Taking over the NY Times - gently

New York Times Co. chairman Arthur Sulzberger, Jr.

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NEW YORK (Fortune) -- Arthur Sulzberger, Jr., chairman of the New York Times Co., has had his hands full lately. Last year, he warded off a campaign by a Morgan Stanley fund manager to abolish the newspaper publisher's two-tiered shareholder structure. Then on January 27, a new group of dissident investors informed him that they, too, were mounting an effort to shake things up at the company.

Sulzberger may have even chuckled while reading the letter from Scott Galloway, founder of Firebrand Partners, a self-proclaimed "operational activist investment firm." Galloway doesn't have the credentials of Sulzberger's last foe, Morgan Stanley's Hassan Elmasry. According to the firm's Web site, he currently teaches "brand strategy" to business majors at New York University. Surely, the Times chairman has heard the old adage about those who teach.

But Galloway and his allies have learned something from Elmasry's ill-fated campaign: You can't bully a newspaper company controlled by a family whose shares given them super-voting rights. So Firebrand and its hedge fund ally, Harbinger Capital Partners, who together have amassed 4.9% of the New York Times' stock, are taking a friendlier approach than Morgan Stanley.

It's a long shot, but it just might be the right medicine for a newspaper company whose stock price is down 32% since January 2007. For starters, Firebrand/Harbinger isn't making the mistake of attacking the company's sacrosanct dual shareholder structure, which protects it from a hostile takeover. "I want to assure you that we are not pursing a change in the dual class shareholder structure," Galloway wrote on Jan. 27. "The New York Times is a great institution controlled by the Sulzberger family and we have no illusion about, or desire to change, that fact. Our effects are focused on how we can work with management and the board for the benefit of all stakeholders."

How will Firebrand/Harbinger do this with the Sulzberger clan holding so many of the cards? It has nominated candidates for the four independent seats on the New York Times board, which are up for election at the annual meeting in April 22. The group is confident that it will prevail. "We expect to be in the boardroom in three months," says a source close to Firebrand.

That's a bold statement. But the dissidents clearly feel they can exploit the shareholder unrest stoked by the Morgan Stanley (MS, Fortune 500) campaign. The source points out that more than 50% of investors who are not part of the Ochs/Sulzberger clan withheld their votes at last year's annual meeting. Many of them of when will undoubtedly back the Firebrand/Harbinger nominees simply to voice their overall displeasure with the New York Times' stock performance.

It also helps that the Firebrand/Harbinger group have put up an intriguing slate of candidates. They include Allen Morgan, managing director at venture capital firm Mayfield Fund; Gregory Shove, a former executive at AOL and advisor to Firebrand Partners; and James Kohlberg, co-founder of private equity firm Kohlberg & Company.

Even Sulzberger himself sounded a vaguely conciliatory note in a statement responding to the dissident group's letter: "We have a strong and independent Board, but our Board's Nominating and Governance Committee will review the nominations and make a recommendation to our shareholders in due course."

And what if the Firebrand/Harbinger directors actually win? The source says they will push to the company to increase its online revenues to 50% within the next five years. He insists this can be done through a combination of acquisitions and organic growth: "The traffic that shows up at the New York Times Web site is rocket fuel they could use to grow a lot of other Web sites." The new directors will almost certainly advocate selling some of the Times' assets. Like other unhappy investors, the source questions why the newspaper company also owns a stake in the Boston Red Sox and has built a shiny new corporate headquarters in midtown Manhattan. "There needs to be a bright-light review of the capital structure," he says.

Perhaps. But even if all four of the Firebrand/ Harbinger nominees prevail, they will still be a minority on the 13-member Times board. Then, of course, the company faces the same macro issues plaguing every newspaper company: declining readership and the flight of ad dollars to the Web. That's why Wall Street analysts yawned - even though the company's shares leapt nearly 10% on January 28 after the news broke about the beginning of the Firebrand/Harbinger effort.

"While we understand shareholder frustration with the under performance of NYT shares (and the newspaper sector)," wrote Goldman Sachs' Peter Appert, "we are skeptical that Harbinger and Firebrands' effort will translate into an enhanced valuation for the shares."

But analysts aren't always right. Yes, it's probably way too soon to expect the Times to get out of the professional baseball business. And the group may not be as amiable as it seems. In January, Harbinger made a similar overture to Media General, the Virginia-based publisher of the Richmond Times-Dispatch and the Tampa Tribune. That company's CEO called the the hedge fund's action "hostile." The source close to Firebrand insisted the two campaigns were unrelated.

But Arthur Sulzberger must understand that if he wants to get the New York Times' (NYT) stock price up he has try some of the radical things this new group of activist investors are calling for. "We regularly meet with our shareholders and expect to do so with this group as well," says Times spokeswoman Catherine J. Mathis.

This could be lip service. Then again, it bodes well for Firebrand/Harbinger's attempt to ingratiate itself with the Times leadership. Maybe those business school professors at New York University know something that their peers on Wall Street don't.