Freedom Communications could not overcome family, times

By Mary Ann Milbourne: Freedom News Service

Editor’s note: Freedom Communications announced Friday it has emerged from bankruptcy. Freedom is the owner of Freedom New Mexico, including the Clovis News Journal, Portales News-Tribune and Quay County Sun.

They could have been millionaires, many times over, in 1985 when a million dollars meant something.

But 25 years ago, the majority of the Hoiles family, owner of this newspaper and The Orange County Register, spurned a $1 billion buyout of the Santa Ana, Calif., newspaper and its parent company’s other holdings.

Some say the rejection was to spite Harry Hoiles, the disaffected son of company founder “R.C.” Hoiles. Others argue that it came from a commitment to keep the media company in the family as a platform to advance R.C.’s lifelong crusade for libertarianism and individual freedom.

Either way, those who bet on the business lost. This newspaper and the Register, the profitable flagship of the Irvine, California-based Freedom Communications Inc. chain, will live on, but not under the Hoiles family.

The family, which planned to celebrate more than 75 years of ownership this year, instead handed over the keys to the company to the banks after Freedom completed bankruptcy reorganization on Friday (April 30).

The loss of the family business could be attributed to many things — too much debt, poor business decisions, an economic downturn of epic proportions and an inability to adapt to the changing tides of the newspaper industry.

But the center of the problem was the Hoiles family itself, the seeds planted by the pugnacious founder but exacerbated after his death by power struggles, petty jealousies, personal vendettas — and money.

Crusty character

While R.C.’s initials stood for Raymond Cyrus, they just as well could have meant Real Curmudgeon.

From his earliest days he took delight in confronting people to, in his view, make them think. As often, he just made them mad.

In what became his trademark libertarianism, R.C. believed the rights of the individual and personal freedom were paramount. He believed that government should be limited to only the most critical functions and should be supported voluntarily, not through taxes. That meant no tax-supported public schools, libraries or roads. His newspapers became his bully pulpit.

His outspoken views were what landed him in Orange County, Calif. R.C. got his start owning newspapers in Ohio where, after a parting of philosophical ways with his brother Frank, he took over the Lorain Times Herald and the Mansfield News.

In the late 1920s, he got into a long battle with a newspaper rival. A bomb, perhaps coincidentally, blew off the front porch of R.C.’s Mansfield house. Two other bombs later were found on his car and at his Mansfield paper.

R.C. decided it was time to leave. He sold the Lorain and Mansfield papers in 1932. He bought the Santa Ana Register three years later.

The Orange County of the mid-1930s was not the urban community of today with its Boeings and Broadcoms, its Performing Arts Center and Disney Resort. In 1935, it was a rural outpost. The population was about 118,000 — the size of modern-day Costa Mesa, Calif.

It was the Depression. Mothers sewed seed sacks for clothes. Residents were able to live off the land and the ocean, eating the produce they grew, rabbits they hunted and seafood they caught.

For R.C., Orange County proved fertile ground for his beliefs. At the Register, he took up where he left off in Ohio, editorializing in the paper and buttonholing anyone he could to proselytize for the libertarian way. He had extra-deep inner pockets sewn into his JCPenney suits to always have his libertarian tracts close at hand.

R.C. thrived on confrontation, confident that with enough talk, people would see things his way.

The trait seemed embedded in the family DNA: Bully, browbeat, do whatever you must to win. But, it was a zero-sum game: If somebody won, somebody else had to lose.

Family business

All of R.C.’s children were expected to work, so they took on various roles at his growing empire. Eldest son Clarence joined R.C. as co-publisher of the Register in 1935. Clarence handled the business side of the newspaper. R.C. oversaw editorial.

Younger son Harry was ensconced at the Colorado Springs Gazette Telegraph in 1946 while daughter Mary Jane and her husband, Bob Hardie, headed the Marysville Appeal-Democrat, in northern California.

Although it was hard to imagine anyone but R.C. running the company, he had a succession plan. James, Clarence’s son who worked at the company, was named heir apparent. The family business would live on.

James, however, was diagnosed with a brain tumor and died in 1964 at the age of 34. No new successor was named. In retrospect, it was a major turning point.

When R.C. died in 1970 at age 91, his three children each inherited a third interest in what had become Freedom Newspapers Inc., a chain of 16 daily newspapers in seven states. They made Clarence head of the company. But at 65, Clarence was in declining health and no one had been designated to take over when he was gone.

“The beginning of the end was because there was no succession plan,” said Rick Oncken, who married Harry’s daughter, Penelope Ann. “There were a lot of unfulfilled expectations as to who would do the job.”

In 1973, Harry was summoned to help an ailing Clarence at the Register. Harry was reluctant to leave Colorado, where as publisher he enjoyed a certain standing in the community. But in 1975, he finally headed for Santa Ana to join his brother as co-publisher.

While the brothers seemed to agree on running the Register, they were both aging. The board named R. David Threshie, husband of Clarence’s daughter Judith Ann, publisher of the Register in 1979.

But a rift was growing between Harry and the family, which had mushroomed to 50 members. They differed over the management, direction and philosophy of the company.

From Harry’s view, it was a question of whether Freedom was hewing to R.C.’s brand of libertarianism. But it was also Harry’s expectation that he would run the company.

Things got difficult, then contentious, then ugly.

The ‘troika’

In 1980, Mary Jane Hardie announced she would not support her brother Harry to succeed Clarence. Harry thought it was because he had criticized Mary Jane’s husband’s running of his newspaper. But Harry had also picked up R.C.’s zealotry, trying to out-libertarian everyone else.

“Harry was a disruptive influence,” said Mary Jane during a trial in a later lawsuit. “He didn’t contribute and was trying to break up FNI (Freedom Newspapers, Inc.). We didn’t think it was a good idea to keep him on the executive committee. He broke meetings up into shouting matches to the point Clarence stormed out of the room.”

To get around the Harry problem, Mary Jane’s branch of the family joined with the Threshies to abolish the chief executive position. They created a three-person executive committee to run the company. In 1982, the family ousted Harry from the committee.

Harry felt he had been robbed. He believed that the “troika,” as he called it, violated R.C.’s libertarian principles.

“We think that, first, the situation has nothing to do with libertarianism, R.C., management by committee, unkept promises or any other rationalizations Harry has used,” wrote Threshie in a 1981 letter to Clarence that was quoted in the Register. “It’s simply a case of a spoiled child throwing a tantrum because he can’t have his way.”

The battle lines were drawn and Harry wanted out. As a one-third owner of the company, he thought his family should give him one-third of Freedom’s properties. Family members feared he would sell his shares to an outsider or try to take the company public. They were determined to keep it in the family.

They offered to buy out Harry for the discounted price of $74 million for his minority interest in the company. Harry claimed it only represented 9 percent of Freedom’s value, which he then placed at $830 million.

“With that money I couldn’t even buy the Colorado paper,” he told Forbes magazine.

Mary Jane argued, “there’s always a discount for minority interests.”

But even as the family feuded over the old ways, Orange County was changing. The county’s population topped 1.9 million in 1980. A growing aerospace and fledgling tech industries spawned a sea of tract homes to house a burgeoning middle class.

Competition was heating up as the Los Angeles Times began making inroads with its Orange County edition. The Register’s circulation in 1980 hit 230,000 daily.

Freedom also was growing. It had 24 newspapers nationwide and branched out into television with four stations.

It’s war

Stymied in his bid to run the company, unable to get satisfaction and convinced a one-third share of the company properties was his right, Harry’s hurt feelings turned into a grudge.

He sued in 1982 to dissolve Freedom and have it divvied up in proportion to family share ownership.

Harry resigned his job as director of the company’s opinion pages in 1984. “I preferred not to associate with people I considered to be thieves,” he later told a Register reporter.

The family slights, big and small, continued. Driving home from work the day he resigned, Harry found that he couldn’t pay for gas. His company credit card was canceled as soon as he left the building.

As litigation continued, Harry took a different tack. In 1985, he offered to buy Freedom from the family. Harry’s first bid was valued at $900 million, but he eventually raised it to $1.01 billion.

His plan was to team with the investment banking firm Drexel Burnham Lambert, then headed by junk bond king Michael Milken, to raise the $600 million to buy out the two-thirds of the company he didn’t own. Then he would spin off properties to pay down the debt.

“We like newspapering and we would not sell at any price,” Bob Hardie, Mary Jane’s husband and chairman of Freedom, said in a Register interview after the first bid. The subsequent offers were turned down flat.

During the litigation, Harry brought in Abraham Zaleznik, a Freudian psychoanalyst and corporate consultant, to evaluate the private motivations of the Hoileses based on letters and transcripts of their family conversations.

Zaleznik concluded that Harry had been humiliated by the family, according to a deposition cited by the Register.

“People who met together, conspired, held meetings without his presence to bring about a set of results which would have amounted to castrating him, symbolically, of course,” Zaleznik said.

The trial judge didn’t buy Harry’s arguments and refused to dissolve the company, a decision that was upheld in 1990 by the state Supreme Court.

Meanwhile, despite the bad blood in the boardroom, the Register and Freedom flourished.

The Register, which Threshie and new editor N. Christian Anderson III had modernized and tripled in staff, won a Pulitzer Prize for photography for its coverage of the 1984 Olympics, the first of three Pulitzers the paper would be awarded.

In 1985, Time magazine estimated that the Register and the Los Angeles Times’ Orange County edition each made $25 million in profits and that the Sunday papers were so full with ads, they could “crush a Chihuahua.” By 1986, Register circulation was nearly 305,000 daily.

The litigation, however, was a costly distraction — running up an estimated legal tab of $10 million to $12 million.

The period was seen as a time of missed opportunities during which the company could have grown and diversified but instead got bogged down with infighting.

“Had they been able to figure out a way to handle (Harry’s desire to get out) and not turn it into a bitter lawsuit, they could have focused on the business,” said Alan Bell, who joined Freedom’s television division in 1989 and became chief executive of Freedom in 2002.

Harry died in 1998, but Harry’s family — the “losers” — always felt marginalized, their opinions ignored or outright ridiculed. The rest of the family, feeling vindicated by the courts, moved ahead, running the company as it saw fit.

A smaller pie

It was Harry’s son, Tim, who led an effort in 2002 to allow family members to cash out their shares in the company.

His complaints echoed those of Harry — differences over the direction and management of the company and the commitment to libertarianism. Tim and his cohorts felt that Freedom had gotten badly off track.

In the 1990s, the company had continued to grow and experiment but not always successfully:

The Orange County NewsChannel, a 24-hour television station devoted to local coverage, launched in 1990 but never turned a profit.

Freedom began a magazine division of niche publication in 1993. After initial success, the magazine division lost an estimated $100 million.

In 2000, Freedom bought a group of papers in Arizona from The Thomson Corp. for a reported $180 million. Most were sold in March for $2 million.

At the same time, money increasingly was becoming part of the equation. Older family members had profited from years of working at the company as well as partnerships in Freedom’s smaller newspapers.

But only a handful of the fourth generation worked at Freedom. Many did not work at all. Their primary connection to the company was their share of the $13 million in annual Freedom dividends the family got. But that money was increasingly diluted as the family grew to about 75 members. And much of that money was tied up in trusts.

Tim, who owned a motorcycle shop in Colorado Springs and controlled 8.6 percent of Freedom’s stock, just wanted to get his money out.

While Harry’s earlier efforts failed, this time “the dissidents,” as the controlling family called them, had enough votes to force the family’s hand.

What price Freedom?

Here, insiders say, was another critical juncture. There were numerous ways the deal could have been structured, from an outright sale of the company or a merger to a payout over several years that would have cost less.

Instead, the company announced in 2003 that two private equity firms, The Blackstone Group and Providence Equity Partners, would invest as minority shareholders to help buy out the family members who wanted to cash in their shares. The deal allowed the fourth-generation family members who remained to retain control.

Freedom, however, had to borrow $1 billion to cover the buyout, $332 million in existing debt and the deal’s transaction costs. The $1 billion was the same amount Harry had valued the company at nearly 18 years earlier. The deal closed in May 2004.

Family members called it a win-win situation.

The Hoiles still owned the majority of the company — now the 12th-largest media chain in the country with 28 daily newspapers, 37 weeklies, an assortment of other publications and Web sites, and eight TV stations. Tim walked away with $143 million.

It appeared the feuding finally was over and the company could focus on a new chapter of success.

Unfortunately for the family, newspapers were becoming a bad bet. Freedom took a major hit in 2007 when Orange County became ground zero for the mortgage industry meltdown. The Register was one of the first papers to feel the recession. Freedom’s other papers soon followed.

The change in Freedom’s fortunes was dramatic. The company, in its bankruptcy filing, said revenue plunged $226 million in 20 months, from early 2008 through August 2009.

There had been layoffs and cutbacks, pay freezes and furloughs. Insiders said the final blow was a multimillion-dollar class action settlement for a lawsuit brought by newspaper carriers against the Register. The family had run out of options. Freedom filed for bankruptcy protection Sept. 1, 2009.

The family reacted with shock. But even then, old resentments resurfaced.

Some family members and others who had worked for the company took private satisfaction — now, at least some of the trust-fund babies would have to work.

The Hoileses, despite their best efforts, had met the same fate as the Chandlers — the former owners of the Los Angeles Times — the Pulitzers and other newspaper dynasties before them: a family business that could not overcome its own family.

Thomas W. Bassett, a great-grandson of R.C and the last Hoiles board chairman, said Freedom faced the same problem as every family business. There was no way for family members to cash out.

“Liquidity is going to happen in a family business,” said Bassett, a lawyer and CPA who frequently teaches on the subject. “You can deal with it on your own timing and your own terms or the timing and terms will be dictated to you.”

R.C. himself seemed aware that the business would not always be in the family.

“When it came time to name his growing newspaper company, R.C. decided ‘Freedom’ was the right name rather than calling the company after himself,” wrote son-in-law, Bob Hardie, in a company legacy book distributed in 1997. “He always said freedom would live on, but the Hoiles name would pass away.”

Mary Ann Milbourn works for The Orange County Register. E-mail her at mmilbourn@ocregister.com