The "Takeover" Threat
Newspaper executives say that the current wave of cutbacks are needed to keep profits--and stock prices--high. Otherwise,their companies may be swallowed up. Is that a likely scenario?
By Paul Farhi
IT'S THE DARK beast supposedly lurking behind every layoff announcement, every newsroom cutback. Overhead must be reduced, goes the corporate line, to maintain profits. And profits must be maintained to keep the company's stock price from falling. And what if that happens? Knight Ridder CEO P. Anthony Ridder, whose 32 daily newspapers are in the midst of a companywide belt-tightening, once spelled out the potential consequences in a 1996 speech to the American Society of Newspaper Editors:
Senior contributing writer Paul Farhi (email@example.com) is a reporter for the Washington Post.
"Should we fail to generate a fair return, the price of those assets reflected in the price of our stock will fall. Make no mistake. It could fall to the point where someone else might find it an attractive proposition to buy those assets and see what kind of return he or she could get from them. And that person, a takeover shark perhaps, would not necessarily have quality journalism uppermost in mind."
Journalists have been hearing similar rhetoric for months. A few have written it into their stories chronicling the industry's sagging fortunes ("With the mergers of big players like AOL and Time Warner...no chain of press properties can be ruled out as a potential takeover target," columnist Ernest Holsendolph of the Atlanta Journal-Constitution offered in March). In fact, an advertising downturn, coupled with a 15 percent rise in newsprint prices, has triggered the biggest wave of cost-cutting since the last newsprint price spike in 1995. Almost all of the industry's big names--Knight Ridder, Dow Jones, the New York Times Co. among them--have signaled that they will slim down over the next few months.
In theory at least, the notion of a raider menacing a media company is entirely plausible. A company's stock price reflects investors' collective judgment about the company's recent performance and its foreseeable prospects. A company with valuable properties but high costs, whose stock has steadily declined or consistently sells below its competitors', invites takeover speculation, especially in a growth industry. This scenario fueled the takeover and leveraged-buyout boom of the 1980s, as companies in the oil, supermarket, packaged-goods, airline, banking and insurance industries, among others, became the target of takeovers.
But newspapers probably aren't the first businesses a contemporary corporate raider would think of. Newspaper companies display almost none of the characteristics that propelled the takeovers of yore: bloated staffs, underperforming assets, cheap stock prices, huge growth potential. By almost any measure of financial performance, newspapers have been on a long winning streak--not much of a surprise, considering the strong economy (until recently) and the monopoly status of most dailies.
According to Fortune magazine, the publishing and printing industry, which includes newspapers, ranked 11th out of 48 industries last year in profits as a percentage of revenue; the industry churned out profits at twice the rate of casinos and hotels, and three times the rate of airlines. Over the period between 1995 and 2000, the industry ranked 10th among 48 industries in its total return to shareholders.
Even in a downturn, most analysts believe newspapers will continue to produce above-average returns compared with other industries. Which raises the question: What, to use Ridder's phrase, is a "fair return"? Further, why can't publishers gut out the slowdown, satisfied with healthy (if not gaudy) profits, and avoid the pain of layoffs? Mainly because newspaper profits, no matter how large, are all relative, says Robert Dunlap, who follows the newspaper business for Brown Bros., Harriman & Co. in New York. One year of massive returns whets Wall Street's appetite for similar or larger profits the next. "Capital flows toward companies that are improving their profitability," says Dunlap.
With so little direct competition among papers, stock analysts grade the attractiveness of one newspaper company relative to the performance of other large chains across the country, meaning the most profitable operators, such as Gannett, set the standard for everyone else. Executive bonuses and compensation are often tied to meeting or exceeding last year's profits, and sometimes the profit benchmarks reached by industry rivals. Given the boom of the past five years, a year of merely "good" returns might be considered a lousy performance.
But does a company with declining profits leave itself vulnerable to a takeover? Not necessarily, and clearly not historically. Says Dunlap, "I don't recall many hostile takeovers in the newspaper industry."
In fact, contrary to Ridder's suggestion, there hasn't been a successful hostile takeover of a newspaper company in a generation, a period in which industry profits were subject to wide fluctuations. The last time a takeover succeeded was in 1976, when the Newhouse family's Advance Publications went after Booth Newspapers, owner of the Flint Journal and other dailies in Michigan. Booth initially resisted Advance's advances but eventually sold for $300 million.
A similar situation is all but impossible now for most of the newspaper industry's giants. Some--Cox, Hearst and Newhouse--are privately held and tightly controlled by heirs of their founders, along with favored insiders. As such, there's no public market in which to buy shares, which means that no change of ownership could occur without the blessing of a relatively small group of controlling shareholders.
That's not to say these companies are takeover-proof. It's just that no outsider could do so. But internal pressures are often just as dangerous. Disputes among insider shareholders over the direction and management of newspapers have led to many sales over the past 20 years. The St. Petersburg Times was among the most closely held of all American newspapers when it faced a takeover from within in 1990. Texas investor Robert Bass had acquired 200 of the paper's 500 voting shares from Mary Alice Jamison Griffin and Anne Poynter Jamison Parker, sisters in the Times' founding family. Bass then offered $270 million for the rest of the stock, an offer rejected by Times Publishing Co. Bass eventually dropped his offer, but not before the company used up its cash reserves and borrowed heavily to raise the $70 million that persuaded Bass to sell back his shares and go away.
Other companies--the New York Times Co., the Washington Post Co., McClatchy, Media General, Dow Jones among them--have it both ways. They enjoy the benefits of public ownership and the relative protection of private control, thanks to their two-tier stock structures. Typically, one set of shares trades on the public market, providing the companies with a ready currency for acquisitions and an inexpensive source of capital. A second set of shares is closely held by the founding families. Although these shares don't trade, they hold special voting rights that give insiders control over every important corporate decision.
This structure provides a fortress-like defense against an unwanted suitor. In 1988, during a quixotic attempt to take over Media General (parent of the Richmond Times-Dispatch), media mogul Burt Sugarman went to court to overturn the Bryan family's control of the company's voting stock. Sugarman lost, and no one has attempted a similar maneuver since.
Instead, all of the major newspaper sales of the past decade have been friendly deals orchestrated by the sellers--not out of financial desperation but to take advantage of rapidly escalating valuations for newspaper assets or to settle intra-family business disputes. The New York Times Co. acquired the Boston Globe for $1 billion in 1993 after the family controlling the Globe voted to cash out. In 1995, Gannett paid $2.3 billion for Multimedia Inc., which owned 11 daily papers and 49 nondailies, after a five-month auction. Tribune Co. paid $8 billion last year to acquire Times Mirror, publisher of the Los Angeles Times and Baltimore Sun, among others, in a deal that had the assent of members of Times Mirror's founding family, the Chandlers. Thomson Corp. sold almost all of its newspaper holdings last year as part of a strategic shift to electronic businesses.
Knight Ridder, like Gannett and Tribune, is among the handful of major newspaper companies that don't have the protection of significant family ownership or two tiers of stock.
But Knight Ridder's independence isn't really an issue these days. In May, the company's stock was selling in the middle of its
52-week range, and shareholders don't seem particularly unhappy with the company's performance. "We're not sitting around waiting to be taken over," says Lee Ann Schlatter, Knight Ridder's director of corporate communications. "There's not any imminent threat that I'm aware of."
Merrill Lynch analyst Lauren Rich Fine says that Knight Ridder has never had a discussion with the firm about the threat of a takeover. She says the company might be more concerned about internal pressure from shareholders who think the stock should be performing better.
"I think what Tony's telling you is that if he doesn't keep the fundamentals where they should be, shareholders will demand that he sell the company," says Fine.
Ridder, who declined to be interviewed for this article, knows how difficult it can be to buy a newspaper from an unwilling party. At the same time in April that Knight Ridder was marking some of its 22,000 workers for pink slips, Ridder was being rebuffed in his effort to buy the 51 percent of the Seattle Times that his company doesn't already own. The Blethen family, which has owned a majority of the paper for the past four generations, spurned a $750 million offer from Knight Ridder last year, Publisher Frank Blethen told the Seattle Post-Intelligencer recently. Informed that Ridder was still optimistic about buying the paper, Blethen replied, "They must smoke some real interesting stuff in [Knight Ridder's] corporate offices in San Jose. We have no interest at $750 [million] or any other number, but I'd be interested to see how high they're willing to go."
From the newsroom's perspective, a new owner doesn't automatically bring cuts and layoffs. In fact, layoffs appear to be a permanent feature of the business, no matter, with a few exceptions, who owns the paper--and no matter the business climate. Unlike a factory that hires workers back when demand picks up, newspapers don't appear to staff back up in good times, government figures indicate. For example, in January 1991, the peak of the last major recession, total newspaper employment averaged nearly 468,000 workers, according to the Bureau of Labor Statistics. Two years later, with the economy recovering, newspaper employment hadn't; by then, the newspaper workforce had dropped to 449,200. By the beginning of 1999, after nearly a decade-long boom in the industry, the figure was still lower, 440,400.
The BLS predicts that the downward trend will continue into the current decade, with industrywide employment falling to 396,000 by 2006.
Some of the industry's disappearing jobs are a result of the failure or merger of daily papers (the total number of daily and Sunday papers declined by 3.4 percent between 1990 and 1999, according to the Newspaper Association of America). Some of it might even be attributable to new technologies, such as better presses, that require less manpower.
But the falling investment in people overall is ominous to observers such as Stephen Lacy, a journalism professor at Michigan State University. Lacy studied the decline of the Thomson newspaper chain during the 1980s and was able to draw a statistical relationship among newsroom budgets, profit margins and circulation. His conclusion may confirm what every journalist believes: Quality not only costs, but it sells, too. Thomson's papers had admirably high profits during this period, Lacy found, but readers gradually began to desert the papers due to their low quality, as measured by the investment in newsroom resources.
"Quality is a function of those resources," says Lacy. "Resources mean journalists. More is not always better; five of the right journalists might be better than 10 bad ones. But overall, adding to the newsroom budget adds to the overall quality of the newsroom" and keeps readers reading.
Lacy says newspaper readers are a less homogenous group than ever before, and reaching them with news of interest costs more. He looks on the industry's current round of cost cutting as tantamount to slow-motion suicide. "The problem may be that increasingly during these down cycles, when the newsroom gets hit, the readers you lose won't come back during the next 'up' cycle," he says. "The question is, are newspapers meeting their short-term [profit] goals by sacrificing their long-term futures?"
A takeover shark, as Tony Ridder once said, might not have quality journalism uppermost in mind. But in the newspaper business these days, the sharks may be the least of the problem. ###