Knight Ridder, the nation's second-biggest newspaper company, today said it would seek "a possible sale of the company." In doing so, Knight Ridder was responding to pressure from Private Capital Management, the company's largest shareholder, which sees an auction or sale as a way to perk up Knight Ridder's chronically underperforming shares. (Here's a five-year chart.)
Usually shareholders agitate for a sale because they believe selfish or incompetent managers have been blocking one. But this may be one case in which a shareholder activist seeking to take on entrenched management is making a mistake. After all, who on earth would want to buy a big newspaper company?
A strategic buyer—one of the other more or less pure-play newspaper companies such as New York Times Co., Gannett, which gets about 85 percent of its revenues from newspapers, and Tribune—might be interested in Knight Ridder, a profitable company whose properties include the Philadelphia Inquirer and the San Jose Mercury News. But there are no obvious gains for a strategic buyer. When you purchase a newspaper in a different part of the country, few synergies are readily apparent—you can't simply shut down the San Jose operation and run it from Chicago. The last blockbuster newspaper merger, the acquisition of Times-Mirror by Tribune, hasn't panned out well, either for shareholders or for journalists, as Ken Auletta wrote in TheNew Yorker earlier this fall. (Auletta's piece isn't available online, so here's a link to a story discussing it.)
Besides, the potential strategic buyers are themselves under enormous pressure. Companies like Knight Ridder, the Times, and Gannett are consistently profitable and pay small dividends. But forward-looking investors aren't particularly interested in their stocks because they fear the future will bring slow and steady—if profitable—erosion. Newspapers make decent money today. But they might not tomorrow as audiences decline and advertising shifts elsewhere. And as a result, newspaper stocks are weak—here's a chart showing the performance of the Times, Gannett, Tribune, and Knight Ridder against the S&P 500 over the past three years. No industry player has a strong stock to use as a currency. And in any case, the recent trend is for companies with large newspaper holdings to diversify away from newsprint, with the New York Times Co.'s acquisition of About.com and Dow Jones' purchase of Marketwatch. The Washington Post Co., which bought Slateearlier this year, is already well-diversified, especially with its rapidly growing Kaplan education division. In the most recent quarter, newspapers accounted for only 27 percent of the Post Co.'s overall revenues.
Another class of potential buyers is missing from the field, too: media conglomerates. In the past, the empire-builders at Time Warner, Viacom, and News Corp. could be relied upon to put in bids for media businesses with putatively synergistic properties. No longer. Viacom and Time Warner are looking to downsize, not bulk up. And Rupert Murdoch, though he still loves his legacy newspapers, has his wizened eyes firmly focused on the Internet.
How about new media companies with soaring stocks that might like to be bigger players in the content industry? Yahoo! and Google could easily digest a comparative minnow like Knight Ridder. At $4.25 billion, Knight Ridder's present market value represents less than 8 percent of Yahoo!'s and less than 4 percent of Google's. But, again, what would be the point? Companies with explosive growth and massive margins would simply be wasting cash to buy into slower-growth, lower-margin businesses.
Financial buyers—leveraged buyout and private equity firms that are less concerned with synergies and more concerned with balance sheets—likewise wouldn't seem to have much interest in Knight Ridder. The notion behind an LBO is that you take on lots of debt, buy a company that has reliable cash flow at an attractive valuation, use cash flow to pay off debt, and then sell it several years later. And here, newspaper companies present two problems. The cash flow of newspapers is not reliable and may decline over time. Second, in order for the original investors to cash out, financial buyers have to sell the company to someone else down the road. Assuming trends continue, who would want to pay a premium for a bunch of newspapers in five years' time?
It's sad to say, because I derive a chunk of my livelihood writing for newspapers and because my day would be incomplete without the three dailies that arrive on my lawn each morning, but newspapers are just not a very good business. The '90s-era warnings that newspapers were dead were premature. But having peaked in 1984, daily newspaper circulation in the United States is slowly falling. As the New York Times reported last week, the Audit Bureau of Circulation found that "newspaper circulation fell 2.6 percent in the six-month period that ended in September, more than in any comparable six-month period since 1991." The circulation of Sunday papers fell 3.1 percent.
Meanwhile, advertisers continue to shift dollars to television and new media. As a result, even the newspapers with the best reputations and the richest readers can lose money. Dow Jones' print operations, mostly the Wall Street Journal, lost money in the third quarter. The Financial Times is hoping to break even. And of course there have been self-inflicted wounds, such as the revelations that the Chicago Sun-Times and Newsday were inflating their circulation numbers.
So, why is Private Capital Management putting so much pressure on Knight Ridder? Perhaps it has something to do with the pocketbook of Bruce Sherman, Private Capital's CEO. Seth Sutel of the Associated Press reported earlier this month that in addition to owning nearly 20 percent of Knight Ridder, PCM owns "an average position of nearly 10 percent in nine leading newspaper companies, according to a recent research report by Morgan Stanley analyst Doug Arthur." Yikes! By pressing for a sale of Knight Ridder, Sherman is seeking an exit strategy for one big holding—and perhaps trying to light a fire under a sector in which he seems to be stuck.