, making it virtually the only newspaper company financially capable of purchasing Knight Ridder. Assembling the deal, Pruitt, formerly McClatchy’s chief technology officer, also considered the secular forces shaping the newspaper industry—the structural changes involved in making the transition from newsprint to the Internet.
For emerging multimedia companies, balancing the so-called legacy costs of the past with future investment presents a financial dilemma. Printing presses, delivery trucks and the employees who operate them may be obsolete in the paperless world of tomorrow, but on average, the print product still accounts for 96 percent of the industry’s advertising income. Companies can’t just throw the presses over the side. On the other hand, they can’t stand idly by as audience and advertising share are fragmented by the infinite number of channels available on the Internet.
“We always try to think, if you started the company today, what would it look like?” Pruitt elaborated. “Otherwise I’m afraid you’re just overly burdened with legacy thinking that’s based on the past instead of the future. So we very much try to say if we started today, what would it look like, trying not to be sentimental about the past, honest about what challenges we face today and what it will look like in the future.”
McClatchy agreed to pay $4 billion for the company, on the condition that it be allowed to immediately unload 12 newspapers in underperforming markets, including two highly respected major dailies, the San Jose Mercury News and The Philadelphia Inquirer. McClatchy also agreed to assume Knight Ridder’s $2 billion debt. The purchase added 20 newspapers to the fleet, including The Miami Herald and The Kansas City Star. For a brief time, McClatchy was the second largest newspaper chain in the country, with 32 newspapers, valuable Internet properties and roughly $8 billion in assets.
If the Knight Ridder deal offered a glimpse of the future, many observers didn’t like what they saw. Wall Street analysts rolled their eyes as McClatchy’s increased debt obligations cut into cash flow. Industry pundits predicted Pruitt wouldn’t be able to unload the 12 Knight Ridder “orphans” on a hostile market. When Knight Ridder’s California properties were sold to privately held MediaNews Group, headed by infamous cost cutter “Lean” Dean Singleton, journalists cried foul, questioning McClatchy’s commitment to quality journalism.
Nevertheless, Pruitt almost pulled it off. Defying conventional wisdom once again, he sold the dozen orphans and substantially reduced the company’s debt obligations. The Knight Ridder deal netted McClatchy valuable stakes in CareerBuilder, Cars.com, and Apartments.com, important hedges for the ongoing secular transition to the Web. Advertising revenue continued to grow, and the company’s stock price briefly flirted with an uptick.
And that’s when the real-estate market imploded.
California, where McClatchy owns five newspapers, has been one of the markets hardest hit by the housing downturn. In Sacramento, the median home price has fallen 43 percent in three years. A similar tempest has roared through Florida, taking the wind out of The Miami Herald’s sails. The phrase “jingle mail” has entered the national lexicon. That’s the sound keys make in the mailbox when homeowners who owe more than their houses are worth walk away from the mortgage.
The carnage has been magnified by changes in federal regulations made by the Clinton administration that permit investment banks to “securitize” home mortgages and trade them on the stock market. For six years, investment firms rode the real-estate bubble up, betting the house and then some that prices would continue rising. When the bubble popped and homeowners began defaulting en masse, the banks found themselves holding trillions of dollars of worthless paper. Now, the resulting undertow is dragging the entire global economy down with it.
Predictably, no one saw it coming—not Wall Street, not the federal government and certainly not McClatchy.
“We never anticipated this kind of decline,” Pruitt conceded. “We never thought that this would happen. You run all sorts of models and scenarios, but we never thought there would be this kind of decline. Actually, no one predicted this kind of decline for the newspaper industry, this precipitous.”
McClatchy recorded its last full quarter of revenue growth in early 2006. As the economic vortex gained speed and momentum, display-advertising revenue from home builders, big box stores like Home Depot and Lowe’s, and medium-sized department and furniture store chains was sucked down the drain. Struggling to meet its increased debt obligations as well as the pending capital-gains tax bill on the sale of the Knight Ridder orphans, the company found itself in a cash crunch. In December, with nowhere else to turn, it was forced to sell its flagship newspaper, the Minneapolis Star-Tribune, for barely half the $1 billion it originally paid for it.
The sale alleviated McClatchy’s short-term cash shortage, but did little to sway investors the company had turned the corner. The stock price continued to plummet, and the company had no choice but to significantly mark down the value of many of the assets it obtained in the Knight Ridder deal. Pruitt found himself in the unenviable position of simultaneously enacting the cutbacks and layoffs the company had prided itself on avoiding for years.
“We thought we could evolve over time and rely on attrition, and we were,” Pruitt said. “But the downturn has been so precipitous, we reluctantly had to turn to layoffs as well. We thought we could navigate through this transition without going there, but we were wrong. We’ve had to take more dramatic and quicker actions.”
In June, McClatchy’s 10 percent across-the-board cutback cost 1,400 employees their jobs, including 250 at The Miami Herald, 123 at The Charlotte Observer and 86 at The Sacramento Bee. The day before I interviewed Pruitt, the company ordered a one-year companywide wage freeze. The next week, 55 percent of the employees at The Sacramento Bee were offered buyouts, with the knowledge that there may be another round of cuts and layoffs to come.
“It’s not something you look forward to, or want to do,” Pruitt said somberly. “It’s essential for the future success of the company to make sure the company stays safe. You hope you don’t have to do anymore, but you can’t say for sure.”
Pruitt’s total compensation, which includes base pay, incentive bonuses and stock options, has been cut 20 percent, from $5.6 million in 2006 to $4.6 million in 2007. It’s not his favorite topic.
“It’s hard to talk about this without sounding offensive,” he said. “I recognize that I earn a lot of money, a lot more money than I thought I’d ever earn. Appropriately, I now earn less money.”
So far, the damage-control effort appears to have gone for naught. McClatchy’s cost-cutting measures have had no visible effect on share price, and its credit rating remains in junk-bond status. The company has been forced to sell some of its Internet assets to raise cash; meanwhile, other assets continue to be marked down in value, such as its 49.5 percent share in The Seattle Times, which has declined by 90 percent since being acquired in the Knight Ridder deal.[page]
Last fall, Jim Cramer, the acerbic former hedge-fund manager who hosts CNBC’s Mad Money, placed a framed portrait of Pruitt on his “Wall of Shame” and hurled eggs at it. Meanwhile, advertising revenue continues to crater as the economy races for the bottom. McClatchy is bailing as fast as it can, but its fortunes continue to sink.
“Last quarter, we had revenues decline by 15 percent, but cash expenses were down about 9 percent, and that led to cash flow going down by 33 percent!” Pruitt exclaimed. “Even if you’re cutting expenses by 9 percent, in this kind of climate, it leads to big declines.”
The really bad news?
“I can’t say we’ve reached bottom yet,” Pruitt warned ominously. “It may get worse before it gets better.”
McClatchy isn’t the only newspaper company battling heavy weather. In 2007, advertising revenue fell 10 percent across the country, the biggest drop in 50 years. Virtually every major newspaper in the country, including The New York Times, The Washington Post, the Chicago Tribune and the Los Angeles Times, has made deep, across-the-board staffing cuts during the past year. That’s part of a long-term nationwide trend that has seen the industry shed 3,000 full-time news staffers between 2000 and 2006, a decline of 6 percent, according to the Project for Excellence in Journalism.
Nevertheless, Pruitt maintains his characteristic optimism for the industry. He conceded that given the downturn, the timing of the Knight Ridder deal couldn’t have been worse; the debt assumed with the purchase adds to the near-term pressure of keeping the company safe. But he continues to defend the decision, employing some fairly artful spin: As a percentage, cash flow may have actually declined less than it would have if the company hadn’t acquired Knight Ridder. That’s because McClatchy’s existing papers, including the Fresno and Sacramento Bees, are concentrated in California, the region that’s been hammered hardest by the housing collapse.
Who wants yesterday’s papers?
Who wants yesterday’s girl?
Who wants yesterday’s papers?
Nobody in the world.
—The Rolling Stones,
Between the Buttons
“One of the things that I wanted to emphasize is, obviously, we’re impacted by the economic downturn,” Pruitt said. “It’s difficult to tease out how much of this is cyclical, and therefore temporary, and how much is secular and permanent. People have a tendency to conflate the two and assume, ‘Oh my god, it’s the end of the world as we know it—so why do you feel fine?’”
One reason he feels fine is that McClatchy Interactive, the company’s Internet operation, is making headway online, in no small part due to its recent Internet acquisitions. Growth in online revenue and readership has been steadily rising. McClatchy Interactive contributes 12 percent to the company’s revenue stream, twice the industry average. Pruitt predicts that within five years, as much as 25 percent of the company’s business will be online.
Since 75 percent of McClatchy’s revenue would still depend on the printed newspaper, it isn’t going away any time soon. Industry studies corroborate Pruitt’s belief that despite the long-term decline in newspaper readership, a vital core audience for quality journalism remains. Newspapers, which account for as much as 90 percent of the original reporting done in the United States, remain by far the most effective way to reach that audience.
The Sacramento Bee and Sacbee.com reflect Pruitt’s vision of the hybrid print and online company of the future, with a 24-hour news cycle, the leading local Web site and a comprehensive daily print edition. But in order to get to that future, McClatchy must sail the cyclical and secular seas through a crossfire hurricane.
“You don’t want to cut expenses and hurt the company if it’s temporary,” he said. “On the other hand, you want to keep the company safe and secure for the long-term future, and that’s a very difficult balance to strike. I remain optimistic long-term, but in the short run, things may get worse. I hope not, but they could. Sorting that out has been difficult, stressful, painful, whatever you want to call it.”
He’s convinced McClatchy is poised well for the long term in all of its markets, and that quality journalism will survive the downturn, in print and online. The fact that 80 percent of the company’s voting stock is held by the McClatchy family helps insulate it from any hostile takeover attempts and other market pitfalls.
“The company’s old, founded in 1857, and has always cared about quality journalism, public-service journalism, and has had to go through lots of transitions to do that,” he said. “You heard the little Rotary speech I gave. Think about it. There were no electric lights when The Sacramento Bee started. Today, a quarter of the adults in the Sacramento market will visit one of our Sacramento Bee Web sites every week. It’s changed a lot. We’ve adapted, I think largely successfully.”
The recent decision to print The Sacramento Bee on smaller, less-expensive news stock is part of that evolution, as is the planned October launch of the redesigned Sacbee.com Web site. But contrary to the reports sparked by the news he had resigned from four trusts that control 40 percent of McClatchy’s voting stock, Pruitt said the company has no plans to go private, at least in the short term, and that he retains the confidence of the McClatchy family.
“It was done at my initiative,” Pruitt said, adding that he’d been planning to resign from the trusts for some time, but had been waiting for a suitable replacement, which he found in longtime McClatchy board member Leroy Barnes Jr. “It is true that I wear a lot of hats, president, chairman of the board, CEO, and this will make one less transition to go through when I retire.”
Not that he’s planning to retire any time soon. Perhaps Pruitt will defy the naysayers yet again and guide McClatchy through perilous waters to the hybrid print/online future. If not, he’s willing to go down with the ship.
“I came into this not because I had an MBA and I thought this was a good way to make money, but because McClatchy believed in First Amendment rights and quality journalism,” he said. “When you see the bad revenue numbers, you go, ‘Oh god, this is so terrible, I don’t need this anymore.’ But probably the only thing worse than staying would be quitting. It’s too important.”
It’s been a long, strange trip since those halcyon days back in ’99, when McClatchy’s flag was flying high above the Minneapolis Star-Tribune and Pruitt met the Rolling Stones in person. He’d told me the story once before on the telephone, but not with as much detail as the second time around. A record-company friend had snagged him a backstage pass, and all day Pruitt pondered what he’d say to the Stones that could convey the depth of his appreciation. When the Glimmer Twins arrived backstage that night, he was ready with his polished line.
“Hey, I just saw you in Sacramento, I think this is your best tour since ’72.”
Keith Richards replied without missing a beat. “Hey man, I just wish I could remember any of them.”
“Wait a minute, Keith,” Mick Jagger objected, “we’re actually proud of that.”
It was the quintessential Stones experience, and to this day, Pruitt doesn’t know if Mick meant they were proud of the fact it was their best tour since ’72 or that Keith couldn’t remember any of the tours.
He tries not to take himself too seriously, Gary Pruitt. There’s a balance in life and music is part of it and humor is part of it. But after I shut off the tape recorder, he stood up tall, slumped his shoulders slightly and sighed.
“This has been the worst year of my life, by far,” he said.
He quickly reassured me that he’s had plenty of good years, that he didn’t need to see a shrink; he wasn’t ready to walk the plank, not just yet.
But no one could blame him if he was.