In a Big Bet on Newspapers, a Shy Investor Makes News
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By GERALDINE FABRIKANT
The New York Times
December 8, 2005
In the exclusive resort town of Naples, Fla., the fifth floor of a nondescript office building houses the headquarters of Private Capital Management, until recently a little-known money management firm that discreetly handles the investments of wealthy families.
But with a single letter pushing for the sale of Knight Ridder, Bruce S. Sherman, the 57-year-old, press-shy co-founder of Private Capital, has catapulted himself onto the business pages of virtually every newspaper in the country.
At a time when Wall Street views newspapers as an ailing industry, Mr. Sherman has made a $4 billion bet that newspapers will survive the Internet onslaught. Mr. Sherman's clients own large chunks of nine newspaper companies, including 19 percent of Knight Ridder, 15 percent of The New York Times Company and 7 percent of Gannett, among others.
At the end of this week, when expressions of interest in Knight Ridder come due, Mr. Sherman will get a better sense of whether his huge investment was prescient or wrongheaded. Multiple offers for Knight Ridder - with 32 dailies, it is the second-largest United States newspaper chain after Gannett - would underscore the value of newspapers. But a dearth of interest would raise investor concern at a time when his performance is lackluster.
Mr. Sherman's track record has been stellar. Private Capital, which now has $31 billion in assets, has turned in a 20.7 percent annualized gain over the 10 years ended Sept. 30, propelled by shrewd bets on companies from Apple Computer to International Gaming Technology and Qualcomm. Four companies in which Private Capital had major stakes, including International Dairy Queen, were sold to Berkshire Hathaway, the investment company controlled by Warren Buffett. But Private Capital's performance was down 0.06 percent at the end of September, depressed in part by the newspaper companies, with all nine of them showing declines. Shares in six of those companies have fallen at least 14 percent this year.
His investors can take a bit of comfort. Since Nov. 1, when Mr. Sherman's letter put Knight Ridder in play, its shares have zoomed 14 percent, to $60.82 a share yesterday from $53.38. Since Mr. Sherman began bulking up on newspaper stocks in 2000, skeptics have wondered what Mr. Sherman saw in newspaper companies that others did not.
Is he investing in "the buggy whip business," as one veteran media investor put it, declining to comment on the record about a rival's strategy. Or, as others argue, is he buying stocks on the cheap, poised to reap big rewards when they rebound?
To value investors like Mr. Sherman, there is a rationale for putting money into a monopoly business: local daily newspapers are often the only ones in their markets, as well as the largest conduits for advertising. And clearly Mr. Sherman believes that these stocks can continue to generate cash, which can be used to buy back shares and raise returns to investors. Mr. Sherman declined to comment for this article.
Value investors also argue that newspapers have room to cut costs. Douglas Arthur, a newspaper analyst at Morgan Stanley, thinks there could be as much as $350 million in cost savings at Knight Ridder alone.
While the Internet has robbed newspapers of circulation and advertising revenue, value investors also say newspaper companies will eventually be able to make lots of money from the Internet. For instance, CareerBuilder.com, an online site for job seekers, is jointly owned by Knight Ridder, the Tribune Company and Gannett, and could be worth as much as $1 billion to Knight Ridder, Mr. Arthur has written.
"They need to be aggressive about developing their Internet positions," said Henry R. Berghoef, director of research at Harris Capital, which owns 8 percent of Knight Ridder, and is also urging Knight Ridder to sell. "They have had success and I think they will have more success," he said. "And the newspapers are not going away."
This is not the first time Mr. Sherman has bet heavily on a single stock or sector. He currently has 14.8 percent of the fund in Computer Associates and about 17 percent in the financial services sector - more than his 13 percent stake in newspapers. But some investors worry that Private Capital's sheer size could turn into a handicap.
"Size is a concern to us because the investing options are more limited," said Peter J. Tanous, an investment adviser whose clients have money at Private Capital. "Bruce is betting that he will create value for his shareholders. If he is wrong, he loses because he is stuck with it. It would take him years to get out of these positions."
Still, Mr. Tanous said, "If I am going to bet on anybody, Bruce Sherman is where I would put my money."
Mr. Tanous's opinion aside, not much is known about the man who is challenging Wall Street's view of the newspaper industry. He is rarely quoted in newspaper business pages. Nor does he appear on TV's business talk shows. His firm has no public relations department, nor does Mr. Sherman solicit for new clients.
A number of money managers who generally know the industry's top players say they know little about Mr. Sherman. One executive at Private Capital seemed genuinely surprised at the amount of attention the firm had attracted. One of the few insights into Mr. Sherman's investment approach comes from a lengthy interview in a book by Mr. Tanous called "Investment Gurus."
Mr. Sherman prefers to visit companies personally, he told Mr. Tanous, because "you're seeing the C.E.O. in his office. "
"You're asking the in-your-face questions that he doesn't want to answer."
But Mr. Sherman has not always applied that strategy. For example, Polk Laffoon, a spokesman for Knight Ridder, said that Mr. Sherman did not meet with top executives there before buying stock. It is not clear whether Mr. Sherman's approach has shifted as his funds grew, or if he feels he knows the newspaper industry well enough already.
Last April, Gary B. Pruitt, the chief executive of the McClatchy company, which owns 29 newspapers including dailies in Minneapolis; Sacramento; and Raleigh, N.C., and Mr. Sherman, whose firm owns 16.4 percent of McClatchy, had lunch at Citarella in Manhattan during a break from a media conference. "He was on top of everything that was going on with our company," Mr. Pruitt said. "He knew details of who owned our stock and what percentage. He knew all the revenue numbers and regional revenue numbers. It was not a passing or cavalier knowledge," said Mr. Pruitt, who said he regularly talked with Mr. Sherman.
Mr. Sherman began learning value investing at a tender age. Growing up in Queens, he became fascinated with stocks. He was given shares of the Polaroid Corporation as a bar mitzvah gift that his father insisted he hold until he was 21. By then, their value had increased ninefold. The neophyte investor concluded they were overvalued, and sold them.
Mr. Sherman earned a degree in accounting from the University of Rhode Island and received his M.B.A. during night school at Bernard Baruch College in New York. After college, he did not head for the stock market; he joined Arthur Andersen, the accounting firm. At age 29, a search firm recruited Mr. Sherman to be chief financial officer of a company owned by the Collier family, which held interests in a variety of businesses, having made a fortune in advertising and real estate. He moved to Naples, Fla., where he worked closely with Miles Collier, the scion of the family.
Mr. Sherman began managing stock investments for the Colliers in the 1980's and, as word of his skill spread among other wealthy families, they began giving him money to manage.
He got his first taste of the newspaper business as a director of The Naples Daily News, which the Colliers owned. His involvement was important in the sale of the Naples paper to the E. W. Scripps Company for $170 million in 1986. Over the years, his firm also made money investing in Dow Jones and the Washington Post Company in addition to the Times Company.
Today, Mr. Sherman and his second wife, Cynthia, a former lawyer, live just down the street from Private Capital's offices in a high-rise in a gated community on Pelican Bay. Though Mr. Sherman is not an avid golfer, two people who know him said he was a member of the exclusive Collier's Reserve Country Club in Naples.
Over the last several years, the Shermans have played an increasingly visible role in the social life of Naples.
In January, for example, the Shermans will hold one of the dinners for the Naples Winter Wine Festival, which raises money for the Naples Children and Education Foundation. Last year, the weekend-long festivities raised more than $10 million. Charlie Palmer, the chef of Aureole in Manhattan, will prepare the dinner that the Shermans are holding. The couple are also involved with efforts to build a Jewish community center and Mrs. Sherman is a founder of the Holocaust museum in Naples.
Mr. Sherman's big coup came in 2001, when he and his business partner, Gregg J. Powers, sold to Legg Mason for $1.4 billion. Private Capital was then managing $8 billion.
Some Private Capital investors have worried that Mr. Sherman put pressure on Knight Ridder so that he could be sure to be paid the remaining $300 million owed to his firm from the sale to Legg Mason. The final payment depends on how much money Private Capital has under management at the end of 2006.
However, there appears to be little risk of Mr. Sherman's failing to collect the balance. The firm will be paid the $300 million unless the fund's assets drop below $20.5 billion. If it meets that goal, the payments will be made over a three-year period starting in 2007. Instead, the push to sell Knight Ridder came because the chain's bylaws require that dissident shareholders submit nominations for board seats by the end of November. And Mr. Sherman was clearly worried. Last April, he told Mr. Pruitt of McClatchy that he was "disappointed in the stock performance of the entire sector," Mr. Pruitt recalled.
Now Mr. Sherman can only wait and see whether bidders emerge. Some private equity firms and McClatchy may be interested in bidding for Knight Ridder, a person close to Knight Ridder said. Also, Craig A. Dubow, the chief executive of Gannett, said yesterday that his company would "take a hard look" at Knight Ridder.
If he bet right, Mr. Sherman could make a killing. If not, it could cost him and his investors a bundle.
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