Knight Ridder and Its Buyer McClatchy
Before Its Time, the Death of a Newspaper Chain
NY TIMES By RICHARD SIKLOS March 19, 2006
nytimes.com
ONLY a handful of days have passed since he announced the deal to sell Knight Ridder, but P. Anthony Ridder, the company's chairman and chief executive, already has ghosts to contend with. The biggest, of course, is the pending disappearance of the company his great-grandfather, Herman, founded in 1892 — Ridder Publications, which merged in 1974 with Knight Newspapers to create what has for much of recent memory been the nation's second-largest newspaper group, with 32 dailies.
But he also has to wrestle with the fact — apparently unknown to him until the deal was sealed — that the buyer, the McClatchy Company, plans to turn around and sell 12 of Knight Ridder's biggest papers, representing nearly half its $3 billion in annual revenue. "It's terrible," Mr. Ridder said after the deal was announced. "The whole thing."
Then why did he do it? Mr. Ridder's heartfelt contention is that he was boxed into a corner, and he extracted the best outcome from a tough situation. With its stock lagging and its biggest shareholder, Private Capital Management, agitating for change since last fall, Mr. Ridder had few options.
He personally owns only 1.9 percent of the company's shares, and Knight Ridder isn't governed by the kind of dual-tier share structure that keeps voting control in the hands of a founding family and is quite common in the media industry. (One example is the arrangement at The New York Times Company.) An argument can be made, and has been, that Mr. Ridder struck a good deal with a preferred acquirer. But it doesn't quite add up. The end of Knight Ridder looks like nothing so much as a stunning capitulation in a period when every bean-counting fund manager can fancy himself an activist and media companies are in the investment dog house. It wasn't ever thus, and it may not be thus forever. One wonders if another chief executive — one with the vigor and vision of, say, Gary B. Pruitt of McClatchy, his much smaller acquirer — might have toughed it out and generated a different outcome.
Under Tony Ridder, Knight Ridder over the years faced a seemingly never-ending series of financial struggles at big newspapers in Detroit, Seattle, Philadelphia and elsewhere. Cost-cutting reduced some news staffs to a shadow of their former selves, but overall the company maintained a reputation for respected journalism. Mr. Ridder, well-meaning as he was, did not have an answer for the perennial riddle of why his company's margins didn't measure up to rivals like Gannett and McClatchy.
"He wasn't a good operator," said Christopher H. Browne of the Tweedy, Browne Company, an investment firm that has several investments in newspaper companies, including the Tribune Company. "Look at McClatchy, and it's night and day."
The newspaper industry itself, meanwhile, has come under a cloud because readers and advertisers are migrating to the Internet, where news is largely free and things like classified advertising can be purchased much more cheaply than what the local paper charges.
Despite a long track record of investing in online ventures, and even relocating the company's headquarters from Miami to San Jose, Calif., in 1998 — ostensibly to soak up a little Silicon Valley effluvium — the company never stole a march on the Web-heads down the road. During last summer and fall, newspapers stocks went into the doldrums along with much else in media land.
So in November, Bruce S. Sherman, the accomplished money manager at Private Capital Management of Naples, Fla., wrote to Knight Ridder's board to say that despite recent efforts by the company, he and other stockholders had run out of patience. "We believe the board should aggressively pursue the competitive sale of the company," the letter said, noting that otherwise his firm would consider joining forces with others to replace the board or "take other action to maximize shareholder value."
The Knight Ridder board enlisted Morgan Stanley and Goldman Sachs to do as Mr. Sherman bade. He is, after all, the company's largest shareholder, with 19 percent. But at the end of the process, which attracted interest from Gannett, William Dean Singleton's MediaNews Group and various private equity groups, only McClatchy made a formal bid: valuing the company at $4.5 billion, it would buy Knight Ridder through a combination of cash and stock.
The structure of the deal is a crucial point, with Knight Ridder shareholders to receive $40 in cash and 0.5118 of McClatchy Class A share for each of their shares. When the deal was announced Monday, its value was put at $67.25 a share — a nice premium above the $53.38 Knight Ridder was trading at when Mr. Sherman fired off his letter. But as of Friday that deal's value was down to $65.39 a share as investors worried about the debt McClatchy was taking on. Two years ago, Knight Ridder traded around $70 a share.
Mr. Sherman, in the end, may eke out a small profit on his firm's investment. "When the world thinks you may have struck out, it's not bad when you hit a single," he said after the deal was announced.
Indeed, Mr. Sherman must positively delight at how, with a single letter, he could move a mountain. Let's contrast Knight Ridder's rolling over with how Time Warner recently dealt with demands from the financier Carl C. Icahn to break up that company, which has been a stinker of an investment. Of course, there is a gigantic difference: Mr. Icahn and his allies had only 3 percent of the company's shares behind them, and Time Warner is too vast a company for anyone to take over.
In the immortal words of the media and Internet baron Barry Diller, Mr. Icahn represented a "bad-part-of-town brush fire" for Time Warner. Still, Richard D. Parsons, Time Warner's chief executive, went out of his way to try to work out a deal with Mr. Icahn because he was worried that the wind might change and blow the fire into the better parts of town.
But it is illuminating to compare tactics. Mr. Parsons consistently said his company had a brighter future intact rather than in pieces, that he would seriously consider any ideas to return money to stockholders, and all the while hedged that he could not control market sentiments.
Perhaps most important, Mr. Parsons kept other big investors on his side by shrewdly making this an ideological battle between people who build businesses for the long term and the growing influence of hedge funds and other investors who specialize in exploiting vulnerability for short-term profit.
Last month, Mr. Icahn called off his planned proxy fight, intended to put several directors on Time Warner's board, in exchange for some fairly innocuous concessions from Mr. Parsons. But Time Warner did agree to one significant change: increasing a stock buyback program from $5 billion, when Mr. Icahn began pushing, to an agreed-upon $20 billion.
(By the way, there are influential Time Warner investors, and even senior managers within the company, who think he should have rebuffed Mr. Icahn and fought the proxy battle rather than agree to the big increase in debt that the buyback entails.)
IN the Knight Ridder camp, there are some who depict Mr. Ridder, his senior managers and his board as frustrated and fatigued by their recent travails. Mr. Ridder contends that had he not done the McClatchy deal, Mr. Sherman and other investors would eventually have taken over his board. Thus, he did what he did while he could still control the outcome, seeking to avoid a prolonged period of uncertainty for the papers and their employees.
Here's another ghost: What would have happened if Knight Ridder had made a bold declaration that the sky was not falling on newspapers? It might have said that other media company stocks have suffered just as much in the last year and thanked McClatchy for its kind offer, but decided it could do better as a going concern. It could have said that in order to fulfill its duty to investors it was willing to take bitter medicine, including more painful cost-cutting and selling some of its biggest newspapers to focus on higher-growth markets.
Apparently, this latter bit was just too depressing for Mr. Ridder to contemplate, but was what Mr. Pruitt of McClatchy had in mind all along. It's called creative destruction. |
