The Knight Ridder Company has been
sold and the myopia of the Media industry is demonstrated in my view:
Knight Ridder, the nation's second-largest newspaper company by circulation, agreed last night to sell itself for about $4.5 billion in cash and stock to the McClatchy Company, a publisher half its size, according to people involved in the negotiations.
The deal, which is expected to be announced today, comes as the newspaper industry is gripped by uncertainty as readers across the country turn away from printed newspapers in favor of the Internet. However, the sale could help assuage some investors who are nervous about the values of newspaper companies because Knight Ridder commanded a premium of about 25 percent for its shares from the time it put itself up for sale in November under pressure from shareholders who were unhappy with its stock performance.
Still, McClatchy, which is based in Sacramento and publishes the Sacramento Bee and the Minneapolis Star Tribune, among others, was the only major newspaper company to submit a final bid for Knight Ridder, publisher of such venerable newspapers as the Miami Herald, the Philadelphia Inquirer and the San Jose Mercury News. While it garnered interest from some big publishers, including Gannett, most major newspaper companies like The Washington Post Company, the Tribune Company and Dow Jones, passed on the auction entirely, underscoring just how unsettled the biggest players are about their own business.
Under the terms of the deal, McClatchy agreed to pay about $67 a share in cash and stock for Knight Ridder, these people said. About 60 percent of the payment will be in cash, while the rest will be in McClatchy shares. On Friday, Knight Ridder's shares rose 4 percent in anticipation a deal would be reached over the weekend. But those shares had been trading at about $53 a share when Bruce Sherman, a Knight Ridder shareholder, went public with his efforts to put pressure on the company to put itself in play.
The tentative package is not nearly as big as the $8 billion purchase of Times Mirror by the Tribune Company in 2000. But it comes at a time of deep uncertainty for the print side of the newspaper industry, as readers and advertisers migrate to the Internet. That Knight Ridder was up for sale at all was perceived as a sign of the industry's weakness.
That Knight Ridder was up for sale reflected on the desire of the stockholders of Knight Ridder and nothing much more than that. I believe McClatchy got a bargain. The practical import is some "synergies" and cost savings but I imagine as a journalistic matter, not much more. As McClatchy publishes the Star Trib, it is clear they are not a company driven by ideology, like a Scripps or Belo, and of course, the bottom line.
I'll explain why I think it was a bargain on the flip.
Let me start with what I think drove McClathy's thinking here:
Such combinations would also greatly enhance McClatchy's presence on the Internet. Like other newspaper companies, McClatchy is on a mission to maximize its growing online profits, and the Knight Ridder purchase will vault it way ahead of where it is now. In addition to several strong newspaper Web sites, Knight Ridder has a stake in the popular CareerBuilder.com site.
The purchase is out of character for McClatchy:
McClatchy's philosophy has been to find papers in growth markets with no direct daily print competition, although Minneapolis and Anchorage, Alaska, were exceptions. The company bought the Anchorage Daily News in 1979 and went head to head against the Anchorage Times, which it bought and shut down in 1992.
So why did McClatchy do it? I think it is simple -- newspapers have become undervalued. Consider Knight Ridder. It had an operating profit margin of 16.4% on revenues of $3 billion. And the purchase price was only 1.5 times total revenue? That is extraordinarily cheap.
Why so cheap? Because folks think newspapers are dying. I think they are wrong. The basic mistake is believing that the only revenue model that works is the advertising driven model that newspapers have used forever. In particular, the dropping revenues for classified advertising has investors in a panic. Craig's List is what they fear.
Well, suppose classified advertising dies, will people stop reading the information provided by newspapers? Of course not. The question is to find the way to present it to readers so that you can make money. Do I know the way to do it? Not necessarily. But does anyone doubt a way WILL be found? I do not. What newspapers do has value and customers and will continue to. Has demand for information dropped? No. So why would anyone believe that the ability to make money providing information will suddenly disappear? It won't.
Yes, classified advertising has represented a major part of profits for newsppapers, but never more than 20-25% and much less today. Is the end near? Of course not.
Is the Internet the end of newspapers? Puhleeaze. The Internet is a delivery system in many respects. The fact is newspapers dropped the ball on it and still aren't thinking clearly about the opportunities it presents. But eventually they will. The Internet won't killl newspapers. The Internet NEEDS newspapers.
In the 50s TV was going to kill the movie industry. It didn't. Now, Cable will kill the networks. It won't. And the Internet won't kill newspapers. (I do worry about the music industry a little bit though . . .)
Newspapers are a safe investment. And at the price, a very good investment. Mc Clatchy has snapped up a bargain.
Good for them.
Full disclosure - I represent a newspaper company but niether McClatchy or Knight Ridder.