The future of Knight Ridder is becoming clearer. By the end of the first half of 2006 the company will be sold, broken up or taken private. If there was any doubt in anyone’s mind, it should be gone by now.
Despite the opinion of some on Wall Street that the company would draw little interest there is actually an impressive pool of bidders.
The company has not released any information about the bids but word has started to leak out about who has expressed interest in buying the company. Gannett and McClatchy are said to have made bids. Also a handful of private equity companies, individually and in various combinations, have reportedly made offers. Chris O'Brien and Pete Carey reported in the Saturday Dec. 10, 2005 Mercury News that “MediaNews, a Denver-based newspaper company, was said to be interested in joining a bidding coalition but had not yet submitted its own bid.” Also, other companies can still make bids.
The final decision is months away and will be driven by one thing: Which bidder will offer the highest premium above the current stock price to the shareholders who are forcing this sale. That means the company will go to the bidder which believes it can generate the most profit above what Knight Ridder is currently returning (an operating margin of about 18%).
The most likely scenario
Here is the scenario I find most intriguing and which I think has a great chance of happening.
This is a potential offer from a consortium of Gannett, MediaNews (owner of the Oakland Tribune and nine other Bay Area newspapers) and possibly another mainstream media company or a private equity firm providing financing. I first heard about this possibility at the end of November from very deep inside one of the companies involved. The details were far from resolved, but the essence of the various ideas being discussed was that the consortium would buy Knight Ridder and then parcel out the various newspapers to be operated by different companies.
Members of the consortium would not make the purchase under their current names. Instead, they would form a new company which would own the former parts of Knight Ridder and then cluster them with existing parts of the partner companies.
Clustering boosts profits
Miami and Bradenton get clustered with the Gannett newspapers in Florida. San Jose, Contra Costa, Monterrey and San Louis Obispo get clustered with the newspapers MediaNews runs out of the Alameda Newspaper Group, including the Marin Independent-Journal. In northern California, Hearst might even want to ultimately fold in the San Francisco Chronicle as a way of getting out of the million dollars a week loss mess they have themselves in.
With the footprints Gannett and MediaNews have across the country, few Knight Ridder papers would be so isolated they would be left without clustering opportunities. The few stragglers could be sold or turned over to others in their areas for operation.
The advertising sales synergies from this move would likely drive millions in revenue. At the same time, there could be major reductions in operating costs at the KRI papers as various functions were moved to the newspapers in the cluster with the lowest wages.
This method of acquiring Knight Ridder solves several impediments to the sale:
Also, having the newspapers owned by a separate consortium with no publicly traded stock prevents the low-performing papers in Knight Ridder from being a drag on the margin of any of the newspaper corporations. This means there is less of a threat to the Gannett stock price from the deal.
Getting around the unions
Although effective clustering can save millions in expenses, Knight Ridder has embraced the concept less aggressively than some of the other newspaper companies. This is especially true in California where San Jose, Contra Costa, Monterrey and San Louis Obispo share very few functions.
In large part this is because San Jose is a union operation, with just about every non-management job in the company assigned to one of the bargaining units. This has meant that it is not possible to transfer work from relatively highly-paid people in San Jose to lower wage workers elsewhere.
There is a labor law concept that says that if people outside of a bargaining unit do work that is contractually assigned to members of a bargaining unit they are due the wages and benefits of members of the unit. The technical term for this process is "accretion." San Jose’s labor costs applied to the company's other California newspapers would substantially reduce profits.
When San Jose takes on functions for Contra Costa, as it has done in ad sales and IT, there is no danger of accretion. Also, San Jose uses some content from Contra Costa Newspapers, but in almost all instances these stories and pictures are passed through a wire service. Using a third party like this limits the danger of accretion.
For Knight Ridder to take advantage of the savings offered by clustering in California they would probably have to go to war with the unions. This could involve strikes, bitter negotiating or a union decertification effort. About five years ago I asked a former corporate staff member why these steps had not been taken and was told the company had no stomach for another war with the unions after the relative disasters in Detroit and Monterey.
New operators of the company would not have the same qualms. Also, contracts in San Jose and Philadelphia are up this summer so the timing of the sale would be excellent to drive major contract concessions at these newspapers. St. Paul is facing negotiations in 2007 and could be dealt with separately, after labor and benefit costs in San Jose and Philadelphia were reduced in new contracts.
There would have been a time when cooperation of this type among newspapers companies would have been inconceivable. But in addition to the cluster they operate jointly out of ANG, Gannett and MediaNews recently announced an expansion of their Texas-New Mexico Partnership to include four newspapers in Pennsylvania. This is obviously a concept that works for them.
Taking Knight Ridder private
One other scenario worth mentioning is the possibility that current management of the company would take Knight Ridder private.
I have reminded people on a number of occasions that this is all very personal to Tony Ridder. The men in his family founded and ran the company for most of the last 114 years. His name is on the building in downtown San Jose.
I have previously called Tony proud and purposeful and if he is not satisfied with the direction the sale of the company is taking he is likely to intervene. I think there is at least a chance he, other members of his family and a few top business associates will borrow the billions necessary to leverage the balance sheet and execute a management buyout.
This would probably be a better outcome for the employees, readers and advertisers of the company. But even if this were to happen, the next few years will be filled with uncertainty and discomfort. The debt on a buyout can be crushing and many of the changes that will be forced on the company if it is bought by outsiders will be necessary under this scenario.
Lou Alexander has provided an interesting evaluation of the future of Knight Ridder. Both of the options he presents have important implications for the newspaper industry and, therefore, for our political system.
He is correct that taking Knight Ridder private likely would serve readers better than a consortium of newspaper groups buying Knight Ridder. However, there is no guarantee that this option would result in Knight Ridder successfully dealing with the fundamental social changes reshaping the newspaper industry.
These changes are occurring in a variety of forms, but none more important than the changing information needs and wants of the American public.
Newspapers must adjust. This does not mean turning newsroom decisions over to readers or ceasing to produce public affairs journalism. However, the American public is becoming increasingly diverse along many dimensions, from race and ethnicity to age and interests. Journalists can no longer assume they know the news and information all readers need, and they must experiment with new ways of meeting those needs.
A second basic trend affecting newspapers is the public’s adoption of the growing number of distribution systems available for sending news and information. These multiple distribution systems will continue to exist simultaneously for the foreseeable future and complicate the process of proving news and information. Technological change gives people choices, and we like to use them.
How do these conditions relate to the pending sale of Knight Ridder?
These conditions require a basic rethinking of how newspapers serve the public and a continuing investment of resources in changing the nature of newspapers. A consortium purchasing Knight Ridder is more likely to continue the status quo. This would allow publicly held corporations to continue their quest for unrealistic profit margins for a while longer and to avoid, temporarily, the inevitable redefining of the newspaper industry. Perhaps the public will tire of newspapers unwilling to invest in changes that will serve them.
Although there is no guarantee that going private would lead Knight Ridder to confront these fundamental changes, it would at least release the group’s owners and managers from the profit demands of Wall Street and allow them, if they choose, to invest in the long-term financial performance of their newspapers without fearing repercussions from outside investors. Embracing change successfully is an expensive process.
Private ownership would allow Knight Ridder managers to select from a wider range of market strategies. Whether they pursue the strategies that will maintain newspapers’ unique position in society rests on whether they believe the percentage of the American public that wants quality journalism is large enough to keep newspaper companies financially viable.
Of course, if Knight Ridder managers do not believe a significant portion of the public wants quality journalism, the two options posed by Mr. Alexander will likely yield similar results.
Lou Alexander spent 20 years in the advertising department of the San Jose Mercury News, rising to the top jobs in both display and classified before retiring in 2004. Before turning to the business side, he was a journalist for eight years. He lives in San Jose.
Stephen R. Lacy is professor at the Michigan State University School of Journalism. His research on media economics is known worldwide.