Ink pot tossed in newspaper battle

(Fortune) -- Back in January, New York Times Chairman Arthur Sulzberger Jr. got a letter from two little-known hedge funds. The funds informed him that they'd bought a large chuck of Times stock. Now they were embarking on a campaign to elect four of their own nominees to the company's board.

We all know what happened next.

The Times objected at first. Then the battle-weary publisher controlled by the Sulzberger clan capitulated. It agreed to add two candidates proposed by Firebrand Partners and Harbinger Capital Partners to its director slate at its April 22 annual meeting. And it did this despite rampant speculation that the real agenda of these funds was to prod the Sulzbergers to sell the Times (NYT) - just as the Bancroft family, the one-time controlling shareholders of Dow Jones, recently did.

The Times was not alone, however. Two days earlier in January, Harbinger announced it was launching a similar proxy campaign targeted at Media General, a less prestigious family-controlled publisher in Richmond, Va., which owns 25 newspapers, including the Richmond Times-Dispatch and the Tampa Tribune.

Media General, like the Times, has some unhappy shareholders. Its stock price has declined 71% in the past five years while it has wrestled with the many changes roiling the newspaper business.

But the similarities end here. The Sulzbergers may not be spoiling for a fight. That's not true of the Bryan clan, which controls Media General. With the family's blessing, Media General CEO Marshall Morton has gone after Harbinger with such a vengeance that the proxy battle sometimes resembles a food fight.

It's unclear how well his tactics are serving Media General. Harbinger owns 18% of the company's class A shares, whose holders can elect three directors to the newspaper publisher's nine member board. On April 15, Mario Gabelli's GAMCO Investors, which owns 22% of Media General's Class A shares, said it was backing the Harbinger slate. All the hedge fund needs is a simple majority of these shareholders to seat its nominees.

Harbinger couldn't be more pleased. "We're obviously gratified by the support our nominees have received from GAMCO," says Joseph Cleverdon, director of investments at Harbinger.

But its battle with Media General (MEG) isn't over yet. The fight has gotten so nasty that it may be difficult for Harbinger's candidates to bring any change to the newspaper company even if they win enough shareholder votes.

The hedge fund bares some blame for this. Harbinger and Firebrand took a more deferential approach with the New York Times. Firebrand founder Scott Galloway wrote a collegial letter to Sulzberger and Times CEO Janet Robinson ("Dear Arthur and Janet, I hope this letter finds you well.") informing them of the funds' plans and assuring the company that it has no plans to wrestle the company out of the family's hands.

In the case of Media General, Harbinger didn't bother with such niceties. It filed formal notification that it was mounting a proxy battle - an approach that Morton compares to "throwing a brick through a window." Understandably perhaps, Media General got a little upset. Morton says the company repeatedly tried to talk to Harbinger about its intentions. But he says the fund didn't return its calls.

So Media General took the position that the fund was no friend and that it was probably just trying to stir things up so it could flip its shares for a quick profit. "We urge Harbinger to reconsider and abandon its ill-advised, hostile, and thoroughly unwarranted course of action," Morton said in press release.

By the end of the month, the hedge fund finally wrote Morton a letter assuring him that its intentions were friendly and that its board nominees would "bring fresh ideas and valuable perspective to the company's board."

Yet Harbinger went on to assail the company: "Harbinger believes that [Media General] has lost strategic, operational, and geographic focus in recent years and has demonstrated lack of judgment in [its] capital allocation and growth strategy decisions."

That didn't mollify Media General. Soon the company was attacking the hedge fund's nominees. Media General noted that one prospective director, Daniel Sullivan, a former broadcast television executive, had "a resume problem." He hadn't graduated from the University of Tennessee as the hedge fund stated in an SEC filing. Harbinger's later filings said Sullivan had "attended" the university.

The newspaper publisher also discovered that Eugene Davis, another candidate, currently served on 12 boards. "In corporate governance parlance, Mr. Davis already vastly 'overboarded,'" the company warned its shareholders. Media General has since found that Davis, a turnaround consultant, is actually on the board of 13 companies.

Harbinger is unapologetic: "We believe our nominees will be strong contributors to the Media General board," says Cleverdon. "Each brings extensive, highly relevant experience that we believe will provide substantial benefit to the board and the company. We're pleased that investors, proxy advisory firms and others are rejecting the hollow criticisms that have been leveled against them."

Finally, Media General suggested that its hedge fund foes were a bunch of duplicitous meddlers whose prescriptions for change at the company were naive at best. Morton pounced on Harbinger when Cleverdon told a group of investors that Media General should "consider alternatives for Florida properties."

The Media General CEO sounded flabbergasted in a letter to employees: "[Harbinger] proposes that we consider exiting entire markets, including Tampa - long one of our crown-jewel assets - and react in other knee jerk ways...This is a short-term mentality that, frankly, does affect much of corporate America. But, as you know, it is not the way we run Media General."

Cleverdon says Media General's CEO is intentionally twisting his words. "Our prescription for the company to consider alternatives for its publishing properties in Florida is not code for the company simply to sell the Tampa Tribune," he fumes. "Like many of our statements, this has been mischaracterized by the company." Instead, the hedge fund executive says, Media General should "carefully consider the full range of possible strategic options" for the ailing Tribune.

In the next few days, Harbinger and Media General will undoubtedly be working the phones, trying to win over the remaining Class A shareholders before the company's April 24 annual meeting.

Even if Harbinger wins, however, the Bryans will still control the board. And they are unlikely to welcome Harbinger's directors with open arms after all this rancor. "The Bryan family is a very conservative, old line, Virginia family," says John Morton, a newspaper industry analyst. "I suspect they resent anybody trying to impede their control of the company in any way."

Nobody should confuse a proxy fight with a love-in. But Harbinger seems to be faring better with its approach at the Times. Since late January, that company's stock price has risen 20%. Meanwhile, Media General shares have fallen 32%. Apparently, more than of few of the company's investors don't care for either side in this proxy fight.