Will the Scandal Tame Murdoch? - BusinessWeek

The News Corp. chief's iron grip could finally be challenged

The media mogul's empire has been shaken by allegations of phone hacking and police interference Lionel Bonaventure/AFP/Getty Images

By Felix Gillette and Ronald Grover

When Rupert Murdoch faced inquisitors from a British Parliamentary committee on July 19, the public Murdoch was on display: monosyllabic, defiant, and unwilling to accept full responsibility for the corruption that has ensnarled his media empire. "A lot of people had different agendas in trying to build this hysteria," Murdoch said when asked who he blamed for the sizeable business setbacks of News Corp. in the U.K., due to the phone hacking scandal. "All our competitors in this country formally announced a consortium to try and stop us. They caught us with dirty hands and built hysteria around it."

It was a characteristic performance from a mogul who's perfected the art of the grand escape during a career in which he has stared down competitors, outmaneuvered rivals, and solidified his command over a media empire built from a single family-owned newspaper.

The question now is whether Murdoch will be able to continue to run his company exactly as he pleases. Government investigators in London and Washington are looking at possible misdeeds involving phone hacking. Shareholders have shaved more than $5 billion off the company's market value. Even its directors, largely silent in recent weeks except for a few murmurs of support for Murdoch, seem to have taken notice. They've hired Michael B. Mukasey, a former U.S. Attorney General, and Mary Jo White, a former U.S. Attorney in New York, to advise them on governance issues.

What they are likely to find is that Murdoch's shareholders haven't always prospered under his iron-fisted control. News Corp.'s stock performance has trailed that of its largest rivals, including Walt Disney, Viacom, and Time Warner, over the last five years. (Bloomberg Businessweek's owner, Bloomberg LP, is a competitor of News Corp.) "There's just sort of this generic Murdoch discount, which encompasses the concern that he will make decisions that are not consistent with other shareholder interests," says Michael Morris, an analyst at Davenport & Co. in Richmond, Va. Mario J. Gabelli, chairman of Gamco Investors, which owns 6.7 million shares of News Corp. nonvoting stock, acknowledges that some investors don't trust Murdoch. "There has always been the perception that he would go off and buy something—that he might change direction," Gabelli says. "This is a great collection of assets, however," he adds.

Those assets, some shareholders complain, have for decades been operated at the whim of Murdoch, who along with a family trust owns 39.7 percent of the company's voting stock. When family control was threatened in 2004 by cable billionaire John C. Malone, who had assembled 16 percent of News Corp.'s shares, Murdoch swapped News Corp.'s stake in the fast-growing satellite company DirecTV to recapture the stock. Critics call the deal embarrassingly one-sided. To get Malone's $11.3 billion stake, Murdoch anted up $12.3 billion in News Corp. assets, including $465 million in cash, three regional sports cable channels in the U.S., and a 41 percent stake in DirecTV. Three years after the deal closed, the value of DirecTV had doubled, while News Corp.'s had fallen by 5 percent—even before the hacking scandal. "This is a company where no one could say no to Rupert Murdoch," says Murdoch biographer Michael Wolff, author of The Man Who Owns the News. "And it has only gotten more so as he has gotten older and more focused on the line of succession."

The company's executive ranks have thinned further since 2007, when Murdoch named his 38-year-old son, James, chairman of News International, which operates the parent's British newspapers. News Corp. President Peter Chernin, a 20-year employee, left in 2009 as Murdoch increasingly turned to his son for counsel. Chernin now produces TV shows and movies under a production deal with the company.