Sunday, September 6, 2009

Capitalism Has Sadly and Ironically Hosted the Hoiles On Their Own Petard

Capitalism is wiping out the Holies’ fortune, built on capitalism and libertarianism, and America will be the worse for it. The supreme irony is that the Hoiles family, bred in the bedrock of capitalism, is being consumed by capitalism.

Raymond Cyrus (“R.C.”) Hoiles escaped from the unions of Ohio during the New Deal, fleeing to the rural libertarianism of Orange County, California in 1935. He purchased the Santa Ana Register and used it as the megaphone for his libertarian philosophy. The Chandler family of the Los Angeles Times was purely conservative, but in 1980 Otis Chandler converted it from conservative to socially and politically liberal.

Not so the Register. R.C. and his heirs maintained their libertarianism and turned the burgeoning Orange County into the heart and soul of the California Republican Party. Senator Berry Goldwater may have been from Arizona, but his Presidential campaign started in Orange County. Ronald Reagan’s base was Orange County, or as liberals often derisively referred to it, “The Orange Curtain.” Richard Nixon was first a Congressman from Orange County before moving up the conservative ladder.

Hoiles and the Register was behind them all.

Orange Country boomed in the Cold War, growing from 130,700 in 1940 to 216,244 in 1950, but then ballooned to 703,925 in 1960 and doubled again to 1,420,386 in 1970. The current population is over 3,000,000; roughly 1% of the nation’s population reside in Orange County.

The Hoiles’ and Register rode this growth to personal wealth and power. The Santa Ana Register was renamed the Orange County Register. Hoiles acquired a string of newspapers and TV stations around the country, all the while adhering to the libertarian view. The parent company was aptly named Freedom Communications. Often outside the mainstream political and media slant, his enterprise thrived, just as Fox News does today.

He preached for a smaller government, lower taxes, lower debt and less spending. Pursuant to his views, R.C. publicly opposed the internment of Japanese Americans in concentration camps during World War II and favored free and open immigration.

His successors at the Register continue his philosophy on the editorial and op-ed pages. Again outside the mainstream media, while pundits in 1992 were calling for President George H. W. Bush to drop the bottom of the ticket, Vice President Quayle, as a drag on the ticket, the publisher of the Register proclaimed that it was really the top of the ticket, President Bush, who was dragging down the ticket. The Register could never forgive Bush’s recanting of his “No New Taxes” pledge. Neither could Republican voters.

Freedom Communications, parent of 33 daily newspapers, 8 TC stations, and over 70 weekly newspapers, magazines, and specialty publications declared bankruptcy on Tuesday, September 1, 2009.

The reason: excessive debt. The conservative company borrowed too much money.

The Hoiles family owned Freedom Communications had a major problem in the New Millennium. Half the Hoiles family wanted out. They wanted to take their money and run.

A common problem with family businesses by the third generation is that many family members no longer have close ties to the business, except to draw dividend checks. They lack loyalty to the family business. The means to normally maximize the economic value of the business is to sell it, just as the third generation Binghams did with the Louisville Courier-Journal in 1986.

The Hoiles solution was to engage in a LBO, buying out the disenchanted family members. $1 billion was borrowed and the Blackstone Group and Provident Capital Partners invested $470 million for 40% of the company’s stock.

The politically conservative family went deeply in debt. Excessive debt load is usually not a good idea, but is especially bad in a shrinking industry, the print media. The writing was on the wall by 2004 about the prospects of the newspaper industry. Circulation of the Register dropped by 1/3 from 363,500 in 2000 to the current 231,000. Employees were bought out and laid off. Sections were cut or consolidated as advertising revenues tanked.

Through major budget cuts, especially buyouts and layoffs of personnel, the Orange County Register and the other units of Freedom Communications continue to turn a profit. The cash flow though from $700 million in revenue was inadequate to cover the debt load.

In the prearranged bankruptcy, debt will be cut from $770.6 million to a presumably manageable $325 million, with the current shareholders seeing their investment reduced to 2% from 100%. They will receive warrants to increase their stake to 10% under favorable conditions.

In essence the keys to the Register have been turned over to the banks. The banks in turn will name a new Board of Directors and Chief Operating Officer. The Hoiles beat back the Orange County invasion of the Los Angeles Times, but could not hold off the lenders.

Time will determine if the Hoiles and their libertarian philosophy can hold on.

The big winners: the family members who took the money and ran 5 years ago.

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