A Way Out? By Douglas McCollam

In the spring of 1971 Fritz Beebe, a former partner in the New York law firm of Cravath, Swaine & Moore, and chairman of The Washington Post Company, approached the owner, Katharine Graham, with a dilemma. The company, Beebe said, was running out of money. Over the years the Post had been fairly generous in granting stock options to favored employees, and the cost of buying out those options had put the company in a bind.
But Beebe had a solution. Following the lead of bigger rivals, such as Knight Ridder and Times Mirror, he advised that the company go public. Selling stock in the Post would ease the company’s cash crunch, Beebe explained, and otherwise, the Post would have to sell one of its television stations. Graham hesitated. “I wish I had understood the whole thing better than I did,” she wrote in her 1997 autobiography of the decision to go public. “I . . . simply took Fritz’s word for the problem and assumed we only had two choices: either go public or sell WJXT.” The company went public, making its initial offering on June 15, 1971, the same week the Pentagon Papers controversy erupted. “I wasn’t sure what being a public company entailed,” Graham wrote in her autobiography, “but I knew there would be obligations and disciplines that were not imposed on private companies.”
In the past year, many newspaper companies, including the Post, have been getting a refresher on just how onerous the “obligations and disciplines” of being publicly owned can be. Despite profit margins that generally hover around 20 percent — extraordinary when compared to almost any other business sector — newspaper stocks are getting pummeled. As of early December, the stock of Gannett, the country’s largest newspaper publisher, was down 28 percent for the year. Tribune Company was down 29 percent. The New York Times Company was down 35 percent. Even the Washington Post Company, whose diverse holdings have insulated it somewhat from the market’s pessimism about newspapers, was down 25 percent.
In an effort to arrest the slide and appease shareholders, virtually every major newspaper in the country got busy slashing editorial positions and aggressively cutting costs. The market wasn’t impressed. In November Bruce S. Sherman, whose money management firm Private Capital Management owns 19 percent of Knight Ridder, demanded that the company put itself up for sale. The initial round of bidding in early December generated interest from Gannett, McClatchy, and others, including a trio of private investment banks.
Sherman’s move sent tremors through the newspaper world. PCM has significant stakes in eight other newspaper companies, including Gannett, McClatchy, and The New York Times. Many analysts see Sherman’s effort to force the sale of Knight Ridder as a no-win proposition for journalism. If it fails, then investors may be further convinced that newspapers are terrible investments and pull out of the sector altogether. If it succeeds, then Sherman or other institutional investors may try to duplicate the maneuver with other newspapers, forcing companies to either auction themselves off or make even steeper cuts in an attempt to lift their stock.
Either way, the combination of the precipitous decline of stock prices, shareholder unrest, and the general pessimism of the market concerning the newspaper business has raised an interesting question: Is there any good reason for newspapers to remain publicly traded companies?
I put that question to Donald Graham, Katharine Graham’s son and the sixty-year-old chairman and largest individual shareholder of The Washington Post Company. Sitting in his spacious ninth-floor office, Graham put his feet up on his coffee table and appeared a bit perplexed by the notion. After mulling it over a bit he said that no, he wouldn’t consider taking the company private: “Public ownership has been great for us.” Undeniably, for much of the past thirty-four years, it has been. After it went public in 1971, stock in the Washington Post Company rose from $26 a share to almost $1,000 a share in late 2004. But as of early December it had dropped more than $250 for the year and did not appear to have touched bottom. Graham concedes that he is worried about the business challenges facing the company. Indeed, he calls them the most severe in its history, but says he has no regrets about his mother’s decision to go public. Among other things, Graham notes that being a public company brought in the investment guru Warren Buffett, to whom Graham (and others) give considerable credit for making the Post a successful company. Graham says he keeps abreast of the stock price, but concentrates on the long term. “Our focus is not on the stock price, but on the value of the company,” he says.
Similar sentiments were expressed by The New York Times’s publisher, Arthur Sulzberger Jr., who, like Graham, thinks public ownership has been a boon to the company despite recent difficulties. “There is a real value to companies not being artificially isolated from the demands of the market,” says Sulzberger. “It enforces a certain kind of discipline.”
He admits that recently such discipline has been hard to endure, and says that the American newspaper industry is facing its greatest crisis in its 400-year history. Still, Sulzberger doesn’t see private ownership as a solution. “Changing your capital structure doesn’t get you out of the problems we face,” he says.
Of course, the Times’s own capital structure indicates that it doesn’t totally trust the market, either. Like the Post, Dow Jones, McClatchy, and other family-controlled newspapers, the Times has two tiers of stock — the voting class, owned by the family, and the B-shares, which are owned by outside investors. This kind of ownership provides a layer of insulation between the paper and market forces, and immunizes the company against the kind of forced-sale tactics that Bruce Sherman is using on Knight Ridder, which has only a single class of stock.
That said, Sherman’s company does own about 15 percent of The New York Times Company, which makes him a force that Sulzberger can’t ignore. “Even if family has voting stock in its back pocket,” says John Morton, a newspaper analyst and consultant, “they still develop a culture of being publicly owned and reporting to Wall Street — it infects the way they run their business whether they want it to or not.”
How does that “infection” manifest itself? In general, Wall Street cares about one thing: growth. It’s not interested in how you’ve done or how you’re doing, only in how you will do. This outlook explains, for example, why investors initially fell in love with the Internet, and remain enamored of Google and other hi-tech acrobats. With a short track record of earnings and no obvious barriers to growth, the market sees virtually unlimited potential, and rewards such companies handsomely. Newspapers, by contrast, are a mature business with a limited upside.
In response, many newspapers are desperately trying to convince the market that they, too, are sexy, hi-tech companies. To please the market, companies like Knight Ridder have done almost everything their large shareholders have asked — slashing staff, making stories more “reader friendly,” searching for Internet strategies that might magically transform newspapers from dead-wood deadbeats into new-media darlings. To date, none of it has worked.
It hasn’t worked precisely because the real appetite of shareholders is for greater short-term profitability, not long-term strategic investment. That’s clearly an impediment as newspapers negotiate the transition from twentieth-century monopolies to players in a twenty-first-century media world where competition comes from all directions — a shift that involves a number of complicated puzzles, such as engaging young readers, that cannot be solved quickly. As Paul Ginocchio, a media analyst with Deutsche Bank, put it: “It’s easier to increase short-term operating profits with cost-cutting now than to grow future revenues by making strategic investments that hurt profits in the near term.”
Back in the 1980s, when pariah companies found themselves undervalued and unable to budge their stock prices, they frequently turned their backs on shareholders and took their companies private, using a tool known as the leveraged buyout, a fancy way of saying they borrowed a lot of money from private investors and used it to buy all the stock from shareholders, trading debt for equity. Leveraged buyouts, though, got something of a bad name, becoming linked in the public’s mind with corporate raiders and junk-bond salesmen, some of whom wound up in jail. By the early 1990s, recession, insider-trading scandals, and the savings and loan debacle had effectively put an end to the buyout craze. Fifteen years later, though, private equity investors are back on the scene, more restrained, but also more well-heeled. “Increasingly you are seeing private equity firms buying companies as opposed to other companies buying companies,” says Dean Singleton, head of Media News Group, which invests in media properties. “There is a lot of money in the pipeline from pension funds, boomer 401(k)s, insurance companies. There is more money than the stock market can absorb.”
In many ways, Singleton and others observe, newspapers are ideal candidates for leveraged buyouts because they have such high operating margins, meaning they can service a lot of debt without drowning in it. They also don’t have to make a lot of capital-intensive expenditures on research and development or infrastructure. As Doug Arthur, a newspaper industry analyst with Morgan Stanley, put it, “These papers throw off tremendous cash flow and being publicly traded is very stressful. If Knight Ridder was already private, they wouldn’t be going through this right now.”
To be clear, private equity investors are not Santa Claus. They can be every bit as rapacious as the most aggressive fund manager. But a private investor who buys into newspapers at this point is likely to understand the challenges the industry faces, and at the very least will get the newspapers off the quarterly earnings treadmill that currently drives so much decision-making in the industry. Because private ownership need not be driven by short-term profits, it has the potential to give newspapers desperately needed space to plan and invest in long-term strategies, on both the business and editorial sides. “You can’t view it just like any other business,” says James Rutherfurd, a managing director of Veronis Suhler Stevenson, a merchant bank that focuses on media properties. “To do it and be successful, you have to understand that editorial is the key part of the franchise.”
To illustrate his point, Rutherfurd recalls how, because of newsprint rationing during World War II, papers had to choose between running advertisements or news. Some, like The New York Times, chose news and absorbed the losses, while its competitors chose to rely more heavily on ads. By the end of the war, Rutherfurd notes, the Times had achieved a market dominance that it has yet to surrender. “People like us, who invest for five or ten years, look over multiple years,” says Rutherfurd. “We don’t get all twitched out over what happened in the March quarter.”
Rutherfurd says he is aware of the threats that companies like Google and Craigslist pose to newspapers, especially to the all-important classified advertising, but says he thinks newspapers actually enjoy some built-in advantages. “They’ve got multiple revenue streams, good brand names, great access to information in their core markets. They’ve got a good head start. They just haven’t been good at innovation.”
If Rutherfurd represents the most editorial-friendly version of going private, there are plenty of examples of private equity firms resorting to a “pump it and dump it” strategy, making steep cuts to goose earnings and prettify the balance sheet before flipping the company to another buyer. Consider, for example, a widely circulated analysis of the sale of Knight Ridder done by Morgan Stanley. In gaming out the potential for a leveraged buyout of Knight Ridder (one of several scenarios considered by the analysis), Morgan Stanley offers a range of potential outcomes, based largely on how much the buyer pays for the stock. From a journalistic standpoint, the less the buyer pays for the company the better it would be for the health of the newsroom. Under the Morgan Stanley analysis, if a buyer paid $65 a share for Knight Ridder, a bit below the historic valuation for newspapers, then with modest cuts it could realize an internal rate of return of close to 25 percent on its investment. If, on the other hand, the buyer has to stretch up to $75 a share, then the rate of return drops dramatically — unless the buyer institutes draconian cutbacks, such as closing some of the chain’s less profitable papers. Because newspapers have enjoyed such healthy operating margins, buyers have traditionally been willing to pay a fairly high price to acquire them. Now, with growing threats to those fat margins, some analysts and investors think the price that prospective buyers should be willing to pay for Knight Ridder and other newspaper companies needs to come down. The problem, as James Rutherfurd sees it, is that some investors still want to see newspapers valued like high-growth Internet companies, driving up the price and all but insuring that any buyer would have to strip the operation clean to make the deal pay off. That, he says, is shortsighted. “Getting people’s expectations adjusted is key,” says Rutherfurd. “You can streamline the production and delivery, but if you don’t have a good product no one will buy it. To do that on a daily basis takes good reporters and editors and some vision of what people want.”
What newspapers really need, above all else, is ownership that values journalism and understands that the work of gathering, writing, and publishing the news is an inherently inefficient business that is in a period of profound transition. The private press baron of the past might have been a blowhard propagandist with the ethics of a wharf rat, but at least he loved the trade. Compared with the lineup of bloodless managers and mandarins currently squeezing the life out of journalism, Charles Foster Kane looks pretty damn good. So while there is no guarantee that the private ownership of today would recognize the value of journalism, it has already been established that Wall Street does not. Maybe it’s time we took our chances.

Douglas McCollam is a contributing editor to CJR.