Paper Money

by Mary Van de Kamp Nohl, Illustration by Stuart Bradford Steve Maersch had already worked for four newspapers – including the Chicago Tribune and Melbourne (Australia) Herald – when he landed a job at the Milwaukee Journal in 1969. The other papers paid better, but only the Journal promised to make him a part owner. On Maersch’s first day as a Journal copy editor, a colleague dropped off a pamphlet titled “Journal Employees’ Stock Trust Agreement.” Maersch showed it to his dad, an ex-IRS man turned tax accountant. “He’d never seen anything like it,” Maersch recalls. “He called it a…

by Mary Van de Kamp Nohl, Illustration by Stuart Bradford

Steve Maersch had already worked for four newspapers – including the Chicago Tribune and Melbourne (Australia) Herald – when he landed a job at the Milwaukee Journal in 1969. The other papers paid better, but only the Journal promised to make him a part owner.

On Maersch’s first day as a Journal copy editor, a colleague dropped off a pamphlet titled “Journal Employees’ Stock Trust Agreement.” Maersch showed it to his dad, an ex-IRS man turned tax accountant. “He’d never seen anything like it,” Maersch recalls. “He called it a marvelous investment.”

The younger Maersch invested with abandon, and by the time he retired in 1995, he’d made more than $70 for every $1 invested. “Journal stock never had a losing year,” Maersch wrote in his 2003 book on a newsman’s life: You Get to Meet Such Interesting People. Between 1937 and 2002, the company shares produced an average annual total return of 15 percent.

“Anyone who worked for the company for 35 years, and bought the stock, had a lavish retirement,” Maersch adds.

It could take even less than that, if you were as aggressive as Ben Gumm, publisher of Connecticut and New York papers owned by the Journal’sparent company, and his wife, advertising director Sally McLaren. “We bought a lot of stock for a relatively short time,” says Gumm.

After just 21 years, their holdings peaked at $3.5 million. The couple left the company when Gumm was fired in 1996. Still in their mid-40s, they bought a bed and breakfast and settled into semiretirement. “The Journal stock literally made thousands of employees millionaires,” says Gumm.

Journal stock gave one columnist the cash to buy a riverfront condo – sans mortgage. Another bought a sailboat. White-collar workers weren’t the only winners. The stock plan made millionaires of pressmen and maintenance workers, too.

Buying shares – as much and as often as you could – became a mantra passed down from veterans to newcomers for 60 years.

Paul Hayes, a Journal science writer from 1962 to 1995, famously wandered the newsroom with a 3-by-5 card in his shirt pocket – which he’d happily share with others – showing his appreciating net worth. Warren Heyse, a classified ad salesman who rose to vice chairman of the company by his retirement in 1992, would give pep talks about the stock. He hung a picture of praying hands in his office with the caption, “God Bless Our Journal Stock.”

For three generations, the stock did seem blessed. Then, in response to new financial challenges, CEO and Chairman Steve Smith decided to lead the privately owned company and its internally controlled stock plan into the deep waters of the publicly traded stock market. Standing on the dais of the New York Stock Exchange in September 2003 and “beaming his cheeks off, bad teeth and all,” as one excolumnist jibes, Smith took the company from Main Street to Wall Street.

Smith would later call it his greatest accomplishment. Yet over the next five and a half years, Journal Communications Inc. stock lost 97.6 percent of its value. When the market hit bottom on March 9, 2009, it took nearly six shares (trading at 36 cents each) to buy the Sunday paper.

The stock has recovered some of its value since then, but it has already shattered lives. Almost half of the 4,158 people employed by Journal Communications when it went public have lost their jobs. “A lot of people are really, really hurting,” says Marie Rohde, a reporter for more than 30 years.

As stock bought on margin lost value, banks called in their loans. It was like 1929 for many. “I know former employees who owe more than $200,000 on their stock, and people who used their homes as collateral to buy stock who are close to losing them,” says a manager who left in 1998. At one point, Paul Kritzer, a retired company vice president, secretary and general counsel, counted 200 employees and retirees who’d lost as much as $80 million – $400,000 per employee. The stock fell from there.

Just how bad was it doing? In 2008, The Motley Fool named it one of “the 5 worst stocks in the world.” The company posted a $322 million loss that year. Yet when things looked bleakest, Smith’s handpicked board of directors paid him a handsome half-million-dollar bonus, putting his pay at $1.7 million – calling it a “retention award” for a “key talent” who had guided the company through dire economic challenges. In fact, a once-fantastically successful company had hit the lowest point in its financial history.

Golden Days
On Feb. 1, 1954, the cover of Time magazine was devoted to the “florid-faced millionaire with china-blue eyes, a mouthful of flashing gold teeth, and the booming voice of a sideshow barker” – Journal Co. Chairman Harry J. Grant.

Time went on to describe how the 72-year-old Grant had made the paper “one of the best … in the U.S.” with the “fervor of an evangelist.” Under Grant’s leadership, the Journal was selling more advertising than any paper in the world, even as it practiced tough journalism.

While folks from Washington to Hollywood cowered at Sen. Joseph McCarthy’s accusations of communism, Grant’s Journal fearlessly attacked its home senator. Wisconsin Gov. Phil LaFollette vowed he’d rather have his children grow up illiterate than read the Journal,while Milwaukee Mayor Frank Zeidler called it “the intellectual life of Milwaukee.”

“We’re not a loved paper. But we’re a respected one,” said Grant. “You have to have good editorial matter … to get circulation, and you’ve got to have circulation to get advertising.” To do all three, he said, a paper needed to be free and independent.

With newspaper chains buying up urban dailies, Grant feared for that independence. As the president and publisher who owned one-fifth of its stock, he decided to do something about it. “If owning stock works for me,” he said, “it should work for others on the payroll.” Overcoming intense opposition, the Journal employee stock trust was created in 1937, becoming Grant’s crowning achievement.

The actual stock shares were placed in a trust. Employees bought “units of beneficial interest” – in essence, shadow stock that appreciated and accumulated dividends just like actual stock. To assure the local control and independence Grant treasured, the units would never be sold outside of the trust, nor could they be owned by anyone other than active employees.

To help employees pay for the stock, he declared an immediate bonus and first-year dividend, giving employees the 50 percent equity Grant required. Then, he persuaded a Milwaukee bank to lend his employees the rest of the purchase price, which they could repay as the stock grew in value.

Grant insisted he wasn’t being socially minded. “It is the right of men and women whose lives go into building a newspaper to … share in the ownership,” he said. Grant added that employee ownership was better than profit sharing and other incentives because “it can’t be dissolved at the discretion of management.” He structured the trust to ensure that.

To make sure neither management nor any combination of shareholders controlled the company, Grant created a Unitholder’s Council made up of representatives elected by shareholders in each department. Six were chosen to represent the employee owners on the company’s board.

“Some journalists still argue the executives really own and run the paper, and that [employee] ownership – intended or not – is a device for keeping staff salaries lower than they should be,” Timenoted. Yet with $7.2 million in dividends and $8.7 million in appreciated share value by 1954, Time said, the stock “gave employees security they might otherwise lack.”

Maersch eventually served as a Unitholder Council representative but likened his experience to that of Lot’s wife in the Old Testament. He had to sit silent as a block of salt, never daring to question management, he says. Other representatives report the same experience.

For decades, there wasn’t much to question. In 1939, the stock had a total return of 28 percent (still the record). In 1948, it split five shares for every one. In 1962, when the company acquired its chief competitor, the Milwaukee Sentinel, JESTA stock was worth roughly seven times its 1937 price. The Journal’scirculation peaked in 1963 at 375,326 daily and 567,042 Sunday, further enhancing the share value.

The company had added WTMJ-AM radio in 1927 and WTMJ-TV in 1947, but the newspaper generated most of the revenue. Perhaps sensing the aging of the company’s cash cow, Grant’s successor, Irwin Maier, launched a campaign to further diversify the firm. Grant’s son-in-law, business manager Donald Abert, and Tom McCollow, a certified public accountant and tax specialist, joined the effort, and each followed Maier as chairman. Maier wrote that diversification would make the company “more secure … add to prosperity in good times and cushion the impact of bad times.”

The team’s acquisitions included other newspapers, three cable companies, numerous printing operations – among them, a leading billboard maker, a bottle-label manufacturer, a religious and educational film company, and a microwave transmission system. By 1972, employees owned 91 percent of this diversified conglomerate. The remaining shares were held in trust for Grant’s descendants.

With employees owning so much of the company, former Journal writer Robert W. Wells warned in his 1981 history, The Milwaukee Journal, “Executives were under pressure to keep dividends high enough to help employees pay off their stock loans. This set limits on how much profit could be plowed back into the company.”

But with the newspaper at its peak (its most profitable year was 1980) and new acquisitions adding to the bottom line, Maier’s efforts were hardly constrained. In 1978, the company purchased Milwaukee’s suburban newspaper chain, Community Newspapers Inc. The next year, it bought a Las Vegas TV station. Operations spread to Michigan, Illinois, New York, Connecticut and Nevada.

Diversification paid big dividends. Earnings grew 91 percent during the ’60s, then more than tripled in the ’70s. Nearly half the profits now came from acquisitions, Maier noted in his autobiography.

“In the ’60s and ’70s, we had a reputation as being one of the most masterful papers in the country because of the stock plan. It kept us magnificently independent,” says science writer Hayes. “The pay wasn’t high, but with the stock … you had to be a star at The New York Times or the Washington Postto make more.”

When the prime rate hit 20 percent in the early 1980s, then-Chairman Abert got the banks to hold the rate on employee loans to 15 percent, Maersch recalls. Still, some employees had to sell shares to pay their interest. There was no shortage of willing buyers.

“You couldn’t go in and buy as much stock as you wanted,” remembers Rohde. “Management had to ask you.”

Scarce supply fueled buyer interest, as did the changes management implemented over the years to juice demand. The waiting period for purchasing stock was reduced from five years, to three, and finally to six months. Stock ownershipwas opened to retirees and part-time employees. The initial 50 percent down payment eased to 20 percent.

The company introduced a new profit-sharing program in 1973, in part to help employees save money to buy stock. For every $1 an employee put in, the company contributed 40 cents. “To get the thing going, the company contributed a week’s pay,” says Maersch, who snapped up the “free money.”

With just 20 percent down on their stock purchase, employees easily borrowed the remainder from the Journal Credit Union and local banks at sweetheart rates. “We used to get stock loans at the prime rate – the rate banks charge preferred customers,” Maersch notes. By 2003, stock loans were 0.6 points under prime, “a discount given because no Journal loan ever defaulted,” he adds.

The loans were often highly leveraged. The rule of thumb for buying a home was that you could afford 2.5 to three times your income. Maersch’s stock loan reached 11 times his income. “If Journal Communications ever went belly up,” he wrote, “the lines of its shareholders would wrap themselves several times around the bankruptcy court.”

As the number of shares he owned soared, so did Maersch’s net worth, his debt and the income tax deduction he got on his interest payments. When Maersch had started at the Journal, he’d calculated that if he saved 5 percent of his salary and earned a 5 percent return, he’d have $1,000 in 630 days. Now, thanks to the stock and leverage, he added $1,000 every fivedays.

It’s illegal for banks to lend money to customers for buying publicly traded stocks on margin, says a banker who handled employee stock loans. “But the Journalwas privately held, so it was up to the bank to assess the risk.” From the banks’ perspective, there wasn’t much. The formula used to value the stock was conservative. The company had solid earnings and management rarely carried debt. If a unitholder needed to sell his shares, there was a ready market.

Not everyone bought the stock. Some bought only with cash. “Then, there were plungers like me,” says Maersch.

As the Journal and Sentinel newspapers merged in 1995, the 57-year-old Maersch and other longtime employees flush with stock left the company, producing a flood of shares for sale just as interest in the stock waned. Both the newspaper’s stature and its circulation had steadily declined. New hires no longer saw the paper as a lifetime career. “They couldn’t give a rat’s ass about the stock,” Rohde says.

“There was so much stock, management simply couldn’t sell it all to employees anymore,” says Gumm. “I could buy as much stock as I wanted with a phone call to the bank. There weren’t even any papers to sign.”

Some managers redoubled their efforts to encourage employees to buy stock. Lucille Chadwick sold classified ads for the company’s 19 East Coast community newspapers. She says her boss, Gumm, was always “after me to buy more shares.” When she retired at age 72 in 2002, Chadwick had 40,000 shares and a hefty stock loan.

An ad salesman in the same office says he was just 20 years old when Gumm began looking at his stock. “He’d say, ‘You have enough equity here to purchase more stock without any money out of your pocket,’ ” the ad man recalls. He amassed 60,000 shares and a stock loan of $200,000. “It was almost like a cult,” he says now. “If you weren’t buying stock, it was like you were stupid.”

Employee bonuses were paid in stock to absorb the excess, but by 2000, the company treasury was awash in surplus shares. By 2002, Journal Communications was cash poor and borrowing money to buy back all the unwanted shares. It was not a small problem.

Let’s Make a Deal
Like Harry Grant and Irwin Maier, Steven J. Smith began his career as an ad salesman. But Smith sold not for the newspaper but the company’s radio station, WKTI-AM. He was so successful that within six years, he was made vice president and general manager of that station and WTMJ-AM. In 1985, this magazine called Smith “one of the youngest and most respected radio GMs in the country.”

A stint as general manager of KTNV-TV in Las Vegas followed. It improved, too, recalls Ed Hinshaw, then VP of human resources for the Journal Broadcast Group. Management brought Smith back to Milwaukee to run its flagship, WTMJ-TV. “Channel 4 fared well considering the increased competition from cable TV,” says Hinshaw, who told Smith, “You’re the first guy from broadcast who has a chance of going Downtown to corporate.”

Sure enough, in 1987, at age 36, Smith was named to the company’s board of directors. Climbing with record speed, he became president in 1992, CEO in ’98 and chairman in ’99.

Smith originally pursued a higher calling. The Wauwatosa native graduated from St. Francis de Sales Preparatory High School, a stepping stone to the priesthood, in 1968. His classmate, Glendale City Administrator Richard Maslowski, recalls Smith as “a star athlete” who excelled at basketball, track and water polo. Yet Smith wasn’t cliquey. “He was very friendly and outgoing,” says Maslowski. “Steve could always make things look better than they were. If you were facing a tough exam, he always had a wisecrack to make you think, ‘I can get through this.’ ”

Like many of their classmates, Smith and Maslowski did not continue on to the seminary. But Smith retained that friendly, non-cliquey style. Even as Journal chairman, he remained “a man of the people,” says a former company manager. “Smith was the only one from the sixth floor who ate in the employee cafeteria.”

By 2002, Smith was also a big player in the civic arena. He would eventually chair the boards of the Medical College of Wisconsin and the Greater Milwaukee Committee after heading the United Performing Arts Fund drive. There, he forged a critical connection to his UPAF co-chair, Mary Ellen Stanek, the president of Baird Funds Inc. and a member of the Robert W. Baird & Co. board of directors. Within the year, Smith appointed her to his board, where she would help him address his most pressing problem – the employee stock accumulating in his treasury.

The problem was partly caused by his predecessor, Bob Kahlor, and two journalists who lost their jobs after the Journal and Sentinel merger. At that point, the employee shares were valued at a third to one-half of what they’d be worth as a publicly traded company. The Journal Sentinel was one of the nation’s last independently owned urban dailies – as Grant planned – and its depressed valuation and negligible debt made it an attractive buyout candidate.

One victim of the merger, former outdoors editor Ron Leys, recruited investment banker Christopher Shaw, who’d brokered the sales of 121 newspaper companies, many of them for Goldman Sachs. Leys connected Shaw to longtime Journal columnist Joel McNally, another merger victim. McNally began recruiting converts for a plan proposed by Shaw: The elderly Englishman said he had an anonymous bidder willing to pay $1 billion for Journal Communications. The $72-a-share offer was twice the shares’ internal value, which would provide a huge windfall for Leys and McNally (who still owned stock) and other shareholders.

Although he cast Shaw as a raider and publicly scoffed at his chances of success, Kahlor now says Shaw was a real threat. Kahlor launched a five-year “ramp-up” that pushed the share price closer to its publicly traded peers. That quelled interest in Shaw’s offer. (It also jacked up the value of Kahlor’s holdings as he headed toward retirement, some have noted; Kahlor says it’s “totally false” that this motivated him in any way.)

The ramp-up, though, may have dealt a fatal blow to the company stock plan by abandoning its historically conservative pricing formula.In 1997, the stock’s value climbed 16 percent. It rose 17 percent in 1998, 18 percent in 1999, 17 percent in 2000 and 11 percent in 2001. The higher prices made it more difficult for employees to buy shares, but even more importantly, when the ramp-up ended in 2002, the stock’s annual appreciation was a mere 0.34 percent – “enough to make any bank skittish about granting loans against this stock,” says Maersch.

The Journal’s own credit union stopped making stock loans. Soon, “the banks were all holding information sessions stressing the dangers of having all your financial eggs in one basket,” says a loan officer for a major bank.

For more than six decades, the employee shares had provided a key source of capital for the company. Now, they were a financial drain. The company treasury, forced to repurchase $110 million in stock, buckled under the weight. On Oct. 25, 2002, the board of directors stopped the bleeding, suspending all stock purchases to pursue “a new permanent capital structure.”

“Smithinherited a legitimate problem,” says one insider. “The ramp-up kept the employee ownership program alive for another five years, but he couldn’t keep going with a financing structure that relied on the company buying stock.” Others agree.

Stanek would help Smith with the problem. Journalists awoke on the morning of May 13, 2003, to discover their company was going public – by reading it in the Wall Street Journal. Stanek’s employer, Baird, would handle the initial public offering (IPO).

Employee stock loans totaled an estimated $432 million. “In the eyes of the banks, that became defacto corporate debt,” says John Torinus, a former Sentinel business editor and now chairman of Serigraph Inc. in West Bend. “That allowed the Journal’s lawyers at Foley [& Lardner law firm] and the investment bankers at Baird to convince Smith the IPO was the only way out. After all, the deal guys always like to do deals.” (Smith and Stanek refused interview requests.)

Smith’s only other realistic options were to sell the company (but Smith and other company executives would probably lose their jobs) or raise capital by selling a big stake in Journal Communications to a private equity firm (which would demand some degree of operational control, constraining Smith’s power). Only the IPO would leave Smith with full control.

But some question why he simply handed the deal to Baird, his fellow board member’s company. “There were much better firms at media than Baird,” says one insider. “They weren’t even big enough, so we went with [Baird Chairman Paul] Purcell’s brother’s company, too.” At the time, Philip J. Purcell was chairman of what was then Morgan Stanley Discover.

Doing business in the family was not unknown at Journal Communications, where Smith paid his brother $85,000 for marketing that year.

“Usually when a company is thinking of going public, it has a beauty contest where they haul in all the [investment] banks to make their pitch,” notes professor James Seward, an expert on IPOs who is director of the UW-Madison Nicholas Center for Corporate Finance and Investment Banking. “The fact that there was no beauty contest is very unusual. They needed to get arm’s length, independent, objective advice, particularly from banks with expertise in media. They failed to avail themselves of that learning. It was arguably poor business judgment.”

The IPO was carefully orchestrated to handle the objection of employees and Grant’s heirs, who balked at anything jeopardizing the patriarch’s cherished employee ownership and local control. Three types of shares were created. Class A shares would be publicly traded and have one vote each. Class B shares – owned by employees and retirees – would have 10 votes each. That assured local control would continue, Smith said.

Current and former employees with shares to sell could still sell to other employees, but if they failed to find a buyer, the B shares would convert to A shares, and the public, not the company, would buy them.

The Grant family stock became Class C shares with two votes each and a guaranteed minimum 56 cents per share annual dividend. It assured the family of almost $2 million a year. Grant’s heirs would also net $5.5 million by selling some of their shares as part of the IPO.

A source close to Grant’s family says it opposed the IPO, but “understood what had to be done.” No doubt, the substantial payday helped.

As the IPO advanced, the old employee stock (then at $39.54 per share) split 3-for-1. The new share price was $13.18. With the offering price of $15, shareholders registered an immediate gain, and “everyone believed the blue-sky story management and Baird told us. … We were going to be rich,” says an ex-manager.

The IPO raised $259 million. The company netted $231.9 million – after fees and expenses paid to the investment houses and legal counsel. With $110.2 million in new debt, that gave the company $342.1 million to buy back employee shares.

Smith repeatedly urged employees to tender their shares to the company and use the proceeds to pay down their debt. The company’s SEC filing reinforced his appeal, warning dividends might not be there in the future to pay interest on stock loans.

“There were employees who were suspicious management was trying to get away with something [by] buying back the stock at the $15 and $18.55 tender offer prices,” says the stock loan banker. “Many didn’t take advantage.”

Industry analysts with no financial interest in the offering predicted Journal stock would perform at the industry average. Not Morgan Stanley and Baird. “They were so bullish,” Maersch says. “They misled a lot of people shamefully.”

Even Maersch fell for the siren song of Stanek and company. “I delayed the sale of my last stock,” he says. “It cost me $15,000.”

Well before the public stock deal, the praying hands imageMaersch had copied from Heyse andhung in the newsroom had slipped inside its frame. The caption still read “God Bless Our Journal Stock,” but now the hands remained askew. “It was kind of symbolic,” says Rohde.

A Public Failure
Journal stock, symbol JRN, hit a peak of $20.35 a share in February 2004. Then came the decline. Operating profits fell 33 percent the following year, and the stock lost 22 percent of its value. Shareholders with the minimum 20 percent down saw their equity evaporate, triggering margin calls from the banks.

With employees struggling to raise the additional equity the banks demanded, the tension in the newsroom was palpable, says reporter Meg Kissinger. She had fortunately sold her stock, but was dismayed at what she encountered on a night out with her family at Jack Pandl’s Whitefish Bay Inn. At a nearby table was a group “talking in really loud voices about what a piece of shit the Journal Sentinel newspaper was,” Kissinger recalls. She noticed one of the men wearing a Baird shirt and recognized another as a Baird employee. These were Baird managers and their wives, she realized.

This was the company that told JS employees what a great deal the public stock plan was – many of whom were now struggling to not lose everything. Fuming, Kissinger strode to the Baird table and introduced herself. “I told them I was outraged they could sell our stock during the daytime and badmouth the paper in public at night,” says Kissinger. She could see the color drain from the face of “one of Baird’s big dogs,” Kissinger adds.

Journal management had been just as enthusiastic about the IPO. Yet from the start, the company was a less-than-attractive buy. Its overall profit margin was an anemic 14.2 percent; its media industry peers averaged 21.1 percent. The company’s publishing division (the Journal Sentinel, community newspapers and shoppers) posted a paltry 9.7 percent profit margin, “woefully below” the 22.3 percent of its counterparts, media analyst John Morton wrote in the American Journalism Review.

By then, famed investor Warren Buffett, once a bullish fan of newspapers, had changed his view. He told his Berkshire Hathaway shareholders he wouldn’t buy most U.S. newspapers “at any price,” adding, “they have the possibility of … unending losses.”

Smith was ill-prepared for the challenge, Torinus contends. “The company was in the dark ages on executive development.”

The first fiscal year after the IPO, net earnings rose 2.8 percent, but over the next six, total revenue dropped by almost half to $433 million. The loss of classified ads to online providers, followed by the Great Recession that hit in 2007, was exacerbated by Smith’s flawed strategies.

“The whole problem is they put in a management team of nice, friendly, gemuchlikeit guys [Kahlor and Smith] who just got in way over their heads. Then, Smith … surrounded himself with ‘yes men,’ ” says Gumm, who was relieved of his duties in 1996, but remained a major shareholder for more than a decade.

Smith’s central strategy was to expand his broadcast empire. He had already added 18 broadcast stations since becoming CEO. Now, the company’s SEC filing called for more of the same. JRN would create “duopoloies” where it owned two TV stations and multiple radio stations in a market. These could share administration, reducing costs, and package bundled ad offerings, increasing sales.

Management would target midsized metropolitan cities with either a state capital or a large university – areas most resistant to recession. The “geographic diversity” of its holdings – in six regions of the country – would also buffer the effect of recessions, the filing explained.

Smith spent lavishly implementing the plan – $43.3 million for two Green Bay TV stations, $235 million for three TV stations from Emmis Communications in Florida, Arizona and Nebraska; $4.7 million for a second TV station in Palm Springs, Calif.; $12 million for a second TV station in Tucson, Ariz. But the promised results never materialized. The broadcast sector was slumping in value, too.

Between 1993 and 2006, national TV news viewership declined 52 percent. Local news viewers dropped 33 percent, according to a 2008 report by Pew Research Center. With fewer viewers, ad rates and revenue fell. JRN beefed up its Internet offerings, but across the industry, $10 of old media ad dollars vanished for every $1 gained on the new platform.

Between 2008 and 2009, JRN had to write off nearly $400 million of the estimated worth of the new broadcast licenses and their acquisitions’ intangible value. In SEC filings, management warned it could write off all of the remaining “good will,” or intangible value of purchases – amounting to 19.2 percent of the company’s total assets.

“JRN discovered Florida and Arizona and invested heavily just as everything was about to sink,” says industry analyst Morton. Barry L. Lucas, senior VP and analyst for New York-based Gabelli & Co., agrees: “When the housing markets collapsed in those states, advertising revenues crumbled.”

Eventually, Lucas says, the Sunbelt areas will come back. Lucas is less enthusiastic about Smith’s acquisitions in Boise, Omaha and Green Bay – areas he doesn’t see growing.

Smith also sold off printing operations and community newspapers in Connecticut and Vermont, shoppers in Ohio and an automotive publication in Louisiana. Then he bought Wisconsin Trails, Milwaukee Home and Fine Living and Waupaca Publishing Co.

“It made sense to close down operations in the parts of the country we didn’t know and expand in Wisconsin,” says an ex-manager, explaining that Smith sold off parts of the company “outside his comfort zone.” The company kept its Florida publications. No doubt, Smith was more familiar with that market. He’d purchased an $805,000 second home in an exclusive gated golfing community near Sarasota; that, too, plummeted in value, to $602,600 by last year.

Morton says management may have sold “the wrong part of the company.” Paid-circulation small-town papers – like the ones the company had owned on the East Coast – have been more resistant to the recession than big-city dailies because they provide local news not found elsewhere. “They are also closest to advertisers,” he adds.

Despite Smith’s pledge to increase the company’s geographic diversification, he actually diminished it. “The area that’s problematic for Journal Communications is an overemphasis on Wisconsin, especially Milwaukee,” says Lucas. “Last year, metro Milwaukee accounted for nearly half the company’s total revenue.”

On the eve of the IPO, 58 percent of JRN’s revenue came from publishing and broadcasting. By the end of last year, it had jumped to more than 84 percent of revenue and 93 percent of net earnings. As the traditional media was imploding, Smith made it an ever bigger part of the company.

“I totally lost faith in management,” says Maersch. “It’s clear you can’t go it as a straight communication company anymore.” He points to The Washington Post Co. as an example of proper diversification. Last year, 49 percent of Post Co.’s revenue came from its Kaplan education division – a recession-resistant business. Just 35 percent of revenue came from publishing and broadcasting.

JRN seriously underperformed well-diversified peers like the Post. Yet, Smith’s pay was more than three times the $412,740 Donald E. Graham, chairman and CEO of The Washington Post Co., made last year.

Journal management also failed to maximize the potential of its new purchases, says Bob Chernow, an investment broker with Royal Bank of Canada’s Milwaukee office. Representing clients who owned a large block of JRN, Chernow confronted Smith at an annual board meeting, telling him, “Your company has a tendency to absorb companies and suffocate them.” He pointed to the local community newspapers, as an example. Then he told Smith he was grossly overpaid given his company’s poor performance.

“The problem with Journal Communications is that it has a bunker mentality,” says Chernow. “It’s unable to innovate.”

Smith tried in vain to push the stock higher, spending $150 million buying back shares, but that only added to the company’s surging long-term debt. By the start of 2006, it owed $275 million. Since then, in a wholesale cost-cutting drive that slashed 28 percent of employees, JRN has trimmed much of the debt – getting it to $151.4 million by the end of 2009. But that was still nearly three times the debt Fitch Ratings says a media company should have today.

Meanwhile, the company’s agreements with its lenders are coming up for renewal. Its 2009 annual report warned that if the company can’t refinance them on “appropriate terms,” it could be pressured to “dispose of assets or operations, further reduce … workforce or … revise our capital structure.” The IPO that was supposed to solve the company’s capital problems had failed miserably.

Smith’s failure to inspire confidence, the demise of the dividend and the margin calls triggered a wholesale defection of employee shareholders, pushing shares even lower. At the IPO’s launch, there were 74 million class B shares. At the end of 2009, only 13 percent remained.

Moral Bankruptcy
Mario J. Gabelli is one of the kingpins of Wall Street. The chairman and CEO of New York’s GAMCO Investors Inc. had earned the nickname “Super” Mario in 2008. That year, Gabelli took home $46 million, a terrific paycheck for an off year in the market, though barely three-fifths of his bounty the previous year, when Gabelli pocketed $71 million.

Now he saw a real deal in Milwaukee. He began buying JRN stock, which would plummet to a low of 36 cents in March 2009. By July, through GAMCO and its affiliated Gabelli Funds and Teton Advisors, Gabelli controlled 18 percent of JRN shares.

Known for shaking up the management of sleepy companies and even demanding his own board seats, Gabelli spurred buyout hopes on Yahoo Finance’s JRN message board. Gabelli had won his reputation as a stock picker during the 1980s merger mania, demonstrating a talent for identifying media takeover candidates.

Gabelli’s entrance, along with Smith’s move to slash costs and pay down debt (Gabelli had pushed for this, Smith revealed at a shareholder meeting) helped elevate JRN stock to a hardly robust $3.89 as 2009 ended. The Journal Sentinel trumpeted the stock’s recovery on its Sunday front page, but the Financial Times called the sector’s rebound a “dead-tree bounce.”

The strapped company slashed the quarterly dividends it paid shareholders, dropping from its once-customary 32 cents per share to just 2 cents. In April 2009, the board suspended dividends entirely. Perhaps to minimize shareholder outrage, an across-the-board 6 percent pay cut reached all the way up to CEO Smith.

Former Journal business reporter and film critic Doug Armstrong still held a lot of stock (more than most board members, he says), and was dismayed at the plummeting value and loss of dividends. “After I retired, the rules changed without me being able to change my investment strategy,” Armstrong complains.

Armstrong, retired Journal attorney Kritzer and ex-business editor Torinus plotted a proxy fight, challenging the three board members Smith wanted reappointed: David Drury, CEO of Poblocki Sign Co. in West Allis; Roger Peirce, a former CEO of Milwaukee’s Super Steel Products Corp., and Jonathan Newcomb, a former chairman of book publisher Simon & Schuster.

The challengers criticized the board’s lack of newspaper experience – only David Meissner had any, but he represented the Grant family. “I decided the Journal could use some fresh eyes and voices on that board,” Torinus says, “especially to represent the huge number of retirees and employees who owned company stock.”

“The Three Musketeers,” as former colleagues dubbed them, promised to stop making high-priced old media acquisitions and aggressively pay down debt while protecting retirees’ dividends. They also pledged to develop an innovative business model to keep the newspaper locally owned.

The company issued a statement saying the challengers were unqualified. “Between us, we had 80 to 90 years business management and newspaper experience,” says Torinus.

The triumvirate might still have been elected, some say, save for their Achilles’ heel: Under an obscure SEC regulation, it was too late to have their names added to the proxy. They’d have to contact shareholders themselves at a cost of close to $2 million, Torinus says.

The Musketeers quietly folded, and while there were other angry shareholders at the April 2009 annual meeting, it wasn’t as combustible as the one in 2008.

Back then, Gumm had come all the way from Maine to join the shareholders’ barrage against management. He began selling his and his wife’s stock in 1997, but the couple still owned a large block of shares, its value badly eroded. “I asked if any one of the directors could tell the audience why Steve Smith should keep his job based upon his previous performance,” says Gumm. “Not one said a word.

“Smith said his greatest accomplishment was orchestrating the IPO,” Gumm adds. “But stockholders would have been better served if the company had been sold. Of course, then management would have lost their jobs.”

Now, however, Smith stands to benefit handsomely if the company is sold. A change-of-control provision in his employment contract would award Smith $7.8 million to ease the blow of an abrupt retirement.

As the number of employee shares plummeted, the amount of publicly traded stock grew 144 percent. Institutional investors – mutual and hedge funds – now control 83 percent of the Class A shares. At the time of the IPO, employees and retirees held 97 percent of the voting power. That’s now down to 67 percent. But if employees continue shedding stock, the power will shift: In seven years, they’ve sold 64 million of their 74 million shares. And as of March 2010, Gabelli’s 19 percent holdings surpassed the 17 percent controlled by company employees and retirees.

“Grant’s plan for a locally owned company is dead,” says Maersch.

Since 2002, Journal Communications’ total operating earnings have dropped 93 percent, pushing the once-vaunted earnings per share from $1.20 to 5 cents. Return on equity has plummeted from 16.5 percent in 2004 to zero in 2008 and 2.5 percent in 2009. The company reported a $10 million loss from operations last year, a $37 million drop. Every line of business showed a major revenue decline: publishing (minus-20 percent), broadcasting (minus-18 percent) and printing services (minus-26 percent). The hope of the future, the company’s websites, saw a 36 percent decline.

It would be easy to blame the devastation on the problems affecting all traditional media, but a look at JRN’s peers tells a different story:

-Value Line notes that $10,000 invested in JRN right after the IPO was worth only $1,134 in April 2009. The same investment in an index fund of peer companies would net $4,413.

-JRN’s bad profit margins have gotten worse. In March 2010, JRN’s 6.61 percent operating margin compared to an industry average 16.61 percent, according to Yahoo Finance.

-JRN’s quarterly revenue growth, the minus-16.4 percent reported in the first quarter of 2010, compared adversely to the industry’s flat growth rate. The well-diversified Washington Post Co., on the other hand, led the peer group with 333.2 percent growth in earnings per share.

“Steve Smith is the worst thing that ever happened to Journal Communications,” says Maersch. “JESTA was designed to give employees financial security. The IPO accomplished just the opposite.”

Chernow, the RBC broker, is more positive, saying he now thinks Smith has finally “got it” and understands what’s needed to make the company successful. But for many employee and retiree shareholders, it’s too late. The stock’s decline devastated their net worth.

“I’m not the millionaire I thought I’d be,” says Rohde. At least Rohde and her husband, former reporter Mike Zahn, enjoyed years of better cars and nicerhomes because of their stock. Their holdings are still worth $150,000, she says.

But many are in far worse shape. Some of the company’s biggest names are reportedly “underwater.” Among them: former editorial cartoonist Stuart Carlson, senior editor Dave Vogel, ex-TV columnist Joanne Weintraub, former music and dance critic Tom Strini, and radio personality Bob Reitman. Carlson and Strini did not return calls. Vogel, Weintraub and Reitman said their experience was just “too personal” to discuss.

Gumm sold his last stock at $1.49. “When the company went public, that’s when I should have sold it all.” But things are much worse for the employees he convinced to buy JRN stock. Chadwick, now 80 years old, lives on Social Security and a small pension of $300 per month. She drives a 16-year-old Mercury Sable wagon and doesn’t go out much. She can’t afford to; she’s still paying M&I Bank $1,700 in quarterly interest on the loan for her 40,000 JRN shares.

“I didn’t take the tender [offers] because I’m a conservative person,” Chadwick says. “I didn’t want to touch the money I was saving for my retirement.”

Chadwick’s former colleague, the ad salesman, was hurt badly, too. When the dividends ended, he owed US Bank $5,000 to $6,000 in interest every quarter. “I didn’t take the tender offers because I didn’t need the money then. It was for my retirement. Now,” he says, “it’s devastated me emotionally and financially. I can’t tell you how many sleepless nights I’ve had.”

The once-magical stock plan had essentially operated as a pension plan for employees. Now many were left with nothing. But not Smith. The board of directors’ compensation committee says it ties executive salaries to performance, but 81 percent of Smith’s salary – more than $1 million – doesn’t depend on how the company does at all. It’s guaranteed. And when Smith’s stock appreciation rights were so far underwater they’d never recover, his directors (who earned $73,000 to $96,000 for a full year of service in 2008), slipped him that extra half-million-dollar “retention bonus.”

“It’s like Smith picked the pocket of a paraplegic,” Maersch charges, “and lined his own.”

“What Smith did was fundamentally unethical,” Torinus says of the ex-seminary student. “In essence, they were running a pension fund for employees. Then you don’t leverage it up $250 million. If not a financial obligation, management had a moral obligation … to run the company conservatively.

“Sam Zell leveraged the hell out of the Tribune Co. and went bankrupt. But Zell brought in professional investors, big boys who knew what they were doing,” says Torinus. “Steve Smith leveraged up a company where the bulk of the shareholders were little old ladies and retirees in tennis shoes. These people were financial innocents.”

Milwaukee Magazine Senior Editor Mary Van de Kamp Nohl was the recipient of two Harry J. Grant scholarship awards while earning her degrees in journalism and specialized reporting of business and economics at UW-Madison. Write to her at