Op-Ed: Why Rupert Has It Right
By: MARSHALL SONENSHINE
The New York Times
May 2, 2007

The news that Rupert Murdoch’s News Corporation has made a $5 billion bid to acquire Dow Jones at a substantial premium value corrects three misperceptions in the financial world. The first is that newspapers are of dubious value. The second is that dual-class voting is bad for shareholder value. The third is that the best way to effect change in a company or within an industry is through shareholder activism.

On value, the demise of the newspaper has been consistently forewarned — consistently incorrectly. Newspapers are the living repository of history in the making. They are content renewed daily, often at the highest levels of quality among media providers. Few people will research and view last year’s television news broadcast, but many will read last year’s articles, particularly those published in high-quality papers like The Wall Street Journal, The New York Times and the Washington Post.

Wall Street has made a sport of trashing newspapers. True, newspapers have high fixed costs and declining circulation. But they also have high-quality content, and in a free-market economy, distributors and consumers find (and pay for) good content just as money finds good companies. It is not hard to imagine News Corp. finding substantial new value for the content that Dow Jones creates whether in its television, digital or other media activities. As the News Corp. bid makes clear, the ultimate strategic value of content and the ability to produce it every day into the future is not necessarily fully expressed through a market multiple of Ebitda.

On dual-class voting, that too has become the plaything of Wall Street. Dual-class voting, a staple of the newspaper industry in the past century, is held responsible for poor stock market performance of newspaper companies — as though the families that control these companies also control the price of ink, the reading habits of Generations X and Y, and the price at which investors will bid their shares.

Even to the extent newspaper families may not always run their businesses to maximize near-term profits, the argument that these families have some duty to do so misses the point. Particularly in the case of newspapers, which have a public trust function, the role of family control may be significant to the mission of the company under family stewardship. Critics of dual-class voting conveniently forget that from the first day on which a dual-class company goes public, and on every trading day since then, the dual-class structure has been priced into the stock. To complain after the fact that the dual-class structure may not maximize a company’s current performance or trading value is to cite a fact that has been all along obvious and presumably appropriately priced into the stock.

Further, it is precisely because dual-class voting creates entrenched ownership that it may drive up ultimate values — even if it also constrained trading values along the way. The premium News Corp. proposes at $60 a share is some 70 percent above recent market levels, and substantially above normal M&A market premium levels. That high premium was obviously calculated against some notion of intrinsic value, and in order to entice the family holders, who are presumed to be considerably more entrenched than the public market. Public markets are made by investors who may be easily lured by a 25 percent or 30 percent premium. To the extent the public market for a stock is held by recent buyers such as hedge funds, including so-called activist investors, a moderate or even a smallish premium can create a home run return on that investment.

By contrast, family members holding supervoting shares typically demand a much higher premium to relinquish their legacy business interests — and ultimately that higher price redounds to the benefit of all shareholders. From that perspective, dual-class voting may insulate the company from the seductions of easy buyers, but it also preserves the company’s ability ultimately to entertain bids from the most aggressive buyers. Families and strategic acquirers may appreciate “ultimate” value even if some public investors do not wish to wait for it.

Of course, the family can in theory still “just say no.” The question is theirs to answer — and that has been the point all along. Within a few days of the bid having become public, a cautious family trustee indicated that family holders representing 52 percent of the primary vote oppose the proposal. This revelation of course also suggests the possibility that other family members may be already leaning towards yes (the family actually controls 64 percent of the vote). The trustee’s message and the broader family and board drama are now all part of the dance that inevitably follows a bear hug on a family controlled business. And the general interpretation of the dance to date is that the message may be more akin to “close call, may well work” than “no way.” That interpretation is borne out in the stock market, which since learning of the bid has traded Dow Jones stock above $56, obviously betting in favor of a deal at or near the bid level.

Finally, the News Corp. bid puts the lie to the flavor of the month called activism. For the past year, Morgan Stanley has been petitioning the Sulzberger family to relinquish its family control of The New York Times Company. But why should the family do so? Unlike News Corp., whose petition comes in the form of a bid, Morgan Stanley offered only a barb. So-called activists may have their role in stirring the pot, but for all their sanctimonious words, words are cheap, as any newspaper publisher knows. By contrast, Mr. Murdoch may effect real change because he arrives with a real currency called cash.

Marshall Sonenshine is the chairman of Sonenshine Partners, an investment bank in New York.