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From AJR,   March 2002  issue

Profit Fever Revisited   

An analysis of the stockholders of publicly owned papers shows that Wall Streetís role in shaping the news business is considerably more nuanced than is often acknowledged.

Related reading:   Cashing In

By Miles Maguire
Miles Maguire is an assistant professor of journalism at the University of Wisconsin Oshkosh.     

As far as some journalists and media critics are concerned, it's people like Mario J. Gabelli who are calling all the shots these days.

Gabelli is the tough-talking, up-from-the-Bronx Wall Street money manager whose stock-picking skill made him a legend in investment circles and earned him close to $45 million in 2000 alone.

As of September 30, his holdings of newspaper stocks were worth $907.1 million.

Gabelli's wit and quotability have made him a regular on PBS' "Wall $treet Week With Louis Rukeyser" and CNBC's "Squawk Box." In the financial press he's been described as demanding and short-tempered. And he isn't shy about taking action to protect his investments. In 1999 he trained his sights on Media General, owner of the Tampa Tribune and other properties, and made a move to grab two seats on the board of directors of the Virginia-based company.

From this brief description, it wouldn't be hard to conclude that Gabelli is the embodiment of all the financial pressures that have been building up on newspaper executives, forcing them to make painful cuts to meet the short-term demands of the markets.

There are, however, a few nonconforming facts that get in the way of such a simplistic conclusion. In Gabelli's case, these include the way that Media General's management gave him the brush-off, his track record of buying shares of newspaper companies when others were bailing out and his insistence that the best way to make money in stocks is by getting in for the long haul.

Gabelli is hardly atypical among newspaper investors, a fact that emerges from an analysis of the shareholder base of publicly owned papers. Such a review reveals a picture far removed from the oft-painted portrait of shareholders crying for quick results and quarter-to-quarter gains in profits. Some of the largest institutional investors in the news business are notoriously passive. Others pride themselves on their patience. This is not to say that newspaper companies are immune to anxious shareholders or that stockholder demands won't clash with traditional journalistic values in a battle over the future of the industry. But the role of the capital markets in shaping the news business is considerably more nuanced than is often acknowledged.

Consider, for example, Knight Ridder, which has taken the most criticism and made the most direct case for being attuned to shareholder demands. Its three largest shareholders as of September 30, Southeastern Asset Management Inc., Harris Associates L.P. and Capital Research & Management Co., are money managers that describe themselves as long-term, value investors. The three of them controlled nearly 24 percent of Knight Ridder's stock at the end of last year's third quarter.

"There is a kind of mythology about the short-term pressure that is not borne out by the facts and patterns of many institutional investors," says Polk Laffoon, Knight Ridder's vice president/corporate relations. "There are some short-term investors. But there are many, many long-term investors. When people talk about the stock market and the short-term pressure, it is overblown."

In addition, many Wall Street money managers have far more sophisticated agendas than merely improving near-term profits. In fact, journalists may have more to worry about from investors who take the long-term "value" approach to stocks. Those investors are placing bets that a new wave of consolidation is about to hit the media business, upping share prices as more news outlets move into the hands of fewer companies.

Many newspaper shareholders, however, don't look at either short- or long-term considerations when buying stock. "A lot of the biggest holders [of newspaper stocks] tend to be index funds, and they tend to be quite passive. They're not going to assert a lot of pressure," says George Nichols, a stock analyst specializing in media companies at Morningstar Inc., a Chicago-based firm that's best known for tracking the mutual-funds industry.

The company with the largest and broadest portfolio of newspaper stocks is Barclays Bank PLC, a 300-year-old London-based firm that boasts of pioneering the concept of index investing. This strategy is designed to boost returns for investors by minimizing tax, transaction and advisory expenses. Instead of relying on highly compensated asset managers who look to individual stocks to deliver superior returns, indexing is intended to mirror the returns of the entire market or a particular sector.

To do this, an index manager "buys the market," owning stock in, for example, all of the companies that make up the Standard & Poor's 500 or all of the companies in a particular industry. This is precisely what Barclays has done in the news business, holding stakes in all 13 of the publicly traded U.S. newspaper companies. As of September 30, its holdings ranged from $6.4 million in the Journal Register Co. to $554.4 million in Gannett, according to securities filings analyzed by Vickers Stock Research Corp. for AJR to identify the 25 largest investors in each company. Its total newspaper investment was nearly $1.5 billion at the end of the third quarter.

Another major investor in the newspaper industry is the Vanguard Group Inc., which also owns stock in all of the public newspaper companies. As of September 30, these investments were valued at $717.6 million and included $236.1 million in Gannett, $139.1 million in Tribune Co. and $100.6 million in the New York Times Co., according to Vickers' data.

Investments the size of Vanguard's and Barclays' would generally come to no more than 3 or 4 percent of the total stock outstanding in a company, but that amount would be enough for any investor to get the ear of management if it so desired.

Index investors may provide a buffer from the whims of Wall Street, but they are not the only newspaper shareholders. Activist shareholders with both short- and long-term investment outlooks exert influence, some of it the profit pressure journalists have heard so much about.

FMR Corp., the parent company of the Fidelity family of mutual funds, had $1.7 billion invested in eight newspaper companies as of September 30. Fidelity has built its reputation on the ability of some of its fund managers to beat the market by significant margins. At the end of the third quarter its investments included $53.9 million in Knight Ridder, $37.2 million in Dow Jones, $275.6 million in the New York Times Co. and $701.5 million in Gannett.

Money managers like Fidelity are under pressure to provide outsized returns to their investors, and they have significant clout with the companies in which they hold major positions. "A lot of institutional managers have very good access to senior managers" at publicly held companies, including those that own newspapers, says Scott Cooley, a senior analyst at Morningstar. "And they are pretty forthright about telling company management when they think there is a problem."

In turn, senior executives at public companies have personal reasons for paying close attention to what is being said on Wall Street. A large amount of CEOs' personal wealth is tied up in company stock (see "Moguls' Millions," July/August). "A lot of senior managers have a lot of stock options and actual shares, and they know if they displease analysts in a way that may hurt the company share price, it directly hurts their pocketbooks as well," Cooley says.

But Cooley argues that there is a "clash of legitimate interests" in the way investors, money managers, the stock market and executives interact. "It isn't fair to cast one side as good and one side as evil." He argues that the pressure for strong financial performance comes ultimately from individual investors who are looking for the best return on their pension plans or other financial holdings.

But not all individuals pursue the same strategy, and on average they are far more patient than professional money managers. While the average mutual-fund investor has a holding period of three years, the average U.S. stock mutual fund holds its stocks for less than a year, according to Morningstar research.

If many institutional investors take the long view, why do so many journalists feel that the stock market has forced their companies to fixate on short-term performance? There is no clear-cut answer. Profit pressures, after all, are not confined to publicly traded companies, and even employee-owned dailies in Milwaukee and Omaha have moved to cut staff in the last year.

Perhaps part of the explanation is Wall Street's transactional culture, which rewards those who can drum up sales commissions by emphasizing fluctuations in the market. But another factor may be that many journalists have minimal training or interest in finance and so are limited in their understanding of market dynamics.

"A big part of it is self-selection. People who go into journalism have interests other than financial rewards," says Benjamin M. Compaine, a researcher at MIT who published one of the earliest studies of media ownership in 1979. "Journalism has always seemed to be some kind of noble profession, and there's something about tainting it with money." When he began his research looking into the economics of the industry, "there were people who thought I was dirty."

Newspaper companies say that they have an obligation to pay attention to their shareholders, but they dispute the notion that large institutional investors have an improper influence over operational decisions.

Investors "have to rely on us to manage the company," says Tara Connell, Gannett's director of public affairs. While Gannett takes seriously the concerns and opinions of investors, "they are very far removed from the operations of the papers."

"If somebody owns a substantial portion of your stock and calls you up, you're going to take the call and hear what the person says, and you're going to be polite and to the extent of the law probably respond or answer the question," says Knight Ridder's Laffoon. "But I've never seen anything done here because any shareholder registered a concern one way or another about a pending decision."

Tim Stautberg, vice president for communications and investor relations at E.W. Scripps Co., points out that "institutional investors are, in effect, handing us their wallets and trusting us that over time we will return it to them with more money in it." He says that the relationship between investors and executives has to be one "of mutual trust," with operational decisions left to management. "Scripps investors, for the most part, have been partners with the company for many years and understand that the long-term value creation is derived from the editorial content that we create and prioritize and package and deliver."

Warren Buffett, the widely renowned chairman of Berkshire Hathaway Inc. and one of the world's richest men, is perhaps the best known long-term newspaper investor. He holds 1.7 million shares in the Washington Post Co. and is a member of its board of directors, and he owns the Buffalo News.

Mario Gabelli, chairman and chief executive of Gabelli Asset Management Inc., may not enjoy Buffett's name recognition, but they have some things in common. Both describe themselves as disciples of Benjamin Graham, the father of value investing, and both emphasize the importance of investing in companies, their physical assets and human resources, rather than in paper stock certificates. Gabelli described his approach in July during an appearance on CNBC: "[W]e're very patient, long-term investors.... We're not worried about the next 12 months, 12 days and/or 12 hours."

Gabelli's company manages a family of mutual funds and other investment vehicles that own major positions in 10 newspaper companies, according to data gleaned from securities filings by Vickers. At the end of September, these holdings included $323.4 million in Media General, $117.8 million in Pulitzer, $108.4 million in Scripps and $82.7 million in the Tribune Co.

In taking the long view, Gabelli looks past the immediate problems that companies face. He believes that the economy will recover this year from the business downturn that had already started before the terrorist attacks of September 11. Those attacks drove newspaper shares down about 10 percent in the first week after the stock market reopened, although the prices later stabilized.

When Gabelli picks stocks, he says his strategy is to look for a "catalyst"--some factor that will lead to a big change in the stock value of a company. The major catalyst he expects to affect newspaper companies is a recent move by the Federal Communications Commission to overhaul longstanding rules on media ownership. Investors like Gabelli are betting that new rules will set off a frenzy of mergers and acquisitions. When the dust settles, more companies will likely be allowed to own both newspapers and broadcast stations in the same market (some of this occurs now and was part of the motivation for the Tribune Co. to buy Times Mirror)--see Top of the Review, page 4. And owners of cable and broadcast properties will be allowed to greatly expand their holdings.

As a result of consolidation, Gabelli says, "there's a lot of opportunity to make terrific profits in a flat market." According to his analysis, companies, like Tribune, that can combine print, television and Internet outlets in the same market will outperform their competitors, although others in the media--notably Knight Ridder--disagree.

Knight Ridder was one of the newspaper companies that Gabelli did not report a major stake in as of September 30. It describes itself as a "pure play" in the newspaper industry because it does not own cable and broadcast properties. Knight Ridder's strategy sets it apart from other large publicly owned newspaper companies, but it has still attracted long-term investors.

Southeastern Asset Management, a Memphis-based money manager, started acquiring a position in Knight Ridder more than a decade ago, says Laffoon. In February 1995, it filed a statement with the Securities and Exchange Commission indicating that it had taken a 6.7 percent stake in the company. By then Southeastern already had a track record in the newspaper industry, as it was a very large investor in Affiliated Publications Inc. in the years before the New York Times Co. acquired it and its flagship Boston Globe.

Southeastern uses a classic value investing approach, seeking out companies that it views as well managed but trading on the stock market far below their "intrinsic value." It also says it looks for "shareholder-friendly" management.

When Southeastern started buying Knight Ridder stock, it was trading at the equivalent of $25 a share, taking into account a later stock split. Southeastern's chairman and CEO, O. Mason Hawkins, was quoted as saying that the shares would double in value. But he was wrong--over the last seven years, the company's stock has risen another 50 percent beyond his estimate.

The dramatic increase is good news for Southeastern, but it also means it might sell its shares, as they have surpassed the target prices. In fact, Southeastern, which according to a Knight Ridder filing with the Securities and Exchange Commission once owned 17.4 percent of the newspaper company, has been reducing its investment since 1997.

Moreover, Southeastern was not the only one of Knight Ridder's large institutional investors that shed stock last year, a fact that may help explain the company's outspoken sensitivity to shareholder sentiments.

For working journalists, the conflict between shareholder values and journalistic values can be particularly acute--and personal. The money that they are investing for their retirement could well be placed with a money manager that is pushing for better financial performance from their own newspaper.

"If you invest in a 401(k) plan without paying that much attention, it may be that plan is a major investor in your own media company," warns James M. Naughton, president of the Poynter Institute and a former executive editor at the Philadelphia Inquirer. "That plan could be putting on pressure to drive you out of work, and you are effectively taking part in that. We have become much more focused on bottom-line performance, bull markets and getting rich, and sometimes we don't even recognize what we are doing to ourselves in the course of it."

Robert H. Giles, the former Gannett executive who is now curator of the Nieman Foundation, agrees that Wall Street's values have taken too great a hold on America's newspapers. "My argument with newspapers in terms of the way that they relate to Wall Street is that they present themselves as not different from other companies," he says. "They talk very little about the quality of the news, and the emphasis is far too much on profits." The result is an "underrating of the value of the standards of journalism."

Despite all the talk of "Wall Street Journalism," MIT's Compaine believes that journalists are overly concerned about the effect of public ownership on newspapers. "There's nothing inherent in corporate, public ownership that makes newspapers better or worse," says Compaine, who issued an updated 2000 edition of "Who Owns the Media?" an analysis of ownership trends in the communications industry. "If anything, the research suggests that publicly owned companies tend to be on the side of being a little better," he adds, citing examples such as the New York Times and the Wall Street Journal.

Still, he warns that the industry has changed in fundamental ways that may not be fully recognized by investors or journalists. Southeastern's Hawkins once was quoted as saying that newspapers had an "unbelievable" power to raise prices on advertising. That may have been true in the mid-1990s, but Compaine doubts that newspaper companies are in a position today to record rapid gains in revenues or share prices except through mergers and acquisitions. "This is a mature industry, not a growth industry," he says. "This is a mature industry, and one that is consolidating."

Gabelli says he doesn't know if consolidation is good or bad for journalism, but it does have major implications for investors. He cites the case of Tribune's acquisition of Times Mirror in 2000. Many shareholders reacted negatively when that deal was announced, and Tribune lost 17 percent of its market value, about $1.5 billion, in a single day.

Gabelli saw the sell-off as a buying opportunity. "We purchased Tribune Co. when they purchased Times Mirror." The stock's price rebounded within the week.

Like Compaine, Gabelli says it's hard to determine whether public ownership affects the quality of newspapers. He stresses the importance of good relations between a company's management and its owners, including large shareholders. But he doubts that newspaper firms can afford to manage strictly for the bottom line. "Companies that have lots of money have to protect the value of their franchise, and they have to understand the importance of quality of content," Gabelli says. "It's hard to see how you can have great economics and poor journalism over a long period of time."