April 24, 2008: 4:45 PM EDT
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Harbinger of things to come in the news business?

How do you take over a family-controlled newspaper company? A hedge fund may have found the answer at the New York Times and Media General.

By Devin Leonard, senior writer

Times Chairman Arthur Sulzberger Jr.

NEW YORK (Fortune) -- Once it was a matter of faith in the newspaper industry that family-controlled companies like the New York Times and Virginia's Media General didn't have to fear hostile takeovers. After all, they had two classes of stock. The Times' Sulzbergers and the Bryans at Media General held Class B shares entitling them to elect 70% of their company's board members. Outsiders could buy all the Class A shares they wanted. But they'd never be able to get the families to sell their newspapers.

These companies no longer seem so impervious. For that, they can thank Harbinger Capital Partners, an Alabama-based hedge fund. On Tuesday, the fund succeeded in getting two of its nominees elected to the Times board of directors. The Times was so fearful of a proxy battle with Harbinger that it endorsed the hedge fund's candidates.

Media General, publisher of the Richmond Times-Dispatch and the Tampa Tribune, instead resisted the hedge fund's advances. But on Thursday, three Harbinger candidates were elected to that company's board, too. "It is now in the interests of Media General and all of our fellow stockholders to move past this proxy contest and focus on rebuilding stockholder value," said Joseph Cleverdon, Harbinger's director of investments, in a victorious press release.

The Sulzbergers and the Bryans are still in control. But Harbinger's position is stronger than it looks. Although the Times (NYT) and Media General (MEG) have valuable assets, their stocks have lost more than half their value in the last five years, as Wall Street has grown disenchanted with the newspaper business.

The immediate future doesn't look promising either. The Times and Media General just announced first-quarter losses. (In Media General's case, the red ink amounted to $20 million.) Times Chairman Arthur Sulzberger Jr. may have recently stated yet again that his company is not for sale. But these are the kind of circumstances that make families wonder if it's time to find a well-financed buyer (like Rupert Murdoch's News Corporation (NWS, Fortune 500), which last year persuaded the Bancroft family to part with Dow Jones, publisher of the Wall Street Journal, for a tidy $5 billion).

Harbinger wisely sees an opportunity to buy low and sell high. It now owns 19% of the Times' Class A shares and 18% of Media General's non-family owned stock. It will undoubtedly propose any number of "strategic alternatives" to improve the results of the two newspaper publishers. With directors on both company's boards, the fund can also soften up the families for possible sales. That's the kind of lucrative outcome that would make any hedge fund guy salivate.

Publishing clans like the Sulzbergers and the Bryans once had it both ways. They ran their companies as they pleased. They made themselves wealthy, too. Now they may have to choose one or the other. They can expect plenty of helpful advice from their new directors. To top of page