Monday, September 11, 2006

News Corp., Old World Executives--New World Bonuses

News Corporation (NWS-$19.54) is one of the world’s largest media and entertainment conglomerates with assets that include Fox Broadcasting Company and the 20th Century Fox film studios, the interactive social networking website MySpace, and the Internet entertainment portal IGN Entertainment. It also owns a number of newspapers, including the Times of London, the New York Post, and the pulp tabloid National Star.

The Company’s pan-continental empire includes equity interests in such recognizable brands as the National Geographic cable channel, Gemstar-TV Guide, DirecTV, a satellite television network British Sky Broadcasting Group, and (50%) of the
National Rugby League.

On Friday, the largest shareholder of News Corp., CEO Rupert Murdoch (who beneficially owns 31.7% of the Common Stock), saw his name splashed across the business pages when it was reported in the Company’s Annual Proxy Statement filed with the SEC that he was paid $25.7 million in the fiscal year ended in June, including salary and a $21-million bonus. Additionally, in May the Company started paying $50,000 a month for a NYC apartment leased in his name.

The excesses do not start and stop with Murdoch. News Corp. also paid $29.3 million to Peter Chernin, its president and chief operating officer, including salary of $8.1 million and a bonus of $21.2 million. Additionally, he earned approximately $12.8 million in Restricted Stock Units (RSUs).

A reading of the Company’s Proxy Statement (analogous to reading Tolstoy’s War and Peace), said the annual performance-bonuses for senior executives were based on a computation of (adjusted) earnings-per-share growth. After a thorough reading of the Company’s 10-K filing, the 10Q Detective was left with a big headache—and a bigger concern—an uneasiness that management had (has) the capacity to massage EPS to legitimize its executive excesses?

According to the Compensation Committee, the "adjusted EPS percentage increase was 32.35%,” and therefore, they approved the aforementioned annual performance-based bonuses.

For the full year, net income from continuing operations was $2.8 billion ($0.87 per share on a diluted combined basis), an increase of $684 million or 32% from the $2.1 billion ($0.69 per share on a diluted combined basis) reported in fiscal 2005. However, on a share-net basis, income increased only 26.08%--not 32.35% as reported by the Compensation Committee. Additionally, on a share-net basis, 3 cents can be attributed to $2.5 billion spent on share buybacks year-over-year.

And, according to the $25.7 million man, Rupert Murdoch: “Recognizing that disconnect and the continued value inherent in purchasing new shares, the Board has extended our original program by an additional $3 billion to be completed over the next two years. We expect to continue to be active buyers of our shares so long as the market undervalues the Company. It's a good use of our cash.” If you are looking to enhance EPS visibility, share buybacks are a good first step.

Capitalization policies can also be a red flag on the march downfield to the end zone. We are not alleging any misdeeds at News Corp, but with millions in bonuses on the line, what entertainment costs the Company chooses to capitalize or expense ought to be closely watched. For example, in the Company’s 10-K filing, it is stated “development costs for projects not produced are written-off at the earlier of the time the decision is taken not to develop the story or after three years.” In other words, the Company has the flexibility of thirty-six months to decide whether or not to write-off production expenses involved in storyboard decisions. One does not have to be a member of the Financial Accounting Standards Board (FASB) to note that write-offs can be timed to coincide when operating income surpasses expected bonuses.

Employment Agreements.

Mr. Peter Chernin, the Company’s President and Chief Operating Officer has entered into three amended employment agreement in as many years. Chernin was paid approximately $72.8 million in salary and bonuses in the last three years (which does not even include the estimated $12.8 million in RSUs awarded to him in FY 2006). Apparently, this was not enough to satiate this COO, for commencing on August 1, 2004, a savings account with monthly Company contributions of $358,334 was set up on his behalf!

Additionally, if Chernin resigns for ‘good reason’ (is there any other kind), he is entitled to the usual perquisites (accelerated vesting of stock options and RSUs), as well as a lump sum
cash payment of $40.0 million!

The 10Q Detective believes that Chernin harbors secret Hollywood ambitions of his own. Buried deep in his employment agreement, we unearthed the following tidbit: “Within 30 days following the termination of Mr. Chernin’s employment for any reason (including for cause), except if Mr. Chernin resigns after declining to replace Mr. K.R. Murdoch as Chief Executive Officer of the Company…. Chernin may require that the Company enter into a six-year motion picture production agreement and a six-year television production agreement…. The motion picture production agreement will provide for the purchase by the Company of at least two motion pictures per year….”

Mr. Roger Ailes, Chairman and Chief Executive Officer of Fox News Channel, Chairman of Fox Television Stations and Twentieth Television, earned approximately $22.7 million in salary and bonus collectively in the last three fiscal years (which does not include the amount spent on his personal security, which equaled $77,243, $113,227 and $130,584, respectively, for the last three years). Additionally, The Company provided a car and driver to Mr. Ailes for commuting purpose at a cost of $124,020, $111,620 and $110,835 for fiscal 2006, 2005 and 2004, respectively.

Pursuant to the terms of his employment agreement, signed in August 2005, the Company agreed to pay Mr. Ailes a base salary of (at least) $5.0 million per annum. Additionally, in August 2006, a retention bonus worth an estimated $7.3 million was credited to Ailes (to be paid in cash and/or RSUs in five equal annual installments beginning on August 15, 2006)!

Retirement Bonus.

In addition to the News America Employees’ Pension and Retirement Plan and (the usual) Supplemental Executive Retirement Plan, the Company is providing enhanced compensation bonuses to coincide with the date of retirement of certain key executives. Messrs. K.R. Murdoch, Chernin, and DeVoe, will each receive, as a minimum, an annual benefit of $500,000 adjusted annually for inflation.

Director Compensation.

In October 2005, News Corporation announced that
Stanley S. Shuman resigned from the Company’s Board of Directors. Mr. Shuman, who is managing director of investment banker Allen and Company LLC, has been a director of News Corporation since 1982. He will continue his association with the Company as Director-Emeritus, attending Board meetings but not voting on resolutions.

Commenting on Mr. Shuman’s resignation, News Corporation Chairman and CEO Rupert Murdoch said:
“Stan has been an outstanding director for the past 23 years as News Corp…. His sage advice and his firm friendship have been deeply valued. We are fortunate to be able to count on Stan’s opinions in the future as he continues to contribute to our Company as Director-Emeritus. All News Corp. stockholders owe Stan a debt of gratitude for the great work he has done for our Company over the years.”

[Ed. note. Dissident shareholders demanded the
creation of an independent majority on the board; this change was set in place by retiring the seat held by former director Shuman (when he left on October 6, 2005). Shuman’s 'hari-kari,’ however, came with its own price. The ‘debt of gratitude’ voiced by Murdoch will be paid for by shareholders. In addition to his honorary—and non-voting—position, Mr. Shuman will receive $185,000 per annum ($85,000—annual retainer and $100,000 in annual Deferred Stock Units of the Class A voting shares). Oh—Shuman’s firm, Allen & Co., received $6.1 million and $3.9 million in fees from News Corp. for the last two years, respectively.]

In August 2005, Lachlan Keith (LK) Murdoch, age-34, Rupert’s son, resigned as the Deputy Chief Operating Officer of News Corporation. His dad, commenting on LK’s decision said,
"I am particularly saddened by my son's decision and thank him for his terrific contribution to the company. I have respected the professionalism and integrity that he has exhibited throughout his career at News Corporation."

His service at News Corp is better remembered by other shareholders for the collapse of
One.Tel Ltd., a telecommunications company that Lachlan advised News Corp in to taking an investment stake.

“You'll tell your friends about One.Tel.” This slogan was engineered to draw the connection between the One.Tel brand and personal communication. Three and one-half years after its IPO on the Australian Stock Exchange, One.Tel was declared insolvent in March 2001. One of the more notable business failures of the year—it
cost News Corp. more than $500 million in losses.

These days, the 10Q Detective doubts that L.K. Murdoch tells anyone about One.Tel.

Pursuant to the terms of his severance agreement, LK received a separation cash payment of approximately $7.8 million (equal to his salary and bonus for fiscal year ended 2005).

Like a bad joke being played on shareholders, LK continues to sit on the Board of Directors. As LK is no longer an employee of News Corp., he, too, (as a director) will be compensated $185,000 per annum.

Additionally, Mr. L.K. Murdoch will serve as an advisor to the Company [compensation unknown].


Freud Entertainment Limited, which is controlled by Matthew Freud, Rupert’s, son-in-law, provided external support to the press and publicity activities of the Company during the fiscal year 2006. The fees paid by the Company to Freud Entertainment Limited were approximately $502,860 for the fiscal year ended June 30, 2006.

Rupert Murdoch, commenting on the FY 2006 said, "Longer term, we're intently focused on developing ways not only to monetize our acquired internet assets, but also on how to exploit our vast content libraries. As regards executive pay, insiders have already figured out how to monetize and exploit corporate assets.

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