Thursday, November 30, 2006

Lady in distress

Migrating the New York Times Co. from public to private ownership could well endanger our most distinguished journalistic institution.

Although some wishful thinkers believe a management-led buyout could shield the New York Times from the disenchanted investors pummeling the stock of its parent company, the heavy debt required to take NYT Co. private would put more profit pressure than ever on the Gray Lady and her sister publications.

That pressure almost certainly would lead to sharp reductions in the abundant resources – staff, bureaus, travel budgets and more – that enable the Times to be the newspaper of record for the world’s largest and most powerful democracy.

If the unthinkable occurred, the Times likely would remain a solid and respectable regional publication. But it would lack the resources and authority to fulfill its unique role as watchdog and national conscience. With all due respect to the Wall Street Journal and Washington Post, even they lack the resources or mandate to fill the void.

The good, the bad and the ugly aspects of private ownership were discussed here in connection with the unfolding drama that will determine the fate of the Tribune Co.

Although private ownership might prove to be the best course for Tribune (if not for the employees whose jobs are sacrificed in the interests of efficiency), it is difficult to imagine a structure more favorable to the New York Times than its existing ownership.

Unlike Tribune, whose management answers more or less directly to the owners of its common stock, the NYT Co. is effectively controlled by members of the founding Ochs-Sulzberger family, who own a super class of shares that gives them the ultimate power in managing the business and setting profit targets.

Even though a rising chorus of investors is pressuring the family to cut expenses to raise profits to 20% of sales or more, the company has produced an operating profit of 16.4% in the last 12 months. The additional resources made possible by lower profit targets are a blessing for the New York Times and its readers, but there’s a problem:

The relatively low operating profits are depressing the value of NYT stock and effectively forcing holders of the shares to subsidize the company. Because shareholders believe their investments would be worth more if the family required management to produce higher profits, they are up in arms.

Led by Morgan Stanley Investment Management, there is a growing movement among common stockholders to pressure the family to abandon the two-tier stock structure. If the movement were successful, the management elected by the common shareholders – and not the family – would set the profit targets. Rest assured, they would be a lot higher than they are today.

In light of the shareholder discord and the fairly depressed value of NYT stock, it is perfectly logical for family members to think about buying the public shares and running the company as a private entity insulated from the scrutiny Wall Street. This would require raising more than $5 billion of debt and equity from financial firms seeking high rates of return.

A leveraged buyout, as such a transaction is called, can work well when management has a plan to improve profitability by accelerating sales, significantly cutting expenditures or, ideally, both of the above.

Given concerns in the financial ocmmunity that newspapers may face up to five more years of weak revenue growth, the only buyout plan likely to win funding would be one calling for even deeper expense reductions than typically demanded by the public shareholders.

If the family decides to take the company private, it's hard to imagine how the Gray Lady could come out whole.