Guest commentary

Humbler profits won't encourage buyouts

Newspapers earn more than other industries, can afford to boost quality

By John Morton
Posted Sept. 29, 2005

Lou Alexander responds; posted Sept. 30, 2005

Lou Alexander makes some interesting and realistic points about newspapers and profitability. But he sets up a premise, "cutting newspaper margin expectations to something under l0%," that is easy to knock down.

While academics and some journalists may decry newspaper companies' efforts to increase profit margins -- and have suggested lower margins could permit greater spending on news gathering -- I am unaware of anyone suggesting margins of under 10%. That would be less than half the average operating margin for the newspaper operations of publicly reporting companies, which was 20.5% in 2004 (covering a range from 15.3% at the Washington Post Co. to 27.7% at Gannett).

A point Alexander might have made is that while a 20% average margin is high compared with many businesses, some of the reason for this is inherent in the newspaper business. Unlike, say, department store or grocery chains, newspapers are not burdened with covering the profit margins of a series of raw-material suppliers, manufacturers, wholesalers and distributors that contribute to the products that ultimately are sold at retail.

Essentially, newspapers pay for newsprint (most of which is brought directly from producers without an intervening wholesaler's profit margin) and for their production, sales and distribution costs (which are largely in-house). Newspapers do have to pay for wire services and the like, but most of newspaper content likewise is created in-house.

The opportunity in this is not quite as great as Alexander assumes.

Alexander is right that if a CEO got away with dropping profit margins to 10% or lower, the better to produce higher quality newspapers, there would be hell to pay to the company's directors and Wall Street. The stock price doubtless would fall, and at companies like Knight Ridder, without the protection of super-voting shares held by family members, an unfriendly takeover attempt could be the consequence.

So far, the newspaper business remains reasonably collegial among owners, and the only example of one newspaper company trying to take over another in an unfriendly way happened way back in he 1970s, when Advance Publications (Newhouse) mounted a successful tender offer for Booth Newspapers of Michigan. Intentions, though, can change.

The more likely scenario, also suggested by Alexander, is an unfriendly tender offer from a takeover consortium. I would add to that an offer from a company (Google?) completely outside the newspaper business.

The opportunity in this is not quite as great as Alexander assumes. He cites Knight Ridder's market capitalization as $4.7 billion (it's gone down since he wrote this) and a breakup value of around $6.63 billion. The $4.7 billion market capitalization represents a collective minority ownership, while an unfriendly takeover offer would require a substantial premium -- in my experience 30% to 50% -- which would pretty much wipe out the difference between the market capitalization and breakup value.

Most takeover artists, though, generally tend to hang onto newly acquired properties until cost efficiencies (layoffs and other actions calculated to increase profit margins) produce higher earnings and a higher sell-off price. Alexander is right that this would not be a pleasant scenario for those working at the newspapers, or for anybody who cares a damn about the quality of newspapers.

The hard truth, though, is that probably newspapers of the future will have lower profit margins, not by design but because competition from the Internet and elsewhere is only going to get tougher and newspaper readers, a distinctly aging group, will continue to die off faster than they will be replaced.

John Morton is a newspaper-industry analyst in Silver Spring, Md., and a columnist for American Journalism Review.

Mr. Alexander responds

News corporations may no longer be so resistant to take-overs

I am more than slightly awed to be involved in a dialogue with John Morton. I just an old ad guy who writes from his patio in San Jose and he’s JOHN MORTON.

But here goes…I tried to deal with the inappropriate focus on my “10% margin” suggestion in my response to the commentary by Professor Stephen R. Lacy.

I think for the most part Morton agrees with me more than he disagrees. Our disagreements seem to be a matter of degree.

He shares my concern about an unfriendly take over by a non-newspaper company. Google, Yahoo and Microsoft could be companies looking for a content provider like a newspaper chain if the price were low enough. And his fear of what would happen if a takeover artist bled the profit from newspapers is certainly the same as mine.

He is more willing than I am to depend on the friendly nature of newspaper companies to keep them from gobbling each other up. That is probably reasonable at the moment. Unfortunately, I fear collegiality will be less a deterrent as the heads of the public companies come more and more from the world of investment bankers. Also, I have distinct memories from the 1980s of a time when another newspaper company (Cox, I believe) had accumulated enough KRI stock to have executed a takeover had they chosen to do so.

Finally, I completely disagree with the esteemed Mr. Morton that “ newspapers are not burdened with covering the profit margins of a series of raw-material suppliers, manufacturers, wholesalers and distributors that contribute to the products that ultimately are sold at retail” in department stores or grocery chains.

At a newspaper the “raw-material suppliers, manufacturers, wholesalers and distributors” are people. Reporters, photographers, editors, ad staffs, IT staffs, production staffs, mailers and several dozen other job classifications all demand their own “profit margin” in the form of regular paychecks, medical insurance, other benefits and a thousand non-salary expenses.