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The Comeback That Wasn’t

Stewart, with then-CEO Susan Lyne, addressing the company upon her return from prison in 2005.  

MSLO recently announced that it had retained the Blackstone Group to “explore strategic partnerships.” Many analysts interpreted the move as the first step toward a possible sale. This past Friday, Stewart’s top executive announced he would step down a year ahead of schedule. The idea of ­Stewart selling the company that embodies her life’s work seems almost unfathomable. In fact, it’s difficult to say which would be more unlikely: Stewart relinquishing her company completely, or Stewart reporting to other owners. But she may have a powerful incentive to sell. Her wealth is overwhelmingly tied up in her stock, which is both depressed and illiquid; an acquisition could provide a cash windfall. She also may have little choice. Given the straits in which the company finds itself, her board may see no alternative.

Though people close to the company were reluctant to speak on the record, they tell a remarkably similar story of how things reached this point. Following her June 2003 indictment for charges surrounding her suspect trade of the biotech stock ImClone Systems, Stewart had watched her control over her company disintegrate. The board of directors, which she had kept out of the loop about the SEC’s interest in her stock trade until after it had become a full-fledged problem, had cautioned her about the risk of denying everything. If she disgorged her profits, admitted to a faulty memory, and showed some humility, she would likely get off with a slap on the wrist. But Stewart, who declined to be interviewed for this article, had been determined to maintain her innocence. “No amount of advice could dissuade her,” recalls someone knowledgeable about Stewart’s conversations with the board.

Upon being indicted, Stewart had stepped down as chairman and CEO, and with the company losing advertisers and business partners en masse (Safeway pulled out of a significant planned licensing deal), the board had quickly embarked on a de-Martha-ing strategy: shrinking her name on the cover of the magazine, and removing it altogether from ­Everyday Food (an unfussy magazine the company had launched to hold the line against Real Simple). The company’s attempts at ­diversifying included acquiring the newsletter of ­alternative-health guru Andrew Weil and the magazine Body & Soul. It also began to develop new personalities from within, including Marc ­Morrone on pets and ­Lucinda Scala Quinn as a more approachable food brand.

De-Martha-ing, not surprisingly, did not sit well with Martha. But by this point, her influence over the board was minuscule, and a number of directors who had joined what they thought would be a board “about fun and eating cookies,” as a colleague recalls, were replaced. On the advice of counsel, the board largely ceased communicating with Stewart. When she asked that the company pay all her legal expenses, on the grounds that what was good for her was good for the business, the board refused. “She said, ‘I am the company. Without me, the company’s nothing,’ ” says someone familiar with the matter. “It was a very emotional conversation.”

Jeffrey Ubben, the then-chairman of her board whose investment fund had taken a 20 percent stake in the company, had believed that she was being scapegoated. Still, he also felt a fiduciary duty to his investors. “I spent a lot of time personally trying to get her to put it behind her,” Ubben says. “As awful and unfair as it was, if she went to jail and paid penance and came back strong, that was the way to get through it. That was a terrible conversation.”

It had been perhaps the most destabilizing episode in Stewart’s life—the moment when she felt least in control of Martha Stewart Living Omnimedia. But it also marked the beginning of her attempts to take it back. Because when Stewart finally agreed to begin her sentence, she had asked for something in return.

In March of 2004, a week after her conviction, Stewart joined her friend and personal banker Jane Heller, of Bank of America, for lunch at the Long Island home of Charles Koppelman, former CEO of EMI Music. In recent years, ­Koppelman had developed a specialty advising celebrities in trouble. When designer Steve Madden went to prison for securities fraud, Koppelman took over the company in his absence, and Heller, who was both Koppelman’s and Michael Jackson’s banker, had ­insisted that Jackson hire Koppelman as an adviser. At a moment when Stewart had been frozen out by her board, a former director says, “he told her, ‘I’ll help you get the company back.’ ” Koppelman would later tell Fortune that he had told Stewart “there would be circumstances where what’s good for Martha Stewart isn’t good for the company. But what’s good for her company is 100 percent certainly good for Martha Stewart.”