Why They Hit the Street   

Newspaper companies that chose to go public are facing the consequences.

BACK IN THE DAYS WHEN I spent a lot of my time trying to persuade Wall Street institutions to invest in newspaper companies, I met an investment analyst who remarked that he liked newspapers because when times got tough they could save money by cutting loose reporters and editors, who, after all, were not "revenue producers."
The comment was staggering in either its ignorance or insensitivity (or probably both), and it helped convince me that Wall Street's values would never be compatible with my convictions about what a newspaper company should be.
These thoughts are occasioned by the current and widespread fear in newsrooms that publicly owned newspaper companies pay too much heed to the demands of Wall Street, and that in a difficult economic year like this one journalistic quality will suffer. Already one major Knight Ridder publisher has resigned, complaining that the cuts demanded by corporate headquarters would damage his paper.
A logical question arises: Why would a newspaper company want to go public in the first place?
The basic answer is no different for newspaper companies than it is for other companies that go public: to raise money. The money can be used to pay down debt, to pay off selling shareholders, to buy new presses or other equipment or to buy more newspapers.
There are, of course, other ways of raising money for these purposes--issuing bonds or other forms of indebtedness and borrowing from banks or other financial institutions. These approaches, too, impose requirements for financial performance, though not so public as those brought to bear by Wall Street.
Issuing stock to the public has other attractions as well. Newspaper companies initially were family businesses (most of them still are, even those under public ownership), and having stock in a company that is publicly traded gives family members a mechanism to "get liquid," in the parlance of Wall Street. In other words, shares in a newspaper company that would be difficult to sell when the company was private become easy to sell when it goes public.
Another attraction of going public is the ability to reward management with options to buy stock at a set price. If the stock rises over time, the options when exercised result in substantial gains. This is the principal way newspaper executives get rich. Having options is a powerful incentive for a newspaper executive to work on increasing profits, which over time makes the stock price rise.
The argument is that options are necessary for a company to attract and keep the best and brightest managers. Of course privately held companies--Hearst Newspapers, Advance Publishing (Newhouse) and Cox Enterprises spring to mind--have had no difficulty attracting talent. These companies may not be able to offer publicly traded stock, but most private companies in my experience have some form of what is known as a unit-appreciation plan that serves the same purpose. Values are determined by independent appraisal.
The description "public ownership" is a bit misleading when applied to most publicly owned newspaper companies. Most have two classes of stock, with the family retaining ownership of the voting shares, which are not traded. Hence these companies are still family controlled, one might even say family owned, because the class of stock available to the public has little or no voting power.
Three companies that do not have two classes of stocks are Gannett, Knight Ridder and Tribune, and it is no accident that these companies are closely attuned to the demands of Wall Street. If these companies fail to perform up to Wall Street's expectations, it is conceivable they could become targets of unfriendly takeovers. This would never happen to a public company with two classes of stock unless the controlling family desires it.
Newspaper companies generally are highly profitable enterprises. The average margin of profit before taxes for public-company newspaper operations last year was more than 22 percent, compared with the typical profit margin for industry at large of 8 to 9 percent. Even in a recession, newspaper companies make a lot of money, just not quite as much as usual.
So why can't the chief executive of a newspaper company say to shareholders, "Look, this is going to be a difficult year. Our profit margins are likely to drop 5 or 6 points, and the only way we can prevent that is to undo some of the investments we've made in editorial quality, which we don't think is smart for the long run."
I suspect that executives at some private companies actually do make such statements. But at publicly owned companies, I don't expect to hear such language.