The case for and against Sam Zell

(Fortune) -- How did you go bankrupt?" Bill asked.

"Two ways," Mike said. "Gradually and then suddenly."

"What brought it on?"

"Friends," said Mike. "I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England."

The familiar dialogue above is from Hemingway's "The Sun Also Rises", but it rings apt for the plight of the Tribune Company, which filed for bankruptcy protection under the weight of $13 billion in debts and amid a collapse in revenues at its vast newspaper and television-station operations.

By the way, in this literary analogy, "Mike" is not Sam Zell, the Tribune's billionaire CEO, but rather the thousands of Tribune employees whose stock ownership plan was jerry-rigged to fund the company's buyout last year.

Zell was the architect of the deal, but put up only around $300 million of his own money as a kind of option to later buy financial control of the company for as little as $500 million more.

Under the mind-boggling structure Zell and his advisors came up with, the Tribune Employee Stock Ownership Plan owns 100% of the shares. What happens to them?

The Chicago Tribune said it most starkly, quoting an employee conference call with Zell: "the ESOP, which Zell said a year ago offered employee 'owners' the chance to share richly in Tribune Co.'s eventual success, could be wiped out, leaving thousands of Tribune Co. employees with no company retirement plan besides what they elect to save in a 401(k)."

Even less clear is who will end up owning the Tribune's nine daily newspapers including the namesake Tribune and the Los Angeles Times, as well as its 23 TV stations. There's already been plenty of venom directed at Zell both before and after Tuesday's bankruptcy filings, and the question of whether how much he deserves is worth pondering.

The Argument against Zell: Journalists, by nature, are not likely to be endeared by someone who has dubbed himself "the grave dancer," who seemed to have little regard for journalism and journalists, and who relied heavily on radio industry hacks.

I was wary at the time of his initial investment in Tribune, because I felt that he wasn't straight up about his role in the company: Press releases played up the employee ownership angle, but you had to plumb through securities filings to understand that Zell would essentially control the company through a series of vetoes without owning any of its equity. The only people whose votes counted in the Tribune buyout were those of the company's former shareholders who approved it -- employees had no say over whether they wanted the ESOP, nor any role in overseeing the company once it was taken private. It also wasn't particularly reassuring that after saying he had no plan to sell any of the company's papers, he swiftly unloaded Newsday.

All of this led to a sense that buying Tribune was a bit of sport for a restless billionaire looking for a new challenge. Zell paid a lot of lip service to running a "non-business" as a business, but during his brief time in charge there was plenty of asset-and cost-cutting and cosmetic changes at his papers, but little clear evidence of improving the company's products. Of course Zell, made most of his billions in real estate. So perhaps his brief legacy at Tribune is exemplified by online bidding service for foreclosed homes that the Los Angeles Times became a partner in this fall, called Zetabid. Great concept: read about everyone's misfortune in the paper, then click a few buttons and cash in!

The Argument for Zell: There's a long tradition of media bosses who are not always politic but who lead successful news organizations -- think Ted Turner at CNN, or even Rupert Murdoch in his stewardship so far of the Wall Street Journal. (Conrad Black, the now-incarcerated former press baron, used to openly ridicule the journalistic profession despite owning hundreds of papers.) So don't penalize the guy too much for being rich and eccentric.

As for the structure of the deal, it's worth remembering that the ESOP is something that was created expressly for the buyout, and it doesn't directly impact any pre-existing employee pensions or benefit obligations. So, yes, the ESOP as it exists today could get wiped out, but given that the deal only closed last December, it's not as though the employees had anything to show for their phantom "ownership" anyway. From their perspective, failing now is almost certainly better than failing later. The one thing that can't be disputed is Zell's contention that the advertising market has collapsed far more quickly and deeply than he or anyone else in the media business predicted a year ago. At least Zell was willing to try to fix the company -- which his more than you can say for Tribune's well-compensated former managers.

A final thought that could help determine how Zell is ultimately remembered in this mess: he has pitched the bankruptcy filing as a "pre-emptive" move to preserve assets so that the company can keep operating. It's most likely -- but not entirely certain -- that his relatively small investment will be wiped out along with the employees.

Tribune will ultimately re-emerge from bankruptcy with an enterprise value of, say, $4 billion. Will the grave dancer double down and put in some more money to take another kick at the can and help raise money for another employee ESOP? Would anyone there want him to?