Most news organizations today are either publicly traded firms, or bankrolled by private equity firms. Both public and private capital demand significant returns on their investment. Analysts inside and outside the newspaper business have observed that newspapers, even many of those with sagging stocks, are still profitable, and some even have enviable profit margins north of 20 percent. So why aren’t investors happy? Why have they been sending newspaper stock prices down, down, down?
As the breakup of Knight Ridder and investor pressure on the Tribune Co. show, profits aren’t enough. Investors want growth, not just profitability. Some risk-tolerant investors seek out companies that are growing but not yet profitable, in hope that the higher risk investment will pay off with higher returns. Newspapers are a legacy business, or have been.
Wall Street is surprisingly sanguine about the prospect of newspaper companies dropping millions to develop or buy online services – even when the company is in a negative growth spiral and even when nobody seems to know quite how those online services will create the kind of revenue stream the company enjoyed in the past from its traditional products. Why? Because these are seen as bids to regain their former status as growth stocks.
Private equity firms, for their part, may be even more eager to see their charges make aggressive moves in the online. These firms see their biggest return when the private companies they invest in go public, and the path to the IPO is paved with web pages. Some private equity players, however, may be in the hunt mainly for high-cash flow businesses they can use to pay themselves huge bonuses -- and newspapers clearly qualify. We'll know if this is happening only in retrospect.
Widespread encouragement to invest in something solely because of potential future value, without a clear idea of who will profit or how, is a recipe for a stock bubble. The prospect of being a good investment for any company, including media companies, is a double-edged sword. The company that makes a good argument for future growth online attracts aggressive investors, who pile on money – and big expectations.
Only a small minority of companies will achieve the home-run status that those aggressive investors are looking for, and no company can exceed expectations forever. When the honeymoon is over and reality sets in, investors yank their support for the company, following an exuberant rise with an equally rapid collapse. The fate of Knight Ridder is a good example of what happens to a company after a collapse in investor trust: investors with controlling interests in the company demand the breakup of the company, in hopes that the parts of a company will be more valuable than the discredited whole.
Intriguingly, GateHouse Media's recent public offering and rising stock price, as well as Gannett's current favor on Wall Street (at least relative to its industry cousins), may reflect -- at least in part -- investors' wilingness to support online moves. GateHouse and Gannett, we note, still have the bulk of their print properties in communities where print margins remain quite high. They are far from being Internet plays, but we have no doubt that the Internet component has been a plus in the Wall Street thinking.14
What’s driving many news organizations towards community engagement is the prospect of profitability combined with growth – or the promise of growth – that their backers require.
