September 13, 2006
New York Times Company Spirals Further DownwardBy Thomas Lifson
It is sad to watch a once—great company decline. Jobs are sacrificed, historic facilities closed, and an atmosphere of failure and fear usually permeates the surviving operations. When a company needs to sell—off profitable crown jewels to sustain the lagging less profitable pieces, it does not portend future happiness.
But when the situation is compounded by hereditary management succession based on family control, and when the hapless scion put into Daddy's office leads the firm into blunder after blunder, squandering the resources built up by previous generations, elements of tragedy enter the picture. When the bloodline—based boss is both obsessed with a private agenda and easily led into foolish moves because of his poor understanding of business fundamentals, danger levels rise. Vulnerable to fad—based moves and prey to fast—talking investment bankers, polished consultants and the flattery of subordinates, stumbles and pratfalls accumulate.
The story begins to take on the character of a parable.
Such is the case of the once—great, once—respected New York Times Company under the "leadership" of Arthur Ochs "Pinch" Sulzberger. After squandering corporate resources on a very foolish bet on the future of newsprint in New England, and after committing to a lavish monument of a headquarters, the company needs to generate more cash than ongoing operations are likely to provide. The divestment scalpel is starting to cut into muscle, not fat.
In July we noticed that cash was being pulled out of the production end of the newspaper business, as one of the company's two major modern (opened in 1992 as part of Pinch's brilliant strategy of the moment) printing plants in New York was set to close, providing cash to the coffers of the company, but leaving once—prosperous blue collar employees jobless. This was precisely the sort of story the Times used to specialize in covering with oozing sympathy for the worker—victims, with implied or direct criticism of profit—hungry greedy managers and owners. But when its own actions are in question, the usual anti—business rhetoric was nowhere to be found.
Yesterday, the New York Times Company announced its plan to sell its highly profitable television station group, consisting of 9 network affiliates in medium—sized markets. With a billion dollar building to finish (to house a shrinking editorial staff), and with the metropolitan daily core business in steady decline, the company needs to come up with cash to pay its looming bills. So it is liquidating one of its most profitable operations.
Overall profitability of the company last year amounted to roughly a 7.7% return on gross sales, according to a report the company filed with the Securities and Exchange Commission. But the television station group earns almost three times as much per sales dollar, at 22%, according to the company's statement.
Companies normally sell off their less profitable businesses and keep the winners. But the NYTCo is no ordinary business, and it may need more cash than the declining businesses it owns can provide. While its recent purchase of About.com is profitable, the magnitude of the profits is tiny compared to the rest of the company and compared to the purchase price Pinch paid.
Shareholders may complain about what amounts to a double—down bet on the loser newsprint business, but the Sulzberger/Ochs clan controls the board of directors with only a tiny percentage of stock ownership, thanks to a two—class system of voting rights. This system amounts to a kind of corporate Jim Crow system that liberal Pinch Sulzberger is in no hurry to change. Equality has its limits when personal and family benefits are in question.
It is theoretically possible that the sale of the broadcast properties is a brilliant, well—planned strategy. But if the television stations were to be liquidated, the best time to have done so would have been several years ago, before cable television and the internet predictably began to really destroy big chunks of the value of broadcast television licenses. Back when broadcast television was more of monopoly, or at least a more dominant force in advertising markets, local affiliate stations were valued much higher than they are today.
If there is something more than desperation behind the sale, the Times itself is not trumpeting that vision. The often insightful Times media business writer Katharine Q. Seelye offers little more than a warmed—over version of the press release—based item appearing on MarketWatch and other business news services. If there were a scoop to be had with the inside story of the well—crafted strategy at work, one might think she would be the chosen instrument to bring it to the public.
The sale may be better late than never, perhaps, but the company's overall profitability will fall, something Wall Street never likes to see. On a pro forma basis, the effect of the transaction will be to shrink the company's overall margins by almost 10%, from 7.7% last year to 7.03%. Turnarounds are rarely built on such a move.
Of course, the company has soothing words on offer.
Ah yes, synergy. Many an acquisition has been based on that magic word. Does anyone remember Time—Warner/AOL? Viacom acquired a host of media properties, and recently split into two companies in part because the synergies never appeared. As they often do not.
It is, of course, possible that Pinch really knows what he is doing. But if so, he doesn't seem to have communicated it clearly to star columnist Thomas Friedman, who was captured on video at the Webby Awards this year with he following explanation of the company's digital strategy.
The astute Rosslyn Smith two months ago offered the following possible explanation for the very strange behavior of Pinch Sulzberger in destroying so large a portion of his shareholders' value:
I am not generally attracted to such conspiratorial theories. But the latest move does not seem to be aimed exactly at increasing the stock price. If the board of directors had their fiduciary duties in mind, they might well pay heed to the advice the Times editorial board offered less than a week ago to another famous family—dominated (thanks to two—tier shareholder voting rights) company with a scion running it.
Hat tip: Clarice Feldman, David Yerushalmi
Thomas Lifson is the editor and publisher of The American Thinker. He graduated from Harvard Business School, where he was a Baker Scholar, and taught on the faculty there.