Own Up to the Truth

If we were to ask you what JPMorgan Chase, Credit Suisse, SunTrust Banks, Union Bank of California and Regiment Capital have in common, the answer would be more than just they’re being money-lenders. Each of them owns a prominent newspaper company.

The banks don’t own them because their boards of directors took a vote and decided newspapers would be a great investment. They own them because the papers, as borrowers, have defaulted on their enormous debt loads. And so now, the only way for these businesses to have even a chance to survive is for their lenders to agree to convert their debt into equity shares, thereby easing the debt burden.

Uneasy lays the crown on the heads of these accidental owners. For now, banks are treading lightly across the hardwood floors in the executive suites at such places as Tribune Co., Freedom Communications and Journal Register. But during the next year, look for the inevitable collision between the accidental owners and newspaper management.

Typically, when banks end up owning a company or property, they may passively hold ownership and bide their time until the economic cycle turns for the better. If the held business rebounds, it’s a better candidate for sale.

But that scenario simply won’t hold true for newspapers. The industry not only underwent a cyclical economic downturn, it’s also navigating a secular shift — changes that will overturn the entire industry. The challenges are many, of course, but the main ones include the flight of national advertising to other mediums and the digital replacement of classified, auto and real-estate advertising. Pick your poison if you want to guess what made newspapers so gravely ill, but know that these companies simply can’t wait for an economic rebound to save them.

Accidental owners have a common experience when they start to learn about their new properties. They suddenly realize that the financial information about these companies (which used to be their borrowers) is not terribly helpful to them as owners and managers. Most print publishing operations don’t have a standard suite of management statistics. This paucity of useable information about the business compounds the challenges of accidental ownership.

For instance, the accidental owner will ask management, “Have you taken all the costs out?” The CEO says yes without being able to substantiate his claim. Say the annual spend was $20 million. Management may say it has taken $3 million out of its budget, but it can’t substantiate how the other $17 million is being spent to generate value for the corporation.

A media company may have 200 newspaper titles in a given region of the country, but that doesn’t mean it can compare one against another. In fact, the major metro dailies in the chain may have their own management information system that’s separate and distinct from those used by the regional titles owned by the same parent. In almost all the papers, there is a distinct lack of performance measurement in the editorial departments, which typically consumes up to 45 percent of expenditures.

Let’s talk about the advertising department. Often, the old inbound order-taker approach is still being used without tracking the customer records necessary for an outbound approach, leaving newspapers clueless about who really buys their inventory. There is little customer-relation management technology that could significantly reduce management costs and improve efficiency.

A second missing metric is that many newspapers don’t know how much of the local ad market they’ve captured. Our studies show that a good penetration is 30 percent of the local market. A third measurement that’s missing involves individual sales performance. The ad team is managed by how much revenue the sales force brings in, not by its effort. We had one client that spent $175,000 a year on a customer-relation management software license — but only 20 percent of the sales team was using it.

The only good metrics newspapers do have measures performance where it matters least in terms of generating value: the printing and circulation operations.
Unless management and its accidental owners have an informed dialogue, there’s no way those owners will write any more checks to fix the business. Instead, it will force management to take down costs further. The “we’ve already cut to the bone” argument will fall on deaf ears.

Unless accidental owners are able to objectively understand where to pare back and repurpose their investment to generate some added value, there’s little good in store for the newspaper industry. The demise of papers will accelerate dramatically. More jobs will be lost — which is unfortunate, because some newspapers are having success by enhancing their digital products and installing pay walls. The accidental owners will eventually minimize their downside and sell off the pieces.

We believe that newspapers can survive and make a solid 10-15 percent bottom-line return. But too many of them, particularly the metro dailies, are buried in the past. They were owned by prominent families and generated significant wealth at a time when the printed medium was significantly more relevant and largely without competition. If the papers broke even, that was fine. Today, they can’t see the future.

The good news is that there is a future — but newspapers and their accidental owners will have to modernize and adapt if they ever hope to see it.

Neil Heyside (pictured above) and Michael Epstein are turnaround specialists with CRG Partners in New York.