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media finances — Shareholders pressure and the bubble

The examples stated above epitomize the increasing pressure of shareholders activists. The CBS/CNet deal has been, for a large part, prompted by an angry campaign led by the investment firm Jana Partners LLC. Jana criticized CNet strategy and called for a complete overhaul of the board. Actually, more and more media companies are facing shareholder actions. In past Monday Notes, we described the New York Times under attack by the Harbinger-Firebrand combined hedge funds. The Deal.com, a financial website, reviews the scope and the reasons behind such activism.

The flurry of deals in the Internet sector raises another question: are we facing another kind of Internet Bubble? In a lengthy article, the Wall Street Journal tells the story of financial bubbles in general, from internet to Chinese stocks or the US housing market. Here are some clues: – “Bubbles don’t spring from nowhere. They’re usually tied to a development with far-reaching effects: electricity and autos in the 1920s, the Internet in the 1990s, the growth of China and India. At the outset, a surge in the values of related businesses and goods is often justified. But then it detaches from reality.” And therefore, it is extremely difficult to go against the tide of optimistic investors. Until the tip of the curve. – Then, “When a lot of borrowed money is involved — as it often is in a bubble — once prices peak, the speed of their fall is intensified as investors sell urgently to pay down debt”. – Finally comes the “trading signal” : “At the height of the tech bubble, Internet stocks changed hands three times as frequently as other shares. “The two most important characteristics of a bubble are: People pay a crazy price and people trade like crazy”, says one of the researchers

Interestingly enough, this excellent WSJ story details the sources for its research. The Princeton trio the article refers to had been hired by current Federal Reserve Chairman Ben Bernanke, who was at the time head of Princeton economics department. The team was made of foreign born students (Chinese, Vietnamese and German) ranging from 32 to 39 year-old. This speaks well of some American Universities’ vitality and cross-pollination with the public sector.

The battle for New York’s papers

An update: Murdoch decides not to bid for Newday. The AP story.

Five newspapers in New York. Ranging from the most respectable to the lowest tabloid. One is the object of a bidding war, another is under siege by Wall Street. Who will control NYC’s newspapers a year from now? Here is an overview of the main players and scenarios for their possible next move.

#1 : Rupert Murdoch, owner of the New York Post and the Wall Street Journal.
Rupert completed the acquisition of the WSJ from the hands-off Bancroft family for $5.2bn in December 2007. He’s happy with his new toy. He set an office in the Journal’s headquarters overlooking Ground zero, he revamped parts of the paper (an upgrade is due this Monday April 27), and he will replace the managing editor Marcus Brauschli who resigned last week. Things are moving fast and hard, the usual Murdoch way. At 77, the Australian-born mogul seems rejuvenated by this acquisition. In his crosshairs: the New York Times. To Arthur Sulzberger, Times owner, he said in a note “…let the battle begin!”. And he means it. He will modify the Wall Street Journal to go after the Times’ audience, adding more politics, sports, and even culture.

But he won’t rest with this media trophy. On April 22, he made a $580m offer to buy Newsday. The New York (Long Island) paper is a nice business: a bit less than 400,000 copies; $500m in revenue for 2007 and a nice $80m EBITDA, many papers would be happy with such numbers. Newsday is to be unloaded by Sam Zell, the new owner of Tribune Company (The Los Angeles Times, Baltimore Sun, Chicago Tribune). Zell is saddled with a crushing debt load ($1bn due this year) that a collapsing advertising revenue can non longer support.

Why Murdoch would want Newsday ? Because he also owns the New York Post (667,000 copies), that has been bleeding money for long ($50m a year!). Murdoch wants to combine back office operations and thus save a lot of money. Plus he wants to increase pressure on the New York Times by controlling a broader spectrum of news — from highly respected financial stories to trashy tabloid gossip — and their related operations (syenergies on printing, adverstising, classifieds).
And, combining audiences, Newsday (870,000 copies) plus the New York Post (400,000) — even if there is duplication — would make life harder for the Times.

#2 : Michael Bloomberg, currently mayor of New York and main shareholder of Bloomberg LP, the financial information service he created in 1981. On April 19, Newsweek broke the story that Bloomberg could bid for the New York Times. The paper is facing a deterioration of its fundamentals, with an advertising base shrinking faster than expected and web revenues that are growing but are still far from compensating losses at the carbon-based version.

Why would Bloomberg want the New York Times? First, because he can. His stake in Bloomberg Limited Partnership is worth $11.5bn according to Forbes magazine In comparison, the market value of the New York Times Co. is estimated at less than $3bn. Michael Bloomberg is currently 65 and his second term as a mayor will end in 2009. There are obstacles. First, Bloomberg has to be embraced by the Sulzberger family: it controls the NYTimes Co’s capital through a dual shareholding structure. Also, there is no doubt that an open and friendly proposal from Michael Bloomberg for buying the Times (or a big chunk of it), would increase Wall Street pressure on the family. Such pressure is already intense (see below, the Harbinger paragraph). In other words, Sulzberger would have to be pragmatic and negotiate. Second argument: the business potential. Combining the pantheon of journalism (soon to be a mausoleum) and a Bloomberg’s fantastic business news delivery system is a no-brainer as far as shareholder’s value is concerned. Bonus result: Murdoch would have a much more difficult time eating Sulzberger’s (or, rather, Bloomberg’s) lunch.

#3 : The Harbinger-Firebrand private equity fund. To sum-up, the tandem now owns 20% of the New York Times. Their proxy contest succeeded, they get two seats at the Gray Lady’s board. Philip Falcone and his pal Scott Galloway are not exactly newspapermen, but they are nevertheless willing to push the Times to innovate. Their foray epitomizes the tremendous firepower of the big investment funds. In that instance, this power is about to reshape a icon of the media industry.

What to expect with the Harbinger gang ? Not that much because of the dual ownership model of the Times. But the management of the NY Times now must make moves in several directions: ownership, content, business model, staffing, spin-offs…

#4 : Warren Buffet. Investor, the wise man from Omaha (the Nebraska, glowing headquarters of its investment vessel Berkshire Hathaway) second to Bill Gates with a net worth of $52bn, according to Forbes. Warren Buffett is also a board member of the Washington Post Company. He knows quite a lot the newspaper business. He could be credible white knight for the New York Times.

#5 Mort Zuckerman. Owner of The Daily News (700,000 copies), Murdoch’s New York Post archrival. Friday night, Zuckerman announced he was to match Rupert’s offer ($580m)
for Newsday. Same idea as above, he whishes to combine operations and save money for both papers.

Why this battle is worth to watch, even from Europe?

1. It will we be interesting to see the results of Murdoch’s strategy to expand the territory of the Wall Street Journal towards a broader audience (French new owners of business dailies, do you read this?)

2. There is a new kind of players in town. Big hedge funds, like the Harbinger-Firebrands. Many escaped the credit crisis. We’ll see the results of the pressure they are applying to a company such as The New York Times.

3. Aside of the papers circulation, there is the online audience issue. The NYT Times, WSJ.com and even Newsday are big players in a field still pregnant with possibilities.

4. New York is New York. Among others things, it is the capital of advertising. Trends start there. So, watch.

> Related stories on MondayNote.com, here
> A profile or Rupert Murdoch. Newsweek published an excellent account on the way he’s functioning. In this piece, they revealed Michael Bloomberg’s itch to buy the New York Times
> The Bloomberg Monday Machine, the best story ever written about Bloomberg LP, how it works, its journalistic firepower, etc. In Fortune.
> The Harbinger Fund, the incredible history of an investor, Philip Falcone, whose fund is worth 760 times its was seven years ago. Read “The Midas of Misery”, cover story of Business Week.

Truce at the NY Times

The New York Times Company has reached a deal with Harbinger Firebrand, the hedge fund that was knocking (hard) on its door. For the first time since it became public in 1967, the Times will open its board to outsiders. The two new directors will advocate asset sales (the Boston Globe for instance) as well as aggressive investments in the Internet. The Sulzberger family retains the supervoting shares, but board meetings won’t be as comfy as they used to be when “we all were family”.
> story in the New York Times and as seen by the rival, The Wall Street Journal

At the NY Times, job cuts and outsiders pressure

The New York Times caught between Wall Street and Wall Street. On one side of the The Street, the group faces a major offensive of the Harbinger/Firebrand hedge fund which now owns 10.5% of its stock. The attacker is pushing hard for a board upheaval. In response, the Times made some changes on his board by nominating an internet expert (Dawn Lepore, CEO of Drugstore.com and an eBay board member) and a seasoned financier Robert Denham, former CEO of Salomon. But the Times board has no intention of letting Harbinger representatives in.

Activists-led campaigns are on the rise in the United States, and media groups are good targets with their great brand, shifting business model and trailing stocks — the NYT Co’s share is at a 11 years low. (Plus, this comes after Morgan Stanley’s decision to end its two years campaign for change at the NYT by dumping its 7% stake).

On the other side of Wall Street, the Times is facing an increasing competition with the “The Journal”. Rupert Murdoch, its new owner, makes no mystery of hos goal: taking The New York Times’s position. To beat Rupert back, the NYT can’t forever rely on its well-worn hauteur. It must remain on the offensive on both print and digital fronts. This is detailed in Bill Keller’s speech before his troops last week. In it, the editor of the New York Times outlines an impressive list of product-related actions undertaken in the last five years, the integration of the newsroom – with print and web being produced seamlessly – remaining quite an achievement. At the same time, he announces a 100 jobs cut in its 1300 plus staff.

> read Bill Keller’s speech

Actvists investors campaigns are at al time high.
> story in the Wall Street Journal

> a recent Bloomberg story about the Times situation

“Shareholders in general do not have the ability to run a company. They are fickle and irresponsible. They only take on a limited responsibility, but they greedily demand high dividend payments.” Who says that ? Takao Kitabata, the vice-minister of Japan’s powerful Ministry of Economy, Trade and Industry (METI) does.
> He is quoted in a story about Japanese rebuttal of foreign activists investorsin The Economist.

Shareholders on the offensive at the NY Times

Not everyone is discounting the value of great newspapers. Take Scott Galloway for instance. He’s leading the fight for a board position at the New York Times after Firebrand/Harbinger LLC, a company created for this offensive, disclosed a 4.9% stake in the capital of the NY Times Company. His pitch : creating more value for shareholders (the usual crap) by a “redeployment of capital to expedite the acquisition of digital assets.” according to the letter sent to Arthur Sulzberger chairman and publisher of the Times and Janet Robinson k the CEO. The fall of the New York Times stock (from $47 to $18 since 2004), shows a true erosion of the “value for shareholders” and it makes the media group tempting for investors such as Firebrand/Harbinger ‘even though the family-controlled board shields the management from outside interference’.
> Read the letter from Gallaway, filed to the Securities and Exchange Commission. A monument of takeover-era rhetoric.
> And the profile of Scott Galloway in Portfolio magazine
> Forbes magazine is detailing the achievements of hedge funds manager Philip Falcone. Not exactly the kind of guy you want at your board for the kind of complicated turnaround the Times is facing.

Hedge Fund eyeing on The NY Times

Harbinger Capital Partners, an Alabama-based hedge fund, gave notice Friday that it would try to elect directors to The New York Times Company board. The very same day, Harbinger did the same with Media General, a Virgina based company that owns 25 newspapers and 75 online properties. The Times is almost immune from an unwanted outside push at its board since the Sulzberger family controls 9 of the 13 directors. But no doubt that pressure will grow.
> Story in The NY Times