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Lessons on Ownership from the Sale of Knight Ridder

The recent auction of Knight Ridder the USA's second-largest newspaper chain has received great attention in the business press. Under pressure from large shareholders who acquired shares in the public market, CEO Tony Ridder, whose family started the chain in 1892, sadly and reluctantly decided to sell. Knight Ridder has been seen as a symbol of old media a dying industry. Still, the company's overall profit margin was 19.3% in 2004.

At least one commentator believes that the industry is not dying and that a different issue is driving the company's circumstances. My concern, James M. Naughton, former executive editor of the Philadelphia Inquirer, told the New York Times, is that it will be considered a referendum on the news business rather than an acknowledgement of what it really is the failure of Knight Ridder many years ago to protect itself in the way it organized its stock.

Many publicly traded media concerns have two classes of stock: closely held voting shares and widely traded shares with little or no voting power. Founding-family control of voting shares at such companies as the New York Times, Scripps, McClatchy, CBS and many others protect them from takeovers and speculators desires for short-term wealth maximization. Because Knight Ridder has only a single class of stock, Naughton says it is more apt to be under pressure from investors and therefore more apt to do bad things to its newsrooms to try and protect itself, like cutting costs to the detriment of journalistic quality.

In other words, lesson number one of the Knight Ridder saga is that both who owns a company and how it is owned can have tremendous impact on the business, its finances and its management. Of course, that is why family businesses generally prefer to stay private and wisely give much attention to the question of who exercises ownership control. Having voting and nonvoting shares allows strong ownership control while achieving financial flexibility, even to the point of trading noncontrol shares in public securities markets.

Knight Ridder did make an effort to protect itself from hostile takeovers. In 1989, an obscure clause was inserted into the company's articles of incorporation. In case of a pending sale, a panel of three journalists would be appointed by the company. If the panel agreed that the buyer would uphold Knight Ridder's journalistic standards, the purchase could be approved with the support of 67% of stockholders. If the panel feared lower journalistic standards, 80% approval would be required. Lesson number two is that articles of incorporation are an important tool for providing creative methods to protect a company.

The McClatchy Company emerged as the buyer of Knight Ridder last month. Possibly because of the journalistic-quality clause in Knight Ridder's bylaws, voracious private equity firms stayed out of the bidding, perhaps keeping the price tag at about $4.5 billion. There was celebration at the Knight Ridder properties being kept in the McClatchy portfolio (12 of 32 newspapers will be sold). This is the absolute best outcome we could have hoped for, Carol Rosenberg, a reporter for the Miami Herald, told the New York Times. It s a newspaper family with a tradition of journalism, not a corporate chop shop.

Because it enjoys an ownership structure with two classes of stock, McClatchy has the benefits of public trading liquidity and the ability to resist Wall Street s insistence on short-term profitability. It can focus more on product quality and profitability than on quarter-to-quarter growth. It can be more patient in realizing value from its investment.

The news business is like many other industries dominated by family businesses. It just makes more sense when it is controlled by family owners than by public owners. That may disappoint family owners, but that s the risk they take.

 

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