Why Murdoch May Have to Leave News Corp to Save It

Last Updated Jul 18, 2011 9:39 AM EDT

Even last week, News Corp (NWS) CEO Rupert Murdoch looked unassailable in the phone and bribery scandals that have ensnared so many current and former company executives. But reality is running far ahead of theory, and that is no longer true.

Over the weekend, the former head of News Corp's British newspaper division, Rebekah Brooks, was arrested and held for 12 hours by police. The head of Scotland Yard resigned because of his perceived potential ties to the growing mess. The company's stock is plummeting and independent directors on his own board are questioning whether it's time for a change in management, according to Bloomberg. The twin pressures of commerce and personal danger may do something that nothing else might have the power to do: convince Murdoch to step down.

Danger from friends
The problem facing Murdoch from friends is that as they become increasingly endangered from authorities, some are likely to do what comes naturally in such cases: flip on those higher up in return for immunity or at least lightened sentences. Here are some of the people in trouble:

  • Brooks was arrested and grilled, and, no doubt, whatever she said can be used against her and her former mentor, the elder Murdoch.
  • Metropolitan Police (formal name for Scotland Yard) Commissioner Paul Stephenson had to step down, and you can bet that he will continue to come under scrutiny.
  • As my BNET colleague Jim Edwards pointed out, CNN host Piers Morgan, a former News of the World editor has many connections to the scandal and could easily get dragged in further.
  • Nine other people have been arrested as part of the revelations so far. They include Andy Coulson, who used to work for current U.K. Prime Minister David Cameron.
The more trouble people are in, the more leverage prosecutors have to twist arms and get them to talk about the involvement of those higher up. In some cases, the people had direct connections to Murdoch and might well be able to tie him directly into knowledge of illegal activity. And authorities now have their choice of people who might crack.

Pressure to prosecute won't abate in the near future. Cameron and other conservatives can't afford to look as though they're taking it easy on Murdoch's cronies for fear of looking as though they, too, belong to that group.

It's the money, honey
News Corp's stock is plummeting because of the so-called Murdoch discount. He's always had a penchant for decisions that benefit him, his family, and his friends, but not other shareholders. But the discount is rapidly becoming a fire sale as allegations mount.

Although Murdoch still has absolute control over any stockholder votes and a lot of sway with his hand-picked board, he can't just ignore the stock price. The company has $15.5 billion in long-term debt. You can bet that most of it involves financial covenants on the paperwork that say the stock price must remain above a certain level, or else penalties and possible complete recall of loans would come into play. News Corp may have something like $11 billion in the bank, it doesn't have enough to cover all the debts, should they suddenly come due.

Furthermore, even though News Corp's board has long been stacked in Murdoch's favor, at a certain level in society and business, there is no such thing as a best friend. These people will not ultimately be willing to sacrifice their own reputations to protect him and his interests, which could mean that either his son James is kicked out as chief executive or -- the greater danger -- they remove Murdoch as chairman and install a true outsider.

Problems also continue to mount in the U.S., with further allegations of illegal dirty tricks used to gain advantage over competitors in various forms of media here. News Corp has bought its way out of trouble before, but how many times can it do that and still have enough cash left to remain viable, especially as the stock price drops and a key way to raise capital becomes ineffective? And when each new facet adds more pressure for a prosecutor somewhere or other?

Murdoch may be scrappy and self-indulgent, but he's also far from stupid. It may be that, by technically leaving the board and letting others run the company, he can maintain his hold -- or try to -- behind the scenes. Which would be a better bet than trying to control the company from behind bars.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.