Saving the Free Press From Private Equity

This article appears in the Winter 2018 issue of The American Prospect magazine. Subscribe here.

There is a standard story about the death of newspapers. After decades of enjoying easy profits from print ad income, publishers were blindsided by the internet revolution. Free information on the web cut into their core audience, especially among the young. The expenses of paper, printing, and delivery—“trucks and trees”—made them increasingly uncompetitive in a digital age. Publishers were slow to adjust. By the time owners figured out how to monetize web content, Google and Facebook had gotten there first, and were taking an estimated 80 percent of digital ad revenues. The crash of 2008 only hastened the decline.

A few national newspapers with unique franchises—The New York Times, The Wall Street Journal, and The Washington Post—have begun to figure out the digital transition, using paywalls, new digital content, and complementary business strategies to realize income from other sources. They will survive, even thrive.

But the real tragedy for the civic commons is occurring at the level of regional papers. Local dailies and weeklies are in a slow death spiral. They missed the digital rendezvous. Operating losses cause owners to lay off staff and shrink content, further depressing readership and ad income, leaving little to reinvest in digital. Local web-only media are feisty in a few places, but no substitute for a robust newspaper, whether print, web, or a blend.

This story is all too true as far as it goes. But it leaves out one major player: the private equity industry. Private equity has been gobbling up newspapers across the country and systematically squeezing the life out of them to produce windfall profits, while the papers last. The cost to democracy is incalculable. Robust civic life depends on good local newspapers. Without the informed dialogue that a newspaper enables, the public business is the private province of the local commercial elite, voters are uninformed, and elected officials are unaccountable.

COMPANIES WITH NAMES LIKE Alden Capital, Digital First Media, Citadel, Fortress, GateHouse, and many others that you’ve never heard of have purchased more than 1,500 small-city dailies and weeklies. The malign genius of the private equity business model, of which more in a moment, is that it allows the absentee owner to drive a paper into the ground, but extract exorbitant profits along the way from management fees, dividends, and tax breaks. By the time the paper is a hollow shell, the private equity company can exit and move on, having more than made back its investment. Whether private equity is contained and driven from ownership of newspapers could well determine whether local newspapers as priceless civic resources survive to make it across the digital divide.

The Bastrop Daily Enterprise, in the northeast corner of Louisiana, was founded in 1904, part of a small family-owned chain. The newspaper did a thriving business, with 30 employees and $1.5 million in annual revenues. “We served our communities, won awards for our reporting, and made good money for the owner,” says a former staffer who asked that we not use her name. Then the Enterprise was bought by GateHouse Media, the newsroom was gutted, and all operations were centralized by the new corporate owners.

“Now they've got maybe eight people,” says this former employee. “They're lucky if they're doing $600,000 gross. I remember what these papers used to be. It's unrecognizable.” Few citizens of Bastrop, however, know the reasons behind the wasting of the Enterprise because no one has reported on it.

In North Carolina, The Fayetteville Observer, founded in 1816, had been owned by the McMurray family since the 1920s and is the oldest North Carolina paper continually publishing. Fayetteville is hard by Fort Bragg. The paper has a daily circulation of about 62,000 across ten counties, and had been profitable and well managed. But family members, getting older, decided it was time to sell. Charles Broadwell, whose grandmother had been board chair, was the last family member running the paper. He engaged newspaper brokers to find a buyer. GateHouse, the biggest of the private equity players, took over the paper in 2016, making deep cuts in the newsroom and the business office, and moving the copy desk to their regional center. They raised the subscription price for a shabbier product. “It was like walking around at my own funeral,” Broadwell says.

However, against this bleak trend, being repeated at hundreds of papers nationwide, there is actually some good news. In some cities, private equity owners are selling newspapers back to local owners who are not looking for windfall gains but are committed to reinvesting in the newsroom and figuring out digital publishing. In other places, like Minneapolis, Philadelphia, and Boston, a category of new local owners whom we might call benign billionaires are devising new business models to allow papers to at least break even, while they give talented editors the freedom and resources to rebuild the newsroom and advance digital.

While newspapers will never be the money machines that they were in the glory days, they may yet endure as core institutions of American democracy.

THIS ARTICLE IS AN UNUSUAL collaboration. One of us is the co-editor of this magazine. Over the years, Robert Kuttner has written numerous articles on the business of media. The other, writing under a pseudonym, Hildy Zenger (first name in honor of The Front Page, and last name for the pioneer of press freedom in America), works at a small-city paper owned by GateHouse. Zenger observes the carnage close up.

Zenger's newspaper, with a circulation of under 10,000, has been pillaged in classic private equity fashion. Its pre-GateHouse staff has been cut by 70 percent, and those who remain have not had a raise in almost ten years. The paper had its own in-house production and printing operation, and had won design awards, but GateHouse shut down and sold the press and fired the entire production staff. The paper is now laid out hundreds of miles away in Austin, Texas, along with most of GateHouse's 770 papers. The printing is done in another city, at a GateHouse-owned shop, by harried press workers who are under constant pressure to cut costs by reducing quality.

Editors must send all the content, page by page, to the GateHouse design center via a cumbersome, laughably outmoded software interface and then wait, often for hours, to see what the pages look like on their computer screens. They are not allowed to speak to the designers, who can be contacted only by email. The designers follow strict rules that make creative layout solutions virtually impossible. GateHouse wages are so low and working conditions so high-pressured and unpleasant that turnover among layout staff is constant—so mistakes are rampant.

Although GateHouse management claims to be aggressively pursuing a “hyperlocal” digital ad strategy, its newspapers' websites—all with close to identical design—are stunningly ugly, hard to use, and filled with dated, soft feature stories of zero local interest. Its subscriber services—all outsourced—are even worse. At Zenger's office, the editors get calls from readers who are having trouble with their subscriptions and can't reach anyone for help. “Sorry,” the editors have to say. “There's nothing we can do.”

Cost-cutting measures at GateHouse are absurdly draconian, ranging from the fact that editorial staffers don't even get complimentary subscriptions to having to buy their own coffee for the office machine. “Next it will be the toilet paper,” says one staff member, only half-joking.

The newspaper where Zenger works, sold to GateHouse a decade ago, has lost 40 percent of its circulation over that time, and nearly half its advertisers. At the Columbia Daily Tribune in Missouri, massive layoffs began one month after GateHouse took over. “You are expected to do the work that three people used to do, and you are not rewarded for it,” says one former employee. Across the company, employees complain of few resources and little tech support. A senior sales rep at a GateHouse paper in Massachusetts had his computer hard drive crash and couldn’t get a new one from the company for nine days. When he finally did get one, it wouldn’t accept his password.

The ruthless miserliness of GateHouse management has two effects: It destroys the newspaper's capacity to do its fundamental job of covering the news, and it makes for miserable employees. “Everybody I know in the leadership of the corporation were financial people or ad directors,” says the editor of a GateHouse-owned paper. “They were never journalists—never covered a story in their life. This corporate stuff is killing local newspapers. I'm sweating bullets hoping some bean counter doesn't say we've got to get another 17 percent profit out of this. How much more can these people cut? It becomes harder to do the right thing—to cover the city council meetings and find out what really did happen—when you had five people in the newsroom and now you're down to two.”

Zenger's paper is in a community with a dense civic life that has supported serious journalism for over a century, but the tiny staff now has little time to cover important aspects of city government, much less do serious investigative work. It's worth noting that GateHouse and other corporate predators are managing to destroy a once-robust tradition of independent journalism without having to tell editors and reporters what to write or not write. Starvation, it turns out, is at least as effective a way to keep nosy reporters at bay as killing their stories before they see the light.

“Eight hundred of us [from local papers] were on a call yesterday with [GateHouse CEO] Kirk Davis,” one GateHouse advertising manager said recently. “We gained nothing from it—a total waste of time. ‘I've got your back,' he said. ‘I hope you've got mine. I'm crazy about all of you.' I wanted to throw up.”

IS PRIVATE EQUITY ANY WORSE than traditional chains? In 2004, the two largest media companies were publicly traded legacy chains, Gannett and Knight Ridder. By 2014, the top two were private equity firms, Fortress/GateHouse and Digital First Media (DFM). The big chains like Gannett, McClatchy, and Cowles got overextended and made some bad business decisions in the decade before the collapse, resulting in severe downsizing. But some of these owners retained a commitment to newspapers as a public calling. “The traditional chains had to downsize, but they still thought like newspaper people—what sustains the product and the community,” says Bernie Lunzer, president of the NewsGuild-CWA. “With private equity, it’s about squeezing out the 20 percent and anything goes. Use it up, sell it, or just kill it. The profit is the product.”

The private equity formula of hollowing out local papers the better to extract windfalls is cynical and deliberate. Between 2012 and 2016, according to the Bureau of Labor Statistics, all newspapers lost 24 percent of their workforces. But at a sample of 12 papers owned by DFM, the layoff rate was more than half, according to a tabulation collected by journalists who worked for DFM papers.

As quality drops at these papers, so does circulation. And though ad revenue is down, many local businesses continue to advertise because they actually value the print newspaper and want to be seen in it. “Print is not close to being dead,” says Mark Jurkowitz, who wrote about the media for The Boston Globe for ten years, then became associate director of the Journalism Project at the Pew Research Center in Washington, D.C. “The reason is not just that publishers are attached to the idea, but you’re still generating most of your revenue from the dead-tree product.”

So, despite having cut costs to the bone, the private equity parent is, for now at least, able to take out profits in the range of 15 percent to 25 percent of revenue. Papers that don't hit this mark can be sold for scrap or closed.

Imagine what these papers might be if this money were reinvested in the newsroom and in an enlightened digital strategy.

GateHouse owns more newspapers, currently in 36 states, than any other media conglomerate: a mix of dailies, paid weeklies, and free “shoppers,” mostly in small cities, but also a few bigger city papers like The Providence Journal, the Worcester Telegram & Gazette, and The Columbus Dispatch.

The model is simple. Buy a newspaper on the cheap, often from a legacy chain like Gannett or from a family owner whose siblings and cousins want to cash out. In the glory days before the internet and the financial collapse, newspapers were earning profit margins of 20 percent to 30 percent, and they cost at least 13 times earnings to purchase. This was the era in which buyers grossly overpaid for newspaper properties, the epic case being The New York Times purchasing The Boston Globe in 1993 from the local Taylor family for $1.1 billion, only to sell it two decades later to Red Sox owner John Henry for about $70 million.

In the first wave of purchases, some private equity companies overpaid and went bankrupt, but the management group often was able to use legal maneuvers in bankruptcy court to keep control. Since 2012, a second wave of private equity purchasers has swept in to buy newspapers for prices at just three or four times earnings. That means the new owner can make back its money fast, and even faster if it strips staffing and siphons off cash flow. GateHouse is continuing its acquisition binge. Just last August, it purchased another 11 dailies and 30 weeklies from the Morris Publishing Group based in Augusta, Georgia. Its most recent move is to buy the Boston Herald, for just $4.5 million in cash, announced on the same day the 171-year-old daily filed for federal bankruptcy protection. GateHouse’s bid was conditioned on voiding all of the paper’s union contracts and discarding all legacy pension, health, and other obligations to Herald workers. Major layoffs in the newspaper’s 120-person newsroom are a certainty.

But the other top private equity player, DFM, got overextended, and has sold some of its papers. Its owner, Alden Capital, targets a profit margin of 25 percent. DFM has pursued some of the most aggressive cash-extraction tactics in the business—for instance, cutting the newsroom staff of the St. Paul Pioneer Press from a peak of 225 journalists two decades ago to just 25 today, with similar-scale cutbacks at flagship papers like the San Jose Mercury News and The Denver Post.

According to newspaper financial analyst Ken Doctor, DFM advised brokers who specialize in the purchase and sale of newspapers that it would entertain individual sales if it could realize prices of around 4.5 times annual earnings. As many as 50 DFM papers were reportedly on the block. Recent sales have included The Salt Lake Tribune and the New Haven Register. In October, DFM chief executive Steve Rossi abruptly stepped down, after serving just two and a half years.

THIS PULLBACK AND SELLOFF has created opportunities for restored local ownership. Consider the venerable Berkshire Eagle, now back in local hands. The Pulitzer Prize–winning Eagle, based in Pittsfield, Massachusetts, has a great tradition of public-minded journalism with roots that go back to 1789. The legendary press critic Ben Bagdikian said there are only three great papers: The New York Times, Le Monde, and The Berkshire Eagle.

The paper, with a current circulation of about 24,000, has existed in its present form since 1891, when it was bought by Kelton Bedell Miller, later Pittsfield's mayor. The Miller family owned the Eagle and four other small New England papers until 1995, when the company, overextended and in debt, was sold to an aspiring private media press baron, Dean Singleton.

By 2006, Singleton's private equity company, MediaNews, based in Denver, owned 55 dailies, including The Denver Post, The Detroit News, the Los Angeles Daily News, the San Jose Mercury News, the St. Paul Pioneer Press, plus more than 100 weeklies, becoming the nation’s fourth-biggest newspaper company. After the 2008 crash, MediaNews used the bankruptcy laws to shed debt, and was reborn as Digital First Media, partly owned by yet another private company, Alden Capital. Under DFM, the Eagle and its sister papers in the New England Newspaper Group, the Brattleboro Reformer, The Bennington Banner, and the weekly Manchester Journal in Vermont, were relentlessly cut, though Alden managed to extract cash flow to meet a target return of 15 percent to 20 percent.

But in May 2015, DFM, financially stressed, went through yet another restructuring and put several papers up for sale, including the New England Newspaper Group. At that point, a group of Pittsfield business and civic leaders resolved to take back the Eagle, which had been in absentee ownership for two decades. In early 2016, former Berkshire County Judge Fredric Rutberg was named publisher. Other investors included former Visa Inc. President John C. “Hans” Morris, banker Robert G. Wilmers, and Stanford Lipsey, former publisher of The Buffalo News.

“We announced a revolutionary business plan,” Rutberg says, tongue only partly in cheek. “Improve content, attract more readers and advertisers.” But in today's private equity environment, that approach really is revolutionary.

“We had to re-populate functions that had been outsourced,” Rutberg adds. “Composition of the paper, design staff, the call center, classified ads, finances—all brought back to Pittsfield. When you walked around here, the newsroom was half-empty.” The Eagle, amazingly, has been hiring. At the three papers, about 50 new positions in all departments have been filled, and newsroom staffing has been built back from a total of 34 to around 50.

“We even increased the size of the paper and we printed it on heavier stock, to signal that the Eagle is back,” says Editor Kevin Moran. “I think there are maybe three or four really lucky newspaper editors in the country. One works at the Post, one works at the Times, and maybe the third works at the Berkshire Eagle. We have worked so long and hard just to keep the paper alive, and now we can build it back.”

In some small towns as well, citizens are finding ways to take their newspapers back.

The independent local weekly in the central Massachusetts town of Harvard, with 6,500 residents, was first sold to the Community Newspaper chain, which was then bought by GateHouse. The corporation did its usual hatchet job on the formerly beloved Harvard Post. But a group of civic-minded citizens got together and started a competing weekly, the Harvard Press, modeled on the old Post, with extensive coverage of town boards, schools, and community life—and a notably quirky and detailed police blotter. Within six years, they put the GateHouse paper out of business.

In Southern Pines, North Carolina, The Pilot has been a family-owned paper for nearly a century, and has been owned for 21 years by its current publisher, David Woronoff and family members. Editor John Nagy wrote a signed article for the paper last January bemoaning the fact that one North Carolina paper in three is absentee-owned, and that others had folded. “Folks in those communities regularly call us, asking us about buying their local paper. … They’re tired of a 12-page paper with no news, and they look at our 40-page, all-local product with envy.”

Woronoff got a call offering to sell a group of five other local papers that had been stripped down as they repeatedly changed hands over a decade. Woronoff took a good look at one, the Richmond County Daily Journal. “It’s maybe eight pages a day, six days a week,” he says. “They sold the building, sold the press; they might have two people in the newsroom. There is no kind of innovation that can come from that environment. There is nothing left. If he just handed me the keys, I’m not sure I’d take it.”

Woronoff has strengthened The Pilot by developing other lines of business that are logical outgrowths of the newspaper. He now publishes four glossy monthly city magazines in nearby communities, and operates a digital agency for the newspaper’s customers. He also publishes telephone directories, and even operates a local bookstore. These profitable enterprises provide a revenue stream that strengthens the newspaper, which now accounts for only 35 percent of total revenue.

According to Penelope Muse Abernathy, the Knight Chair in Journalism and Digital Media Economics at UNC Chapel Hill, the key to this sort of model is local ownership playing to local strengths. Almost by definition, private equity owners can't and don't pursue these strategies, because they have no stake in the community. Among larger papers, The Washington Post and The Dallas Morning News have successfully branched out into profitable services for both clients and other newspapers. In Santa Rosa, California, Abernathy reports, then-publisher Bruce Kyse created an in-house ad agency at The Press Democrat that offers search optimization, web development, and social media assistance for clients who pay $1,000 a month. Her 2017 book, Saving Community Journalism, gives dozens of other examples. “We’re almost coming full-circle, back to the 18th century,” says analyst Ken Doctor. “The first newspapers were published by local printers, who were job shops. They knew their communities, and had multiple lines of business.”

THE OTHER MODEL OF KEEPING great journalism alive relies on arguably benign billionaires. These include Jeff Bezos at The Washington Post, Red Sox owner John Henry and colleagues at The Boston Globe, and an intriguing hybrid in Philadelphia, where the Inquirer and Daily News, after several private equity misadventures, were purchased by a group led by H.F. “Gerry” Lenfest, a longtime media executive and philanthropist, who turned the holding company into a nonprofit.

The Philadelphia story reads almost like a parody of recent events in the media business. The Inquirer went through seven different owners in eleven years, beginning in 2006 when McClatchy bought the Knight Ridder chain, which included the Philadelphia papers. McClatchy promptly sold the papers for $562 million to a local investor, Brian Terney, who went bankrupt in 2009. The papers then ended up with yet another group, Angelo, Gordon & Co., which bought the property for just $135 million in 2010. During this entire period, sickening newsroom downsizings ensued. At length, following litigation among the owners over who was in control, a judge ordered an auction. The winning bidder was the group led by Lenfest.

The three media properties, the Inquirer, the Daily News, and Philly.com, became the Philadelphia Media Network—debt-free. Lenfest turned the company over to a new nonprofit, the Lenfest Institute, which also serves as a grant-giving foundation to help the Philadelphia papers and others like them reinvent themselves. In a radical attempt to accelerate a digital transition, all newsroom staff, the number now stable at about 250 across the three publications, were requested to apply for their jobs—which were drastically redefined to be more like a digital newsroom. That’s down from more than 600 at the Inquirer alone less than two decades ago, but no further cutting is anticipated, and the company operates in the black.

“Gerry established that the papers should have a public mission, rather than one of profit maximization,” says Jim Friedlich, a Wall Street Journal alum who heads the Lenfest Institute. Lenfest and Friedlich see these newspapers as comparable to civic and arts organizations like museums or symphonies. This roughly follows the model of the Poynter Institute, the nonprofit journalism school and research center that also owns the Tampa Bay Times, whose owner, Nelson Poynter, willed ownership of the paper (then the St. Petersburg Times) to the newly created institute in 1977.

Among the most hopeful of these benign billionaire sagas is that of the Minneapolis Star Tribune.

The Star Tribune, once one of America’s great regional dailies, went through a fairly typical family-ownership/private-equity tailspin. The Cowles family of Iowa, publishers of The Des Moines Register, purchased the afternoon Minneapolis Daily Star in 1935 and eventually merged it into the morning Tribune in 1982. In 1998, at the peak of the newspaper boom, McClatchy bought the paper from Cowles for $1.4 billion, only to lose money and sell to a hedge fund, Avista Capital Partners, for just $530 million. But the purchase was heavily “leveraged”—financed with borrowed money—and the Star Tribune went into bankruptcy in 2009 after the financial collapse.

The paper's debtors assumed control and created a new board of directors. Yet another private equity company, Wayzata Investment Partners, temporarily became the majority owners. The new board hired a Time, Inc. veteran, Michael Klingensmith, as publisher. In 2014, the board was able to enlist Glen Taylor, 76, as a local “white knight” purchaser. Taylor, whose reported net worth is about $2 billion, leads the Taylor Company, an electronics conglomerate headquartered in nearby North Mankato, with some 15,000 employees. Taylor, very much a Twin Cities booster, also owns the Timberwolves NBA basketball team.

In drastic contrast to private equity owners, according to Klingensmith, when Taylor purchased the Star Tribune he got favorable financing terms based on his own ample net worth, but did not load any of the debt onto the paper. As a result, the paper’s cash flow can go to rebuilding the newsroom, investing in the digital transition, meeting pension fund obligations, and devising other sources of income to replace print ad revenues that are dwindling at the rate of about 9 percent a year. For instance, the Star Tribune has the contract to print USA Today in the Minnesota region.

Taylor was able to purchase the paper for a sum reported to be around $100 million, or about four times projected annual earnings, less than one-seventh of the $530 million that Avista paid, and one-twentieth of what McClatchy had paid in 1998. In a sense, two rounds of private equity owners and a bankruptcy did the dirty work of ruthlessly cutting costs, laying off employees, and re-negotiating union contracts, allowing a benign local owner to acquire the paper at a sustainable price.

The company now turns a small profit, estimated in the low tens of millions, which is all that Taylor expects. He is not looking to maximize returns. Taylor has given Klingensmith free rein to run the paper, consistent with a sound bottom line. “We've continued to invest aggressively in print,” says Klingensmith, “maintaining the newsroom, and introducing new sections. We've not cut back our news well. That has helped us maintain readership while we increase digital income.”

The newsroom is now back to about 250 employees, and circulation has stabilized at a respectable 288,000. The Sunday paper has the nation's fifth-largest circulation, at 581,000. The Star Tribune has erected a paywall—readers can get seven items a month free—and now has about 50,000 paid digital subscribers. Best of all, Taylor has made provision for the paper to be left to a nonprofit foundation, so that the Star Tribune will stay in local hands and not stripped of the cash flow that it needs, private equity–style.

Not all rescues have happy endings. Billionaire Sam Zell took the publicly traded Tribune Company private in 2007 on the eve of the crash, in a deal valued at $8.2 billion, mostly using borrowed money. The Tribune Company, which included the Los Angeles Times and other media properties, filed for bankruptcy in 2008. The company went through a succession of owners, layoffs, name changes, and bitter newsroom conflicts. Its current publishing incarnation is called Tronc. Local civic-minded philanthropists, including Eli Broad, sought to restore the Los Angeles Times to local control, but were rebuffed by Tronc’s owners, who insisted that they would only sell the entire company.

In Alaska, there is a wonderfully ironic twist. The longtime owners of the Fairbanks News-Miner were Charles and Helen Snedden, a local business and philanthropic family. After the death of Charles in 1989, the paper was eventually sold to Dean Singleton, the same private equity operator whose holdings became DFM. After Helen’s death in 2012, two charitable foundations were created—and last year the Helen E. Snedden Foundation bought back the News-Miner from Singleton, and purchased the Kodiac Daily Mirror to boot.

In another charming wrinkle, in 2014, Alice Rogoff, a would-be media mogul with a fondness for Alaska, purchased the state's largest paper, the Anchorage Daily News, from McClatchy. Rogoff, who was once an assistant to former Washington Post publisher Donald Graham, was married to billionaire David Rubenstein, who co-founded one of the largest private equity companies, the Carlyle Group. Rogoff in 2009 had bought a struggling digital startup, Alaska Dispatch News, but it couldn’t compete with the Daily News. When she solved that problem by purchasing the Daily News as well, many felt that she had overpaid. The deal for the Daily News, with a paid circulation of only about 42,000, cost $34 million, far above the going rate for comparable media properties.

In August 2017, the paper filed for bankruptcy. Unlike many private owners who extracted lots of money before selling off the paper, Rogoff took heavy losses. The new owners are Alaskans, led by the Binkley family, who operate local tourism companies. The new publishers put out a brave statement, declaring, “Alaska deserves and needs a robust and healthy paper of record as much as it needs any other public utility or infrastructure, particularly in these uncertain times,” and projected no layoffs. A month later, about a third of the newsroom was let go.

DESPITE THE RELATIVELY BENIGN experiences of the billionaires who own the Post, the Globe, the Star Tribune, and the variation on the theme in Philadelphia, this is obviously not a reliable recipe. And yet there is some hope that the private equity model may fall of its own weight.

Fortress Investment Group, which controls GateHouse, is the rare case of a private equity firm that is also a publicly traded company. Fortress was the first private equity company to list its shares on the New York Stock Exchange, beginning in 2007—on the eve of the financial collapse. Its media subsidiary promptly went broke. Fortress transferred its media properties to a new subsidiary, and assumed more than a billion dollars in debt. After emerging from a strategic bankruptcy in 2013 though a complex ownership web, and rebranding the company New Media/GateHouse, the private equity managers continue their acquisition binge, spending $735 million to buy up newspapers in the past four years.

As a rare hybrid of private equity operators controlling a publicly traded company, Fortress has to make financial disclosures to the Securities and Exchange Commission and the public, and shareholders get to vote on directors and bylaws. Public filings with the SEC revealed, for instance, that Fortress, as managers of GateHouse, had taken out $19.4 million in management fees and “incentive compensation” in 2016, and $39.7 million in 2015. As newspaper financial analyst Ken Doctor observes, these payouts are not far from the $27 million in operating expenses that GateHouse expects to extract from its papers during 2017. The money from the cuts goes straight to the private equity absentee owner and its executives. The New York Times reported Fortress CEO Wes Edens’s total 2016 pay as $54.4 million, including an $11.6 million bonus.

This public information gives some leverage to another player, the NewsGuild (formerly the Newspaper Guild), the union that represents employees at 17 GateHouse properties. The Guild, after extensive research, concluded that the tightly knit controlling group headed by Fortress CEO Edens was profiting at the expense of ordinary shareholders, and that the strategy of bleeding newspapers dry was unsustainable over time. Some stock analysts who cover media properties had expressed similar concerns. At a meeting in May 2017, shareholders overwhelmingly rebuked management in a resolution offered by the NewsGuild (which had purchased shares), requiring an annual election of directors—the resolution carried by an astonishing 83 to 17.

The NewsGuild is now in collective-bargaining talks with GateHouse management. With management on the defensive, the union may be able to extract raises and better working conditions for employees at unionized GateHouse papers who have not had raises in a decade. At the same time, the NewsGuild, part of the Communications Workers of America, has bigger fish to fry, since the entire private equity model is inherently destructive to both a free and robust press and to decent conditions for journalists. The CWA, of course, can't carry this fight alone. Ironically, the shareholder revolt against Fortress/GateHouse, though stimulated by the Guild, now has allies among other shareholders—including hedge funds and other institutional investors—who could well challenge the entire business model of bleeding the enterprise for the narrow benefit of managers.

THE PRESS IS NOT THE ONLY victim of private equity, one of the most predatory and poorly understood parts of contemporary American capitalism. The idea that managers can make a fortune by bleeding an enterprise dry seems to defy gravity, but that is increasingly the pattern, not just in media but in other sectors where private equity has made major inroads, including retailing, fast food, airlines, hospitals and nursing homes, private prisons, private universities, and a great deal more.

Today, private equity firms control some $4.3 trillion of operating companies that employ at least 11 million workers.

The basic model is the same whatever the sector. Borrow heavily against the assets of the operating company, extract income in the form of excessive dividends and management fees, sell off real estate and other assets, cut wages, pensions, and other operating costs. And then, as an exit strategy, either find a buyer for part or all of the business, or take it into bankruptcy. Though private equity owners are hailed in some quarters as turnaround artists, for the most part the model is inconsistent with reinvesting in the long-term health of the enterprise.

Fortress, for instance, has holdings in a vast array of sectors, ranging from railroads and casinos to nursing homes, fast food, mortgage companies, and media properties. The top managers know little if anything about actually running these businesses—their main concern is the balance sheet—and unlike an earlier wave of conglomerates, there is no supposed “synergy.” This is about extracting wealth, pure and simple.

Private equity exists thanks to three loopholes in the law. Much of New Deal financial regulation was based on public disclosures, which had to be filed with the SEC. But the law granted a small exemption (to the 1940 Investment Company Act) for narrowly held investment companies, many of them built around families. As a result, private equity companies did not have to make the same disclosures to the SEC as other mutual funds or ordinary corporations. But the private investment firms of that era were tiny compared with today's.

Beginning in the 1980s, much-larger firms took advantage of this loophole. Private equity funds began doing large-scale leveraged buyouts and selling shares to “limited partners,” but these were deemed not to be sales to the general public, so no disclosure requirements were triggered and private equity could continue to operate in the dark. This is still the case. Private equity firms are the latest incarnation of what used to be called holding companies. New Deal regulation required far greater transparency of these deliberately opaque pyramid structures—but the private equity loophole allows today's holding companies to operate without financial disclosures. Critics can get a look at the innards of Fortress only because its shares are publicly traded—which suggests the greater accountability that might be possible if the disclosure loophole were repealed.

The second loophole exploited by private equity is the unlimited tax deductibility of borrowed money. That allows private equity managers to borrow massively against the companies that they buy and sell, and use some of the debt to pay themselves. This seems like a conflict of interest, but as owners, the managers are free to do whatever they like. Many critics have argued that unlimited tax deductibility for borrowed money is bad policy—it promotes over-leveraging and hidden liabilities of the sort that crashed the economy in 2008—and the abuse of debt by private equity managers is an extreme case. An aggressive SEC could crack down on these practices, especially when private equity managers prosper at the expense of their own investors or limited partners.

The third loophole is private equity's abuse of the bankruptcy process. Bankruptcy was invented by Queen Anne's ministers in 1706—see Kuttner's book, Debtors' Prison—to give failed merchants a fresh start so that they would not languish in prison indefinitely, unable to ever repay their creditors. The idea was for a magistrate to tally the debtor’s assets and debts, settle debts at so many pence on the pound, and allow the merchant to move on. Debts incurred in bad faith were expressly excluded from this process, and fraudulent debtors were to stay in prison. This was the germ of modern Chapter 11.

The current use of debt to deliberately overburden an operating business, with “prepackaged” bankruptcies as part of an exit plan, is the opposite of what bankruptcy law intended—namely forgiving merchants who got in over their heads because of miscalculations or wider economic circumstances beyond their control. Private equity manipulation of bankruptcy is nothing if not bad faith, and it should be banned and punished accordingly.

THE POST-THANKSGIVING stories on the coming demise of retailing, with icons like Macy’s and Sears near bankruptcy, invariably cited online shopping and the fact that many of the retail chains had taken on too much debt. But hardly any bothered to mention that it was absentee private equity owners who were responsible for the excess debt. It’s bad enough that the private equity industry is accelerating the abuse and collapse of good companies in retail, nursing homes, and airlines. But newspapers are in a special category.

With the exception of a tiny handful of nonprofits, newspapers are commercial enterprises—but they are not only commercial enterprises.

What's being lost in the private equity takeover of community journalism is not just local jobs and local control of an important information source, but something profoundly more important

: an entire profession based on a commitment to fundamental principles of truthfulness, courage, and civic responsibility. In that sense, the gradual destruction of smaller newspapers mirrors the existential crisis faced by all of modern journalism in the era of Trump and “fake news”—yet at the same time may offer a way to counter those troubling trends at the grassroots level.

“People have lost sight of the public-trust aspect of newspapers,” says Jane Seagrave, publisher of the Vineyard Gazette, an enduring Massachusetts weekly in Martha’s Vineyard. “Small newspapers used to be family-owned by local people. That community connection equals accountability, and that does create public trust. The problem with corporate ownership is the loss of context—of deep knowledge of the community. And the loss of local jobs from the outsourcing of management, advertising, and production destroys the fabric of the community.” Ironically, the Gazette, with a full-time staff of 30, remains independent and strong because it was purchased in 2010 by billionaires Nancy and Jerome Kohlberg, longtime Vineyard residents and fans of the local paper. Jerome is none other than one of the original architects of the leveraged buyout, Kohlberg Kravis Roberts & Co. As buyer of the Gazette, he was mercifully in philanthropist mode.

In isolated corners of the United States, community journalists are succeeding at keeping independent papers alive. An informal survey of independent weekly publishers found them reporting profit margins ranging from 2 percent to 15 percent—but all of them were profitable.

After eight years chronicling the decline of newspapers at the Pew Journalism Project, Mark Jurkowitz left in 2014 to buy the weekly Outer Banks Sentinel in Nags Head, North Carolina. “We make money,” he reports, “but it is financially challenging. The headwinds are rough in this industry at whatever level. But weeklies can be successful. They haven’t been devastated the way major dailies have. If you’re doing your job well and you know your mission, you can make a modest success.”

“The most important thing we do is hold local government accountable,” says Cecile Wehrman, publisher of the Journal, which comes out weekly in Crosby, North Dakota. “The Crosby city government has to be one of the most examined city governments in the entire country. I’m sure they don’t always appreciate it. If we weren’t here to report what they’re doing, it would be very easy for it to degenerate into a good old boys’ club.” The people who live in Divide County sure do appreciate it, though. The Journal’s circulation is 2,500, in a county with a total population of 2,400. The paper has existed since 1902, and “it has deep roots—a very strong tradition,” says Wehrman. “Twenty-five or 30 percent of our subscribers don’t even live here anymore. But they keep up their subscriptions to stay in touch with home.”

Her operation is “minimally” profitable, she says, but it's “definitely sustainable. It's done it for 115 years.” She recently had to make some cuts for the first time since she bought the paper in 2012, because the grocery stopped taking a full-page ad every week. “We'll have to figure out how to operate a little leaner,” says Wehrman. “With my background being in journalism, the advertising is a means to an end—how to make enough money to keep doing the news. I'm not going to cut news. That would be cutting off my nose to spite my face. This is the way I plan to spend the rest of my life. And happily so.”

This article has been updated.