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Rupert Murdoch, News Corp. Dodge Phone-Hacking Ruin


Rupert Murdoch, News Corp. Dodge Phone-Hacking Ruin

Rex USA

As Rupert Murdoch made his way into Parliament on July 19, 2011, to answer questions about the phone-hacking scandal engulfing his media empire, ruination hung in the air. Readers were boycotting his papers. The stock of News Corp. (NWS), of which he is chairman and chief executive officer, was plummeting. Political outrage had forced him to abandon the biggest media deal he had ever worked on. Lawmakers in the U.S. and the U.K. were calling for investigations. Even Hugh Grant was on the warpath, appearing everywhere to advocate for an aggressive public inquiry into the wrongdoings. And lurking in the wings was a man intent on hitting Murdoch in the face with a shaving cream pie.

The end of the Murdoch epoch felt at hand. “Rupert Murdoch and his son James arrived here at the British Parliament, moments ago, facing a crush of cameras, and a throng of people,” ABC News’ Jeffrey Kofman informed American viewers. “But the headline this morning: reports that Murdoch may actually step down from the helm of News Corporation as this crisis threatens to destroy a $33 billion global empire.”

Seated in front of a parliamentary committee, Murdoch, then 80, appeared unsure of himself. “This is the most humble day of my life,” he said at the outset. Shortly thereafter, the man with the pie moved in for the kill. It would be an image that would define Murdoch’s collapse, the globe-trotting media mogul reduced to a cable news punch line, wiping foam off his furrowed brow. Just desserts, pundits would say, for the powerful publisher of guttersnipe tabloids.

Deng leaps to her husband’s defenseParbul TV/ReutersDeng leaps to her husband’s defense

But somehow the man with the pie missed. Murdoch’s supporters quickly closed ranks. The lasting image of the morning, the one that played on heavy rotation on cable news, was not Rupert’s face covered in shaving cream, but Murdoch’s wife, Wendi Deng, leaping up and defending her husband with a haymaker.

Two years later, Murdoch has dodged much more than the pie. The darkest predictions from the summer of 2011—that the Federal Communications Commission might pull News Corp.’s broadcasting licenses in the U.S., or that British regulators might force the company to sell off its 39 percent stake in British Sky Broadcasting Group, or that U.S. authorities might launch a racketeering investigation into News Corp., or that the U.S. Securities and Exchange Commission might file a civil suit against the company, or that a Murdoch or two might be arrested for obstruction of justice—never happened. Through a company spokesperson, Murdoch declined an interview request. (Bloomberg Businessweek’s owner, Bloomberg LP, is a competitor of News Corp.)

“We started off with phone hacking, and along the way the business of police corruption, long suspected, also came out in the public,” says Claire Enders, the founder of the London-based media research firm Enders Analysis. “These issues have grown and grown without there being any commensurate damage. It’s simply unbelievable.”

Today, Murdoch survives at the helm of a global entertainment and publishing company that, far from being diminished, has soared in value. The day before Murdoch appeared in Parliament, the stock closed at $14.96 a share. On April 12 it closed at $31.54. The company is now valued at $73 billion. Revenue and earnings are up. The company has $3.3 billion in cash. Since July 19, 2011, the Murdoch family’s 38 percent stake of News Corp. Class B voting shares has grown in value from $5.1 billion to $9.5 billion.

Given his track record, it should come as no surprise that Murdoch has slipped away. “Time and again when his plans have gone awry and he has found himself facing calamity, his superb survival skills have saved him,” the Australian journalist Neil Chenoweth wrote in a biography of Murdoch published in 2002. “Just before he hits the wall … he feints this way and that, and then he sets off with undiminished speed in a new direction. This is Murdoch’s genius: not that he gets into a jam, but that he is able to walk away afterward, an implausible winner.”
 
 
In 2006, Clive Goodman, a reporter for Murdoch’s News of the World, was arrested for hacking into the voice mail of Britain’s royal family. Over the next five years, despite growing evidence of widespread snooping, Murdoch and his executives in London, including his son James, repeatedly downplayed the incidents as the bad behavior of a few rogue employees who had since been punished accordingly. They accused anyone who suggested otherwise of having ulterior motives.

That playbook changed on July 4, 2011, when Nick Davies and Amelia Hill of the Guardian reported that among the victims of the phone hacking at Murdoch’s papers was Milly Dowler, a 13-year-old girl who’d gone missing on the outskirts of London and was later found murdered. The revelation set off a national furor. The crisis also focused the world’s attention on how intertwined Murdoch’s business was with both the political and policing establishments in London.

Over the years, Murdoch’s businesses in the U.K. had created a revolving door in which former editors from Murdoch’s tabloids went to work in key public-relations jobs in politics and at Scotland Yard; and former political operatives and police officials got lucrative jobs writing columns for Murdoch’s papers. It was a cozy arrangement, where money and favors passed back and forth. When Andy Coulson, who edited News of the World when much of the hacking took place, left Murdoch’s empire, he went on to become the top spokesman for Prime Minister David Cameron’s Cabinet.

Coulson, former editor of “News of the World” and former spokesman for Prime Minister CameronPhotograph by Sean Smith/Guardian NewsCoulson, former editor of “News of the World” and former spokesman for Prime Minister Cameron

In the wake of the Guardian story, alongside a reinvigorated investigation into phone hacking, Scotland Yard pursued a probe focusing on police bribery. The probe eventually revealed that reporters and editors at Murdoch’s papers allegedly gave money to police officers for information on various occasions. It was followed by arrests of numerous former News Corp. employees as well as police officers from Scotland Yard. (Arrests in the U.K. are made on reasonable suspicion, which requires less evidence of wrongdoing than the probable cause requirement in the U.S., and do not always lead to charges.) Watching the unraveling of London’s power structure, Cameron announced that he was launching a two-part public inquiry, to be led by Lord Justice Brian Leveson, to look into the role of the press and the police in phone hacking.

On July 7, News Corp. announced it would shut down News of the World. There would be no ads in the final edition. All newsstand sales would go to charity. The sudden closure of the country’s most popular newspaper gave angry members of the public and lawmakers reason to believe that Murdoch was shuffling in the direction they were collectively urging—namely, out of the newspaper business.

July 2011, the last issue of Britain’s most popular newspaperAlphaJuly 2011, the last issue of Britain’s most popular newspaper

Murdoch also needed to do something for nervous investors. On July 12, with News Corp. stock taking a shellacking, Murdoch announced that the company would be nearly tripling its stock buyback plan to $5 billion. “This is a pretty big, pleasant surprise,” David Bank, an analyst at RBC Capital Markets, said at the time. “This is a very, very positive sign.” The move also softened—if only slightly—the bad news for investors the next day. On July 13, News Corp. officially announced it was dropping its $12 billion bid to buy the remaining 61 percent of British Sky Broadcasting (BSkyB), the lucrative pay-TV provider.

In the following days, Murdoch went on an apology tour. On July 15, he met with the Dowler family at a hotel in central London. It was a private meeting, he explained, and he couldn’t say more, but Mark Lewis, attorney for the Dowlers, told reporters that Murdoch “was very humbled and very shaken and very sincere. … He apologized many times.”

The next day, Murdoch booked ad space in several London papers. “We are sorry for the serious wrongdoing that occurred,” the ad read. “We regret not acting faster to sort things out.” A few days later, Murdoch was sitting before Parliament.

In the weeks and months following the explosive Guardian story, Murdoch began purging his top executives in London—anybody not named Murdoch was fair game. Most notably, on July 15, 2011, Les Hinton, the former head of the company’s British newspapers, who had worked for Murdoch for more than 50 years, stepped down. So, too, did Rebekah Brooks, the former tabloid reporter and Murdoch favorite, who had soared to the top of his London press machine. At the time, it was often repeated that for Murdoch, losing Brooks was like losing a daughter.

Brooks is now facing a range of criminal charges related to the phone-hacking and police bribery investigations. She has denied all the charges. Her case is scheduled to go to trial later this year. The future of several other former News Corp. executives remains in legal limbo, though none of the arrested is a Murdoch. “The closest they got to the family was Rebekah Brooks,” says Richard Levick, a lawyer in Washington who runs a firm specializing in corporate crisis management. “But alleged family is not the same thing as family.”

Whether anyone believed in the sincerity of Murdoch’s apologies in the summer of 2011, he was facing a much greater problem. Having spent the past five years insisting nothing was wrong, News Corp. executives now needed to convince a wide range of authorities that the company was serious about aiding their investigations.

Murdoch chose Joel Klein for the job. Klein, a former federal prosecutor and chancellor of the New York City school system, set up a News Corp.-funded operation, called the Management and Standards Committee. With help from the MSC, Scotland Yard was soon arresting low-level News Corp. employees by the dozen. By February 2012 reporters at Murdoch’s papers were complaining that the MSC was too aggressive. An opinion piece in Murdoch’s Sun described it as a “witch hunt.”

Members of Parliament who might otherwise have continued to lash out at Murdoch sat back and watched the MSC in action. “There was a lot of skepticism from people, not just the congenitally anti-Murdoch people,” Louise Mensch, a then-member of Parliament told Bloomberg News last year. “The doubters have been proven completely wrong. In the hardest cases, the MSC has gone against the interests of Mr. Murdoch.”

In the fall of 2011, News Corp. opened up the Compensation Scheme, a voluntary program designed to reach financial settlements with phone-hacking victims and to avoid litigation. The police have said that there were thousands of potential phone-hacking victims. As of February 2013, Murdoch’s company had resolved roughly 700 claims.

It’s cost them. Between July 1, 2010, and Dec. 31, 2012, according to company filings, News Corp. spent $250 million on legal fees and other expenses related to the phone-hacking scandal and an additional $25 million on settlements. While that may sound like a painful amount, the actual legal costs are far less than predicted at the peak of the crisis in 2011, analyst Enders says. “People were penciling in billions,” she says. “That’s been whittled down a lot, and that’s had a positive impact on the share price.”

Levick, the Washington lawyer, says the settlement money was well spent. “The settlements kept it all off the front page,” he says. “What did it cost? Clearly only a fraction of the increase in the company’s share value. So it’s a smart cost of doing business.”

In July 2011 multiple lawmakers in Washington called for probes into whether Murdoch’s reporters had tried to hack into phones of Sept. 11 victims and their families. There seemed to be a real possibility at the time that a second wave of phone-hacking malfeasance would surface inside the U.S. After all, over the years, various reporters and editors from News Corp.’s London tabloids had moved to the U.S. to work for Murdoch’s New York Post.

Yet despite much speculation about when and how the crisis would eventually cross the Atlantic, it never did. Nearly seven years after the first phone-hacking arrest in the U.K., no American phone-hacking victims have emerged.

In the spring of 2012, Mark Lewis, the attorney who represents a large number of phone-hacking victims in the U.K., made a visit to New York. At the time, Lewis confirmed to the New York Times that he was planning to take legal action in the U.S. against News Corp. on behalf of three clients. Lewis declined to name the alleged victims, who were described in the Times as a “well-known sports person,” a “sports person not in the public eye,” and an “American citizen.” To pursue the civil suits on U.S. soil, Lewis said he was teaming up with Norman Siegel, the former director of the New York Civil Liberties Union.

One year later, no suits have been filed. Reached in mid-April at his New York offices, Siegel says he and Lewis are still looking into potential claims. He declined to offer a specific timetable for when they might file suit in the U.S. “Our research is still going on,” he says.
 
 
Murdoch has been lucky, too. News Corp.’s stock rise has been driven by a number of factors, including the strength of its domestic cable assets, rising retransmission fees from distributors for its Fox Broadcasting network and owned-and-operated stations, its attractive portfolio of live sporting rights, and pay-TV growth internationally. A few years ago, Enders says, there was a belief “that all of these companies were going to become toast because of YouTube (GOOG), and Netflix (NFLX), and cord-cutting.” In the summer of 2012, News Corp. executives announced that the company would be splitting in two. The new arrangement would effectively quarantine the newspapers, beloved by Murdoch, from the U.S. TV and movie assets, beloved by the market. The split is expected to be completed later this year.

For years, Murdoch’s passion for newspapers has been seen as a drag on the company’s performance. In 2007, he bought Dow Jones, the publisher of the Wall Street Journal, for $5 billion. Two years later, News Corp. was forced to take a $2.8 billion writedown related to the purchase. Investors were not amused. Murdoch largely ignored them. When the phone-hacking crisis emerged, however, some observers thought the severity of the problems would finally force Murdoch to get out of the newspaper business. “The phone-hacking scandal is symptomatic of his business judgment,” Terry Smith, CEO of brokerage firm Tullett Prebon, said at the time. “We’ll see more pressure on Murdoch now.”

On the day News Corp. announced the split, Murdoch said in a conference call that the decision wasn’t a reaction to “anything in Britain.” Whatever his motive, the stock price has since increased significantly. “The investors are overjoyed,” Enders says.

Murdoch will serve as chairman of both companies and CEO of the entertainment business. The current editor in chief of Dow Jones, Robert Thomson—not Murdoch—will serve as CEO on the publishing side. “This ushers in the possibility that these businesses are going to be run on an arm’s length, commercial basis,” says Enders. “The spectral hold of Rupert Murdoch has at least been loosened slightly from the tiller.”

Murdoch has not escaped completely unscathed. Since scrapping the deal for British Sky Broadcasting, the satellite provider has likewise risen in value. As of April 16, 2013, shares were up 12 percent from the day News Corp. dropped its bid. Last year the company made $1.4 billion in net income. Losing out on the deal has cost News Corp. a chance at even greater fortune.

The crisis has also left Murdoch’s succession plans uncertain. James, once the heir apparent, has sustained serious damage from his role overseeing the early management of the crisis. His ascension is no longer guaranteed. In August 2012, after delivering a speech at the Edinburgh International Television Festival, Elisabeth Murdoch said it had been “a nightmare year for the family” and she had “absolutely no ambition” to replace her father at the top of News Corp., according to the BBC. Lachlan Murdoch, who sits on the company’s board, was recently rumored to be a potential candidate to run the publishing side after the split. He didn’t end up in the job, leaving Murdoch’s eldest son without an active management role. “Hacking has been transformative in many ways,” says Murdoch biographer Michael Wolff. “They lost the big prize—BSkyB. And the family has been left in disarray.”

Later this year there will be criminal trials in London for some of the dozens of former News Corp. employees who have been arrested, including Brooks. In the U.S., the Department of Justice continues to investigate News Corp. under the Foreign Corrupt Practices Act (FCPA), a law that makes it illegal for U.S. companies to offer gifts or payments to government officials overseas to gain a competitive edge. “Certainly, within News Corporation, there remains a persistent, if not a paranoid, fear that the Department of Justice is going to move against them,” Wolff says. “The ultimate resolution has yet to take place.”

In 2011, News Corp. hired D.C. law firm Williams & Connolly to handle the FCPA investigation. In March, the Wall Street Journal reported that in addition to looking into the phone-hacking and police bribery charges in London, the DOJ has also been investigating allegations that Journal employees in China gave gifts to government officials in exchange for information. According to the Journal, the federal probe is nearing completion—possibly setting the stage for Williams & Connolly and the government to begin negotiating a settlement. “You hire Williams & Connolly because it says, ‘We are local, we get the game, and we are innocent. Oh, and by the way, if we’re not, we can work out a deal,’ ” says Levick, the crisis management fixer in Washington.

Whatever happens with the FCPA, it’s unlikely to generate the kind of frenzied outrage that burned in the summer of 2011. “The FCPA is interesting to about 146 lawyers inside the Beltway who practice FCPA law, and it’s interesting to some Americans because the word ‘corrupt’ is in there,” Levick says. “It will get some coverage. But it will get coverage as a legal story.”

“The big win for Murdoch is that as much coverage as it got in the U.S., the crisis didn’t jump the Atlantic,” says Levick. “They were able to cordon it off as largely a British story.”

In February 2012, seven months after closing News of the World, Murdoch rolled out a new Sunday version of his daily tabloid the Sun—effectively reoccupying the niche his company had made such a big deal of leaving. According to the Audit Bureau of Circulations, between September 2012 and February 2013, the Sun averaged 2.3 million daily readers—significantly more than its closest rivals, the Daily Mail (1.8 million readers) and the Daily Mirror (1 million). Over the same time period, the Sun on Sunday has averaged 1.9 million readers, topping its competitors, the Mail on Sunday (1.7 million) and the Sunday Mirror (1 million). Murdoch’s papers may not be as popular as they were before the crisis, but, then again, few newspapers are.

The first half of the Leveson Inquiry—the government’s investigation into the press’s role in phone hacking—has come and gone. The second laborious chapter, which will focus on the role of the police, will take place at some later date. Meanwhile, Murdoch remains the most read publisher in the U.K.
 
 
On Dec. 31, 2011, roughly six months after avoiding the pie in Parliament, Murdoch joined the greatest pie-throwing arena around: Twitter. Long-in-the-tooth, mass-media moguls aren’t supposed to thrive in the fast-moving free-for-alls of social media. But in the year and a half since, Murdoch has proven to be a master of the medium, playfully tossing off pithy insults, insights, and inanities with the omnivorous, attention-addled mania of a newshound a quarter his age. On occasion, he’s created controversies (such as when he wrote, “Why is Jewish owned press so consistently anti-Israel in every crisis?”) and then struggled apologetically to escape the resulting jams. Still, he looks at home on Twitter.

Even with more than 400,000 followers, Murdoch apparently isn’t satiated. Last year he unveiled “Murdoch Here,” a photo journal on Tumblr consisting of behind-the-scenes images of Murdoch taken by his chief of staff. One moment, he’s launching a sports channel in Japan. The next, he’s touring the Vatican in Rome, posing with cast members from Glee in New York, shooting clay pigeons in California, hanging out with Hugh Jackman on the set of The Wolverine, or shearing sheep at a farm in Australia.

Nowhere on display is the battered Murdoch from the summer of 2011. In March, Murdoch traveled to China, where he sat down with entrepreneurs at Cloud Valley, an incubator for Chinese startups, took to Twitter to praise the Chinese social media scene, posed for a picture on Tumblr pawing a pair of smartphones, and sneaked off for a visit of the Forbidden City. “After hard day of meetings, great tour of magnificent and huge Forbidden City,” Murdoch tweeted on March 26. “Full of priceless treasures. Emperors sure lived well.”

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Gillette is a staff writer for Bloomberg Businessweek in New York.

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