DIVIDE AND CONQUER?

IPO DELIBERATIONS PROLONG THE SUSPENSE

by Mark Toner
Presstime Staff Writer

You may have not seen the story in Wired magazine or on CNET, but The New York Times Co. already had its initial public-stock offering. And it was a resounding success.

Forgive the usual Internet-news suspects for missing the story. Three decades ago, when the venerable publisher first offered stock to the public, the Internet wasn’t even a gleam in Al Gore’s eye.

The Times’ and others’ transformations into publicly held companies a generation ago helped “resolve a liquidity problem for family shareholders,” explains John Morton, a Silver Spring, Md., analyst. As Wall Street rewards a brash new generation of Internet start-ups, some publishers consider playing the market again.

In the past six months, several newspaper companies have moved to centralize online operations into discrete business units; at presstime The Times Mirror Co. and Knight Ridder became the latest to join their ranks. That’s nothing new—many such divisions date to 1996 or earlier, and many cite nonmarket motives for the moves.

“This only makes sense,” Knight Ridder Chairman and Chief Executive Officer Tony Ridder says of KnightRidder.com, calling the new stand-alone unit a “natural evolution” allowing execs to “simplify the reporting structures, facilitate our decision making and move faster.”

But the centralization push accelerated along with technology-stock indices, hinting that market timing is more than mere afterthought. Hints aside, officials with at least three newspaper companies—The New York Times Co., Tribune Co. and Knight Ridder—have acknowledged considering spinning off such operations altogether, possibly through the same IPO process that so handsomely has rewarded many Internet start-ups.

While such market speculation affects only the largest companies—and some analysts question whether even they boast the online gravitas to pull it off—the moves could profoundly affect how all publishers fare in the burgeoning Internet economy.

“I can see the compelling reasons why they want to do it,” says Charlene Li, former director of Community Newspaper Co.’s online operations and a senior analyst at Forrester Research of Cambridge, Mass. “But by taking away the Internet, you could be taking away [papers’] future.”

MARKET FUNDAMENTALS

To be sure, watching the Internet explosion has been a bitter pill for newspaper publishers. When Yahoo! opted to purchase online-community developer GeoCities in a January stock swap valued at $3.6 billion, few overlooked the fact that for the same money it could have bought all the available stock of Dow Jones & Co., including that anachronistic ink-on-paper publication, The Wall Street Journal. While many newspaper stocks have since rebounded, giving DJ a late-October valuation of $4.2 billion, Yahoo! isn’t exactly hurting. Valued at $46.4 billion, it still could buy all available stock of The New York Times Co. nearly seven times over.

Blame analysts for putting the IPO bug in publishers’ ears. At the NAA Annual Convention last spring, brokerage-based industry watchers admonished publishers for not moving aggressively enough online (Presstime, May 1999 Convention Report, p. 43). When publishers asked how to do so without taking the earnings hits considered anathema by The Street, the notion of newspaper IPOs was given new credence. The market has since reacted favorably to newspapers’ overall online performance, giving the notion a further push.

“Investors now look at the Internet more as an opportunity for newspapers than a drag,” says Douglas Arthur, a managing director with Morgan Stanley Dean Witter in New York City, predicting spinoffs will begin next year.

PLAYING THE NUMBERS

As newspaper managers remain mum, analysts speculate that the division decision depends on the numbers.

“If there were a huge collapse in Internet stocks, that would be a rather dissuading development,” deadpans Morton.

So long as the opportunity exists to cash in on a market bubble, publishers likely will be interested in The Street. But will The Street be interested in what publishers have to offer? The answer hides within the convoluted logic behind Internet-company valuations.

On one hand, newspapers’ online business units aren’t losing hundreds of million of dollars like many Internet juggernauts; online bookseller Amazon.com, for instance, issues a warning with nearly every quarterly report pushing back its expected date of profitability. Some newspaper sites already are profitable, and their online business units already generate real revenue—Times Company Digital, the most vocal of the would-be IPOs, expects $24 million-to-$26 million this year, while Tribune Co.’s Tribune Interactive estimates $25 million-to-$30 million.

Considering that America Online will likely log a billion-dollar year, newspaper operations seem small potatoes—too small, some analysts argue, to attract the attention of institutional investors, who consider even companies making hundreds of millions “small-cap” opportunities.

“It’s limited how many companies can do this,” says Li. “Most cannot. They can barely take themselves public.”

Ultimately, the decision could hinge on whether investors consider a spinoff as an extension of the existing media company or on the merits of its Internet potential. After all, “many Internet companies have gone public without any revenue at all,” says Morton. “What they sell is an idea of the future.”

PERCEPTION VS. REALITY

That’s all well and good for the three, perhaps four largest newspaper groups that may have something to sell. But in an Internet-crazed investment climate, would IPOs represent a tacit acknowledgement that newspapers as an institution aren’t sufficiently fast, flexible and future-minded?

Not according to their past track records, industry watchers insist.

“There’s no reason a newspaper company can’t become monster.com,” says Li, referring to the online-recruitment juggernaut. In Toronto, The Globe and Mail has done “just that,” she contends, creating a site that captures 80 percent of its ads without the help of the print paper; it also recently partnered with a print rival (see New Media Index).

Much smaller groups also created national Internet brands—consider Landmark Communications’ weather.com and The News & Observer’s groundbreaking NandO.net. And BrassRing.com, a new venture by The Washington Post Co. and Tribune Co., already resembles a ’Net start-up (Presstime, Nov. 1999, p. 8).

IPO backers argue that a supply of readily swappable stock gives companies a liquid form of currency to forge acquisitions and alliances. But its absence hasn’t hurt newspaper-company investments in hot ’Net start-ups to date. Tribune Co. was an early stakeholder in America Online; Times Mirror Co. and Knight Ridder both invested in Netscape Communications Corp. well before its IPO, while Morris Communications Corp. took an early position in Zip2. Prior to formation of its Times Company Digital unit, The New York Times Co. also took a healthy stake in TheStreet.com, and The E.W. Scripps Co. of Cincinnati just launched a second $100 million venture fund focusing on Internet start-ups.

But even if driven by short-term shareholder demand, IPOs could free more cash to pursue long-term strategic acquisitions, contend bullish backers, including William Drewry, a research analyst with Donaldson, Lufkin & Jenrette in Atlanta. That cash, however, may come with an equally long-term cost.

“[Newspapers’] standing on Wall Street has been helped by the fact that they have been aggressive—they’re not going to be the buggy-whip manufacturers of the next century,” argues Morton. “If you’re taking all your Internet initiatives out of your core company, it could draw away [investors].”

THE PEOPLE PROBLEM

When The New York Times Co. created its Times Company Digital subsidiary this summer, it didn’t look far for leadership. Execs raided their own senior management. Along with such new-media stalwarts as Martin Nisenholtz, now TCD’s top exec, and Lincoln Millstein, formerly The Boston Globe’s vice president of new media, notable hires included David A. Thurm, the Times’ vice president of production—ink-on-paper production, mind you; Ellen Taus, Times Co. vice president and treasurer; and key legal and human-resource executives.

But at many newspapers, print-side employees seeking digital rewards typically leave for dot.com pastures. Backers of spinoffs argue that they give publishers ways to compete with high-flying Internet operations that offer stock options. IPO or no, KnightRidder.com may offer “some sort of equity plan,” according to The Philadelphia Inquirer. Creating separate companies, Li argues, also may provide an out for soon-to-expire moratoriums on union attempts to organize papers’ online divisions.

Others fear disparities and strained relations between print and Internet operations; already, some ink-stained wretches derisively refer to online counterparts as “optionaires.”

Seeking to allay concerns, Times Co. Chairman and Publisher Arthur O. Sulzberger Jr. promised that should the company pursue the spinoff avenue, print-side employees will be able to purchase TCD stock at the IPO price.

“It’s important that everyone through-out the Times Company feels personally involved in the success of our newest line of business,” Sulzberger wrote in an e-mail.

Others question whether options attract workers willing to work only long enough to cash in and move on. As a whole, newspaper staffers “acknowledge we’re all underpaid, and we’re all happy with that,” says Li. “We have some very smart people who could be making tons more at other places, but they stay.”

THE LEGACY

Regardless of whether newspaper dot.coms become a reality, the industry’s spinoff flirtations hasten other ongoing trends, particularly the continuing centralization of operations into corporate new-media divisions.

“The Internet, to a certain extent, takes the localness away,” says Morton. “It starts to make sense to have all the far-flung Web sites run more from a top-down basis.”

Doing so brings together disparate media types, such as the cable, radio, newspaper and television assets owned by multimedia companies such as Cox Enterprises Inc. of Atlanta. It also simplifies partnerships with former media rivals as publishers develop local portals. The drawback, Li cautions, is “local creativity,” particularly when innovative technologies are supplanted by one-size-fits-all corporate solutions.

Knight Ridder New Media’s Real Cities provides perhaps the best end-user example of the top-down approach. As a national directory-like portal similar at first blush to Yahoo!, Real Cities links to deep local content in KR markets, as well as those dominated by partners such as Central Newspapers Inc. of Indianapolis and Belo of Dallas. A common interface and technology from providers including AltaVista’s Zip2 division tie everything together.

From a management standpoint, such moves mirror print-side strategy. “It’s a bit analogous to what’s happened to newspaper ownership,” Morton says. “[Groups] are better able to manage collections of newspapers than individual newspapers were managed.” Eventually, though, online strategy could well drive print-side decisions. Morgan Stanley’s Arthur speculates that the Internet’s explosive growth could lead to further consolidation or mergers among entire newspaper groups, not just their online divisions.

Accordingly, perhaps the ultimate returns on spinoff deliberations won’t hinge on market vagaries, but on publishers’ long-term goals.

“If your goal is to create a new company that doesn’t just depend on newspaper Web sites, but does all sorts of other things,” says Morton, “that could be a motivating factor.”