Arthur Sulzberger, Jr. & the rejection of Jack Welch

The question any New York Times shareholder should ask

today is, if in spurning Jack Welch’s generous offer of $500

million for The Boston Globe and the Worcester Telegram

& Gazette, did Arthur Sulzberger, Jr., fail to live up to his

fiduciary responsibility.

The answer appears to be yes because as 2006 turned into

2007, and the subsequent years followed, Sulzberger must

have realized he’d never see such a generous offer again.

Did he really think he was going to recover what the company

paid for The Globe -- $1.1 billion in 1993 – by refusing to sell

to the former CEO of General Electric?  Was that a credible

point of view in 2006?

To put Sulzberger’s rejection of Welch’s offer in perspective,

it’s important to realize that in 2006, Sacramento, Calif.-based

McClatchy purchased Knight-Ridder’s 32 newspapers, which

included The Philadelphia Inquirer, San Jose Mercury News,

The Miami Herald and The Charlotte Observer, for $6.5 billion.

That’s about $200 million for each newspaper, if you calculate

the valuation by dividing the purchase price by 32.  Admittedly, 

it's simple.

But compare it to Welch’s offer – about $250 million per

newspaper if you divide his offer by two – and you seriously

have to wonder what Sulzberger was thinking.

Instead of maximizing the value of a distressed business – the

clarion call of any chairman of a publicly owned company – by

picking up nearly half the purchase price for The Globe and the

Telegram & Gazette in Welch’s offer, Sulzberger, seven years

later, settles for less than 7 percent from the owner of the Boston

Red Sox, John Henry.

It almost makes you wonder if he’s a closeted Rex Sox fan

or just incompetent.

It doesn’t take a genius to look at revenue trends and determine

that your business is sooner headed down the toilet than it is

the top shelf of media properties.  Once you know this, you

either invest heavily to turn it around or you sell the business

as quickly as possible.

You certainly don’t hold onto it and do nothing, which is

what Sulzberger did.

If ever there should have been a Tiffany business – one with

the crème de la crème of readers, highly educated with high

household incomes and wealth – it is The Boston Globe.

Instead of being that business, it was eking out – based on

the offers The New York Times Company received – about $8

million in cash flow, which means Henry likely overpaid;

newspaper multiples – or valuations – were once seven times

cash flow, meaning the price should have been closer to $56 million,

not $70 million.

But maybe Henry figured he needed to offer a premium for

both papers – all of $14 million.

New York Times shareholders should demand Sulzberger’s

resignation before he inflicts even more damage to the firm.

Does Dean Singleton read this blog?

I have no idea. But given his latest pronouncements about potential cost-cutting moves, it appears the chief executive officer of Denver-based Media News, owner of more than 50 daily American newspapers, is very much taking direction from a piece I posted on this blog more than 20 months ago.

In it, I suggested that newspaper companies would outsource editing functions to a company in Vietnam. This was part of a fictional account (maybe not so fictional after all) of what happened the day the last U.S. daily newspaper, The Shenandoah Valley News, located in southwestern Iowa, stopped producing a printed edition. (Yes, the newspaper really does exist – at least as of this writing.)

The tragedy of Mr. Singleton’s pronouncement, as reported in yesterday’s New York Times by Maureen Dowd, is that it will likely come true. There have already been reports about newspapers in California attempting to outsource not only editing functions – but also reporting functions – to companies located outside of the United States.

The Chicago Tribune, about two years ago, led some of this outsourcing initiative, when it farmed out its call center – the people who answer the phone if you call to complain about your newspaper delivery, cancel your subscription or put the paper on hold while on vacation – to a company based in the Philippines. Now when you call about your subscription, someone in Manila answers the phone.

It doesn’t take too much of an imagination to consider that, as Mr. Singleton sees it, his newspapers reporters, after writing their stories, would send them via e-mail to a copyeditor on the other side of the globe, who would simply look for grammatical errors.

With any luck, before the story is printed, there will be someone back at the local newspaper to question the reporter about their sources, put the story into context and add anything that might be missing to the article. Given Mr. Singleton’s plans, and his previous behavior, which includes the ability to squeeze out every last penny out of every newspaper he owns, don’t count on it.

It wouldn’t be surprising if the company providing this editing service was found in India. Given that India is home to call centers as well as jobs requiring a high-end skill set, it’s not too much of a stretch to believe that the former British colony might very well provide the employees editing English-language newspapers, including those in the United States.

Besides being cheaper, one of the reasons that India is home to jobs that require service skills as opposed to manual labor is because they once hosted a professor from the Massachusetts Institute of Technology, Dr. Norbert Wiener. This scientist, who assisted in the birth of the Information Age, and much of the technology we take for granted today, including cyberspace, told India’s top leaders to concentrate the country’s economic development on high-tech jobs – not manufacturing ones – about 50 years ago. Not only did India listen to Dr. Wiener, they acted on his advice.

(For more on Dr. Wiener, either buy or check out of your local library a recent biography of him, entitled Dark Hero of the Information Age: In Search of Norbert Wiener, The Father of Cybernetics, by Flo Conway and Jim Siegelman. It’s a great book and well worth your time, especially if you’re curious about the beginnings of the technology that surrounds us today.)

Mr. Singleton’s actions are par for the course in the American newspaper industry. Like the American automotive industry, this is an industry that’s been told numerous times to produce a product that people want to read and advertisers want to buy. And, too often, when it realizes that the audience has slipped away and that advertisers are reducing the amount of money they spend on newspapers to reach consumers, the American newspaper industry looks like a deer caught in the headlights.

Maybe Singleton and his fellow newspaper CEOs will borrow from the playbook of their cohorts in the American automotive industry and make a trip to Washington to beg for a federal bailout!

Singleton’s announcement is one in a long litany of cost-cutting moves. The newspaper industry has yet to provide a plan to restore its financial health. It slashes jobs, reduces the size of its papers, eliminates many of the sections that readers enjoyed, cuts back on the editorial content and then has the audacity to raise its cover price. As thinking goes in the newspaper industry, this passes for strategic planning. Is it any surprise that people who use to pay for a newspaper instead go to its Web site, which is free, read two or three stories and then consider themselves updated on the day’s events? Not at all!

Jim Oberweis owns a local dairy that sells some of the best milk and ice cream I’ve ever tasted. (He’s also a frustrated local politician who can’t seem to run a winning campaign, which is just fine with me. I’d never vote for him.) But if you order home delivery of his milk, it arrives at your doorstep in a case that keeps the milk cold until you place it in your refrigerator. Jim and his team truly show pride in the way their product is handled.

The newspaper industry would be well served to take a hard look at how Oberweis handles home delivery of its milk. If the newspaper industry stopped believing it produces and delivers a cheap, throw away product, it would take the time to deliver its product right to the doorstep – not the end of a driveway, where it’s subject to weather conditions – with the same care that Jim Oberweis delivers milk. This would demonstrate to its readers that the newspaper industry truly produces something to be treasured – not just a piece of trash.