NEWS ANALYSIS : Where Did Time Inc. Go Wrong? : Its Managers May Have Underestimated the Power of Public Investors

Questions remain even after all that has been said and written in recent days about Time Inc., the media giant that grew out of the legacy of Henry R. Luce, creator of the modern magazine.

Now a big company that gets more of its $4.5 billion in revenues from cable television than from magazines, Time has been in a whirlwind since Paramount Communications Chairman Martin Davis launched a $175-a-share-bid for its stock Tuesday. The Paramount offer threatened Time’s plan to merge with Warner Communications through a deal based on Time’s stock price in March of about $110 a share--a merger that would result in 62% of the combined company being owned by Warner shareholders.

Some questions are obvious. If Time is worth $175 a share to Davis, or even more than that, as many Wall Street analysts suggest, why did Time’s top executives make a deal that, in effect, sold the company at about $110?

The answer is that they believed--partly in self-delusion--that they were preserving a big company and its legacy in a time of corporate raids and takeovers. Also, because a Time executive eventually would run the merged Time Warner firm, they did not think they were selling Time Inc. And critics of the deal, who are numerous on Wall Street, suggest that preserving their own jobs was not far from the minds of Time’s well-paid brass.

However they may have put themselves in the position of the unfortunate U.S. officer in Vietnam who reportedly said, “We had to destroy the village in order to save it.”

For Time’s stock has risen too high for the original deal to go forward. Time climbed last week to $170.25 a share, anticipating a takeover by Paramount, an upgrading of the original Warner deal or a new bid by a third party. A practical certainty is that Time management cannot now allow the stock to fall back to $110 a share.

And that may well mean that Time Inc. will be broken up. The company has incredibly attractive magazine properties--Time, People, Money, Fortune, Sports Illustrated among them. It has the second-largest cable system, American Cable & Television, and the Home Box Office cable service. Selling all or part of any of those properties, or spinning them off into new companies with separately listed shares, could bring billions in payouts to shareholders.

But it is just such a restructuring that Time’s top brass, Chairman J. Richard Munro and President Nicholas J. Nicholas, have sought for years to avoid. In a determined campaign during the past two years, Time’s executives have approached every other sizable media company, seeking a friendly merger partner. “These things were done informally in lunches and dinners,” explains a former high-ranking Time executive. “Nothing specific needed to be said but nobody would be in any doubt of what was involved.”

Reports of some of those contacts, with Gannett Co. and Capital Cities/ABC, reached the public rumor level, but came to nothing. Not surprisingly: Time’s executives, after all, were trying to preserve their own company, not to benefit others.

Warner Deal Too Enticing

Finally, early this year, talks with Warner moved to agreement--with Time paying a high price to entice Warner into the merger. And that deal, say Wall Streeters today, invited the bidding that broke out last week.

So the question arises: Where did Munro and Nicholas make their mistake?

They made it in trying to do a less-than-optimum deal with Warner. That aroused investors and speculators who edged Time’s stock price up to more than $125 a share in recent months in a virtual demand for further bids. Munro and Nicholas appear frankly to have underestimated the authority that public investors have these days over decisions in public companies.

Which begs the further question of why sophisticated executives would do that. Munro, a 32-year Time veteran, has been chief executive since 1980; Nicholas, a Harvard MBA, started at Time 25 years ago in financial analysis.

The answer is complex. One part has to do with a belief that keeping a giant diversified corporation intact was preserving the legacy of Henry Luce, a man of lofty ideals who built a great but much smaller company before he died in 1967.

Another part has to do with the clubby culture of Time Inc., which breeds a faint arrogance toward the investor pressures to which public companies are subject.

Finally, Time’s difficulties were partly inevitable because Munro and Nicholas were playing a weak hand, with no big block of stock in family hands to secure Time from raiders. When Luce died, he owned only 15% of what had become a public company in 1964. Today, corporate officers, directors and employees own roughly 12% of the company, including 4.6% owned by Henry Luce III, the founder’s son.

Luce Had a Different Mission

Luce left a different kind of legacy to his company. The son of missionary parents, Luce saw his business as a mission: To educate a then-younger America coming into contact with a wider world. After founding Time, the innovative newsmagazine, in 1923, he founded Fortune, a serious magazine of business, in 1931--and then pioneered photo journalism with Life in 1936. Even his last achievement, the literate Sports Illustrated founded in 1954, reflected his sense of mission: It took 17 years to become profitable.

Luce’s Time Inc. made lots of money, but the founder was more a publishing than a corporate entrepreneur--he is said to have turned down a chance to buy the ABC television network at a bargain price. He hired talented writers and editors, who over the years created a special atmosphere inside the company. Critics and disenchanted former employees often describe Time’s atmosphere as that of a snobbish college fraternity, but many speak of it with uncommon devotion. “There were relationships there that I have never seen in another company,” says a retired executive. “It was paternalistic, but a very pleasant place to work.”

Munro and Nicholas still like to speak of the old mission, even though a changed America no longer depends on Time for education about the wider world. “We don’t create cookies here, we create ideas,” Munro told a magazine interviewer early this year. “The essence of this company is journalism,” said Nicholas, “everything we do radiates from the fact that this company is in business to make a difference in the broadest sense.”

But outsiders and the stock market have grown skeptical toward Time. Critics saw corporate muscle more than creativity as Time tried to force Ted Turner out of Cable News Network. Competitors saw a loss of touch in the dismal failure of Time’s last major magazine effort, TV-Cable Week, in 1986.

The stock market gave Time stock no premium over other media companies, even though its profitability was consistently higher than that of other publishers and television companies.

Thus, Munro and Nicholas worried with good reason about a takeover as buyers paid hundreds of millions of dollars for lesser magazine properties and the three television networks changed hands.

The fate of CBS made a particular impression. From their 34th floor offices in the elegant Time-Life Building, Time’s executives could look across New York’s 6th Avenue to the headquarters of CBS, which knew years of corporate turmoil after Ted Turner challenged it with a takeover offer in 1985. “CBS was seared into the imagination of Time’s managers,” says a former Time executive.

The Time brass saw destruction, not wisdom, in the policies of CBS’ new Chairman Laurence A. Tisch, who has shrunk the company back to its network roots, and they vowed that would not happen to their company. They scorned Wall Street suggestions to shrink Time, or split it into separate magazine and video companies.

Instead they attempted to make Time less vulnerable by creating an even bigger media conglomerate, and have succeeded only in making it more vulnerable. Whatever else happens in the current takeover battle, the company is in for profound change--including, perhaps, a change in management.

Does that mean the end of Luce’s legacy? Not necessarily. A model Time’s executives might contemplate is that of Walt Disney Co., which drifted for decades after the death of its own founding genius in 1966, but which has been rejuvenated in recent years by new managers who respect the old tradition but are not of it.

Disney may not be a comforting precedent for Munro and Nicholas--but the days ahead are not likely to be comforting either.