Stock Market Influence on Media Firms
JOUR 350
The News and Media Business

Week 10
AOL-Time Warner
•	Mega media merger Jan. 2000
•	AOL 55%
•	Time-Warner 45%
•	AOL market capitalization $165b
•	Time Warner market capitalization $76b
•	= total market cap $241b
•	That was then – this is now
•	market cap = $83b

“Synergy” in reverse
•	AOL-Time Warner stock hit a low of $8.70 on July 25, 2002 
•	AOL earnings plummeted
•	despite rising revenues
•	due to low dial-up profit margins
•	Shareholder lawsuit, SEC investigation
•	over $190m in bogus ad revenues 
•	dropped AOL from name Fall 2003
•	Still actively seeking to unload division

Media stocks have lost their lustre
•	Convergence bandwagon carries few now
•	Viacom splitting Paramount from MTV, cable
•	Bigger not always better?
•	Cyclical nature of advertising revenues
•	Rise and fall with economic cycle
•	http://money.cnn.com/2005/10/31/news/fortune500/media/

Newspaper stocks hard hit
•	Once the darling of Wall St.
•	Now suffering from circulation losses, newsprint price increases
•	http://www.smartmoney.com/sectorpatrol/index.cfm?story=20051011 
•	Downward trend puts pressure on management to keep earnings up
•	eg. Tribune Co. cuts at L.A. Times

The “best-kept secret” in newspapers
•	Bagdikian identified it in 1983 
•	And “third market” in The Media Monopoly
•	Profitability of newspapers – double other biz
•	Especially in monopoly markets
•	Pointed to Davey Senate report 1970
•	Chains grew increasingly profitable
•	By increasing in size
•	And thus in economies of scale

Case study: Gannett
•	Founded 1906 in upstate N.Y. 
•	Now largest chain in U.S.
•	Went “public” in 1967
•	Listed on NYSE in 1969
•	Al Neuharth named president & CEO 1970
•	Company expanded rapidly
•	Acquired many titles, even other chains
•	Posted earnings gains in 85 consecutive quarters

Problems with stock market ownership
•	Links management with quarterly earnings
•	Requires short-term strategy
•	Often to long-term detriment
•	Typical Wall St. tactics perhaps not applicable to the “Fourth Estate”
•	Ignores public service component
•	While hiding behind “Freedom of the Press”
•	Hostile takeover always a possibility
Canadian newspaper industry
•	Public ownership of shares helped shape 
•	F.P. Publications takeover by Thomson 1980
•	Led to “Black Wednesday,” Kent Commission
•	Southam went public in 1945
•	Became a takeover target in 1980s
•	Thwarted Black with “poison pill”
•	But only delayed inevitable
•	Taken over gradually in 1990s

Case study: FP Publications
•	Formed 1958 by Max Bell and Victor Sifton
•	Became largest chain in Canada in 1960s
•	Bell, Sifton died in 1970s
•	Chain run by “Brigadier” Dick Malone
•	Held a small block of 112 voting shares
•	Strikes at Pacific Press, Ottawa, Montreal
•	Hit company revenues hard in 1979
•	Quarterly dividend suspended

The bidding war begins
•	Sharks start to circle FP
•	Group headed by Black offers $45 a share 
•	Former Globe publisher Howard Webster ups bid to $50 a common share
•	And $5,000 each for preferred shares
•	Offer aimed directly at Malone
•	Whose 112 shares suddenly became forth $560,000

Lord Thomson wades in
•	Second Lord Thomson of Fleet Ken Thomson
•	Canada’s only billionaire
•	Father Roy Thomson died in 1976
•	His publishing empire included Times of London
•	Made his money in Scottish television
•	Multiplied it in North Sea oil investments
•	Ken Thomson won bidding war for The Bay
•	1979 “Store Wars” final price $640 million

Malone caught in middle
•	Thomson raised common share bid by $10
•	But lowered preferred share price to $4,000
•	Malone’s shares now worth $448,000
•	Webster ups ante to $69/common, $1,000/pref.
•	Thomson raises to $74/common, $2,000/pref.
•	Malone also ran Sifton, Bell trust funds
•	Had to vote in their best interests
•	Voted to take Thomson’s last offer

Case study: Southam
•	Family firm founded late 1800s
•	Went public on TSE 1945
•	Made fateful decision to make common shares voting
•	On advice of investment dealers
•	Ownership of shares widespread by 1980s
•	fourth generation of Southam family 
•	Owned only about 30% of shares

Takeover attempt on Southam
•	1984 Pacific Press strike weakened company
•	Seven-week shutdown cost $5 million
•	Mystery buyer began collecting shares
•	Southam took defensive measures
•	Negotiated share swap with Torstar in 1985
•	“near merger” made impossible to take over
•	but challenged in court by minority shareholders
•	10-year period reduced to five years

Southam strategy to avoid takeover
•	Boost stock price and become too expensive
•	By becoming “lean and tight” operation
•	Laid off staff at most newspapers
•	Declared 15% profit target
•	Grow too large to swallow
•	Diversified into books, magazines
•	Bought more newspapers, chains
•	eg. most Lower Mainland papers 1990-91

Black moves in for the kill
•	1991 Southam earnings worst ever
•	New CEO non-journalist, non-family member
•	Black bought Torstar shares Nov. 1992
•	Southam board takes defensive measures
•	Issues similar block to Desmarais
•	Black and Demarais on board of directors
•	Cut costs even further
•	But independent directors opposed breakup of firm

The Pain of the Obdurate Rump
•	Black thwarted in bid to take small papers
•	Buys out Desmarais for 40% ownership in 1996
•	Fires independent directors, appoint himself CEO
•	Publicly lashed Southam management:
•	“long accepted inadequate returns for the shareholders” 
•	“we [at Hollinger] have our own shareholders to answer to and serve” 

Taking Southam private
•	Black bid $20 for remaining shares Nov. ’96
•	Got enough for 50.7% ownership
•	Used majority control to get at Southam cash
•	Declared “special dividend” of $2.50/share
•	Hollinger reaped $47 million
•	Leveraged into $923m takeover bid mid-1997
•	But only got enough for 58.6% ownership
•	Bought key block from mutual fund late 1998
•	Got to 69.2% -- enough for his next move 

The coup de grace
•	Black used “creative financing” to complete takeover of Southam
•	Used voting control to borrow $532 million
•	Then declared another dividend of $7/share
•	Hollinger got $378 million 
•	Used cash to finance final share offer
•	Got  97% control in early 1999
•	Took company private, sold to CanWest 2000

CanWest suffers its own stock woes
•	Bought Southam papers at top of market
•	Took on heavy debt load
•	Tried to issue bonds at 10% -- had to pay 12%
•	CWG stock price $16 late 2000 
•	dropped to $12.50 by mid-2001
•	Southam losses drop CanWest earnings
•	payment of quarterly dividend suspended 
•	National Post weighed Southam papers down
•	CanWest cuts 20% of staff , Southam fellowships