With many Knight Ridder employees still emptying their desks in the wake of the latest round of layoffs and buyouts, company executives found themselves faced with potential pink slips of their own this week, courtesy of the company's biggest shareholder, Private Capital Management.
PCM warned the Knight Ridder board Tuesday that if it fails to take its advice and sell the company, PCM will likely lead an effort to get rid of current board members and executives and sell off Knight Ridder assets to the highest bidder.
With more questions than answers available by mid-day Wednesday, Poynter Online editors Julie Moos and Bill Mitchell posed a series of questions in a conversation with Poynter's Rick Edmonds and Howard Finberg. (Mitchell, Edmonds and Finberg are former Knight Ridder employees.)
The edited exchange below is aimed at provoking conversation. Please add your own questions -- and answers -- in the feedback area attached to this article.
Poynter Online: What's the most likely next development in this story? Is Wall Street expecting Knight Ridder management to comment on PCM's action today?
Answer: Some response should be forthcoming from KR management soon, if not today. All kinds of companies have resisted take-over attempts over the years, and the betting is that KR will describe the PCM pitch as a bad idea. The big question on Wall Street, meanwhile, is just who might be willing to pay a premium take-over price for Knight Ridder under current market conditions?
What options might KR management be considering today, assuming they want to resist the proposed sale?
Basically three: They could tough it out and hope that a meaningful offer does not materialize; they could seek a friendly merger or buyout partner (a "white knight," in Wall Street terms); or they could reject a premium offer if and when it's made. Option #3 could be difficult, depending on shareholder sentiment.
We're not sure what, if any, insulation Knight Ridder might have installed in its financial structure to protect itself from a hostile take-over.
How will the decision actually be made about putting the company up for sale or not?
It's in the abstract until and unless an actual offer materializes. But, in the meantime, the company could take more of the kind of steps it's taken in recent months, e.g. sale of assets (Detroit Free Press), additional layoffs and buyouts, etc.
The author of the PCM letter to the KR board, CEO Bruce S. Sherman, says he believes other shareholders would also like to see the company sold and/or broken up for higher profits. PCM owns 19 percent of the company. What are the other major ownership blocs? How will their wishes be determined?
Sherman implies that he has spoken with other big institutional shareholders and has some votes in his pocket. There are two other companies, Southeastern Asset Management Inc. and Harris, that have owned huge blocks of Knight Ridder stock for years. (Their holdings have ranged up to 15 percent each of Knight Ridder's stock, and currently account for eight to nine percent each.) On various occasions, they have declared their interest in the company to be long-term rather than short-term. If Knight Ridder doesn't know already how those other shareholders feel about this latest development, KR execs are doubtless on the phone with them today to find out. All things considered, there are probably about 15 votes that will really play a determining role in whatever unfolds. In addition to PCM, Southeastern and Harris, seven other companies hold between two and a half and four percent of KR stock. That accounts for about 50 percent of the shareholders, and a handful of other institutional investors will also be critical in what happens.
PCM says the actions KR management has taken to date (layoffs, sale of Detroit Free Press, etc.) "have not adequately addressed a number of significant issues facing the company." What are other companies doing in response to those issues that KR has not? The issues are: "i) continuing consolidation among traditional sources of print advertising revenue; (ii) the redirection of advertising dollars to other media; (iii) the company's unexceptional operating margins; and (iv) the company's lack of a nationally read paper capable of being leveraged in the online market."
Some other newspaper companies have achieved higher operating margins and have maintained more consistent strategies in such areas as new media development and new product development. The lack of a nationally read print product seems an odd criticism of a company that focuses on local markets.
Many analysts have listed reasons why the usual suspects among potential buyers of KR may not want to do so. What companies might be among some less predictable potential buyers? Google? Yahoo!? Or would the disappointing results of the Time Warner/AOL merger discourage such cross-breeding of old and new media?
This is not a great time for either Gannett Co. Inc. or Tribune Co. to consider a major acquisition, for at least two reasons. Their stock prices are low these days, and they would have to borrow money to fund the acquisition. Interest payments would put even more financial pressure on the new combined operation. There isn't much history of companies from other fields buying newspapers. GE does own NBC. And The Walt Disney Co. bought Capital Cities Inc., but quickly sold its newspapers. As tantalizing as the idea of a Google or Yahoo! move into newspapers might be, they've already demonstrated their ability to move into local markets. What do they need newspapers for? Perhaps exclusive content, but that content might be too generic to support a premium purchase price for KRI. Another option may be more likely: perhaps an investors group would make a bid, make some changes, and then sell off Knight Ridder in pieces over time.
Given the role of journalism in a democratic society, does the possible breakup the nation's second largest newspaper company rise to the level that government intervention will become a possibility? When the loss of competitive newspaper voices in markets across the company became a trend, Congress passed the Newspaper Preservation Act in 1970 enabling anti-trust exemptions in the form of Joint Operating Agreements. What are the prospects for government involvement at this juncture?
It's a theoretical possibility, but highly unlikely. The Bush administration has demonstrated a great reluctance to use regulation in such circumstances. Plus, many JOAs just didn't work and are being dissolved.
What precedents exist for this kind of strategy by a major shareholder of a newspaper company?
There have been very few examples -- we can't think of any off the top of our heads -- of hostile takeovers of newspaper companies.
Could there be any possible objectives on the part of PCM beyond maximizing shareholder value?
None. They're in the business of maximizing shareholder value.
If you were one of the thousands of Knight Ridder employees today -- or the thousands of others who are KR retirees or former employees with some stake in the form of stock ownership or as-yet-unused pension benefits -- what would you advise?
There may be some up-side for employees and others who own stock, in the event of a takeover that included a premium price paid for the stock. We're not sure what would become of the Knight Ridder pension plan if the company is sold.
What are the possible explanations for what's really going on here?
PCM clearly believes there is a buyer out there willing to pay a premium price, thus creating a windfall for the investors whose money it manages.
With so much emphasis on shareholder value, often at the expense of the quality of the news product, how much does the particular ownership of any given news company matter any more?
It does matter. And certainly companies such as The Washington Post Co. and The New York Times Co. have created ownership structures that have enabled them to invest more heavily than other companies in their news products.
And there is at least some sentiment among Knight Ridder's institutional shareholders that it's a mistake to cut staff and other expenses so much that the quality of the basic product is undermined.
Tony Ridder has addressed the possibility of new ownership. At one point in recent years, Ridder said, in effect: If you don't like what I’m doing, wait until you see the kind of management team that might succeed mine.
What about the "Tony factor"?
Ridder has made it clear that he does not want to be the one to preside over the dismantling of the company. As much as the stock has been dispersed widely, his family name is still on the door.
Might this development prompt Knight Ridder to consider taking the company private? What are the issues for KR and other publicly traded media companies to consider about that option?
Going private is theoretically possible, but not at all likely. The company would have to borrow billions, creating even more pressure to cut expenses and increase revenues.
What are the implications of PCM becoming a major shareholder not only in Knight Ridder, but in Tribune, Gannett, Journal Register Co., Lee Enterprises Inc., New York Times and others?
This is difficult to answer. PCM describes itself as a value firm, doing its own analysis of what a company is really worth. PCM clearly regards newspaper stocks as a bargain. Whether it has a strategy to influence the value of shares in companies other than Knight Ridder remains to be seen. PCM is a 20-year-old company with an outstanding record in its investments and has grown quickly.
What are the implications for citizens and readers that PCM, while asserting "long respect for KR's distinguished history of serving the public," demonstrates such single-minded focus on the price of the stock?
If PCM leads a takeover of Knight Ridder, it would do so in order to sell off its assets or find subsequent buyers at even higher prices. It seems unlikely that PCM would spend much time focused on the quality of the journalism or public service rendered by Knight Ridder operations.
Why Knight Ridder? What makes this company an attractive takeover target, at least in the eyes of PCM?
Knight Ridder is unusually vulnerable because it has no class of family ownership in its stock set up. CEO and Chariman Tony Ridder owns 1.9 percent of the company stock, but that's insignificant in this scenario. Other reasons include its relatively lower stock valuation. It's also smaller than some other publicly traded media companies, such as Gannett and Tribune.
What's next?
We don't know, but we're betting Knight Ridder will have something to say soon -- and that PCM has a few other things up its sleeve.
