The Day of the Analysts

Ken Berents views himself as a journalist at heart, a demanding inquisitor who takes pride in asking the tough questions and reporting to his equally demanding readers. In June 1995, Berents, a former newspaper man and now managing director at the investment house of Wheat First Butcher Singer, had a recommendation for his firm's investor clients about the stock of Times Mirror Company: Buy it. Why? The company was an 'asset cow' waiting to be 'milked,'" Berents wrote, and its "bloated expense base" was "ripe for some significant cuts." He added, "We believe every line of business with a lack of strategic focus should be up for sale at the right price or be a candidate for closure," referring specifically to the chronically unprofitable New York Newsday.

A month later, it was with no small sense of professional satisfaction that Berents watched as Times Mirror, with almost military precision, followed up its earlier decision to close the Baltimore Evening Sun by shutting New York Newsday and cutting the staff of its flagship Los Angeles Times by 14 percent. These moves, along with other austerity measures and the establishment of profit-margin targets, induced an adrenaline-like surge in Times Mirror stock. From a paltry $18 a share in April 1995, it soared to $34 eight months later and to $45 this past spring. Times Mirror shareholders finally had something to cheer about, but at a cost of two newspapers and thousands of jobs.

"If a journalist had been in my place, he probably would have written the same thing about Times Mirror,'' Berents says. "What is a journalist? The fourth estate, acting as a check and balance on the system. That's what we do on Wall Street: we do checks and balances on these companies.''

 Wall Street analysts like Berents work for brokerages and investment houses, studying companies in all sectors of the economy and recommending which stocks investors should buy or sell. The analysts get little public exposure, but they have come to wield enormous influence, notably with huge institutional investors whose buy-and-sell decisions have profound effects on stock prices (see "The New Media Lords," cjr, September/October). Like the investors they serve, the analysts tend to focus on profits in the short term; a company's five-year plan is much less likely to impress them-and, thus, affect the company's stock price - than its latest three months of earnings.

And in a time of so-called media convergence, when broadcasting, cable, telephony, and cyberspace continue to erode newspapers' dominance of news and advertising, the analysts' influence is likely to increase. They may have as much to say about the long-term future of newspaper journalism as they do about the short-term performance of earnings and stock prices.

The clash between meeting investors' financial expectations and protecting journalistic integrity may be approaching a critical juncture. The slimmer Times Mirror is an extreme example, but the mind-set of cutting in the interest of "enhancing shareholder value" - pushing up the company earnings - raises questions about the future of a whole range of newspaper operations, from news holes to Sunday magazines to foreign bureaus.

For the most part, the issue is not about a given newspaper's staying afloat, but about real or perceived investor expectations. The industry-wide average profit margin is still healthy, about 15 percent, at least two-and-a-half times the margin of Standard & Poor's index of 500 companies. But in Wall Street's view of newspaper companies, what matters is that they don't perform the way they used to.

The pressure from Wall Street also raises questions about the investment plans of newspaper companies, and whether they will reinvest in newspapers or - as recent examples suggest - take Wall Street's advice and buy into the lucrative world of television stations with profit margins of 30 to 50 percent, and cable and new media. In September, A.H. Belo Corp., owner of The Dallas Morning News, bought The Providence Journal Company and the nine television stations it owns for $1.5 billion. Gannett, which last year spent $1.7 billion to buy Multimedia Inc., owner of five television stations, swapped six radio stations for a TV station in Tampa. In July, Tribune Company bought six TV stations for $1.1 billion. Media General, owner of the Richmond Times-Dispatch, made a $710 million newspaper/broadcast acquisition, with most of it going toward the purchase of ten TV stations. And the New York Times Company spent $226 million for a pair of television stations.

 While passage of the new telecommunications act relaxing broadcast ownership restrictions has helped spur the buying binge, the message from these moves is a partial reflection of Wall Street's increasing influence and underscores the belief that newspapers, by themselves, don't provide the earnings growth that many investors want.

"One of the unfortunate things about the investment community these days is they tend not to be long-term oriented," says John Morton, a former journalist and now a newspaper analyst in Washington, D.C., for Lynch, Jones & Ryan Inc. "When I got into the business, they tended to recognize the long-term value. You don't find that much anymore.

"My concern is that when economic times get to be better, that newspaper management might not be inclined to reinvest in newspapers as they did before. Will they restore those cuts and editions and news holes? I think that question has yet to be answered.''

For journalists, the whole situation can appear to be a clear case of good versus evil, of public service versus greed. This is, after all, a clash of divergent cultures that do not see eye to eye.

"I think most analysts are basically gorillas,'' says Ken Auletta, media columnist for The New Yorker, discussing Wall Street's numbers-based criteria for measuring the success of a newspaper company. "They just barge straight ahead. They are blinkered, they don't see sideways and they knock over a lot of furniture.''

Analysts have a stock reply that is pretty much a truism:

"If these companies are going to play in the public domain, they are going to have to play by the same rules as everybody else," says Berents, adding that newspapers "have been lackluster for the past four or five years. Unfortunately, we do focus on quarterly earnings, but that is how Wall Street makes companies more efficient.''

Indeed, the relationship of publicly traded newspaper companies to Wall Street has thrust journalism - a labor-intensive venture whose productivity cannot be easily measured - into the same arena with steel production and cardboard-box making.

In the push to improve the bottom line, some newspaper executives overreact to suggestions - or perceived suggestions - from analysts and cut with little regard to protecting the news franchise. "I think if anyone is going to affect journalistic content, it is the people who are frightened by the analysts, who are spooked by them," says Neal Shine, the former publisher of the Detroit Free Press. "They'll cut because that is what they think the analysts want.'' Analysts, he adds, "are not running rampant through newsrooms telling them to cut and buy out."

Some newspaper companies have bought into the quarterly logic, observes Gene Roberts, managing editor of The New York Times, adding that analysts should not shoulder all the blame. "I think in response to this pressure newspapers have raised a crop of publishers and editors who really think short-term, and it's going to take some kind of trauma to turn this kind of thinking around."

Making money is not a problem for most newspapers; it never has been. But newspaper companies need to raise money to compete in the furious mix of competition from other media, new and old.

Newspaper executives woo the analysts during conference calls, media conferences, and social events, trying to convince them to advise their investor clients in their favor. This is a continual campaign, an almost perpetual schmooze. "C.e.o.'s spend an inordinate amount of time trying to impress the analysts," says Auletta. "They treat them as if they are delegates at the old-time presidential conventions and they need their votes. They know that what tends to impress the analysts is cost-cutting."

 At the annual PaineWebber media conference last December, the New York Times Company, which sports the daily logo "All the News That's Fit to Print'' on the front of the Times, inserted the slogan "Improving Shareholder Value" beneath the Old English nameplate in a slide presentation to analysts. Mark Willes, the former cereal executive who, as newly appointed president and c.e.o. at Times Mirror, had closed New York Newsday, talked of a "cultural revolution" at the Los Angeles-based company and repeatedly emphasized cuts. P. Anthony Ridder, chairman and c.e.o. at Knight-Ridder, pledged that his newspapers would improve their profit margins. If they did not perform, Ridder said, "they won't be around." Some diversifying media companies try to promote themselves as multimedia or broadcasting or entertainment companies, playing down the association with the always cyclical newspaper business.

Jim Naughton, until early this year the executive editor at Knight-Ridder's Philadelphia Inquirer, says he can "measure over my lifetime in journalism the changes from forty years ago when you consciously did not let these things enter your head. It was anathema. Increasingly in the last five years much more discussion and dialogue of the whole notion of profit margins crept into our talks," says Naughton, who is now president of the St. Petersburg-based Poynter Institute. "The profit margin in Philadelphia was announced. That was unheard of before. It was quite deliberate, to get everyone in the company thinking about the issue and to be more conscious of the choices that might be made.''

Knight-Ridder's dictate to Philadelphia, Naughton said, was to raise the profit margin this year to 12 percent, from 8 percent, and next year to 15 percent. "The whole concept of trying, for strategic purposes, to be short-range in your focus is nonsense," says Naughton. "Newspaper companies need to have a longer-range strategic viewpoint and the pressure they are under to perform on a quarterly basis is, I think, destructive to the long-term strategic interests of a newspaper.''

Such approaches stand in stark contrast to The Washington Post's decision in 1971 to publish the Pentagon Papers - after a federal court stopped their publication by The New York Times - just as the company went public. Post executives argued against publication, warning of the potential impact on the stock if the paper were indicted. The Post also risked losing its lucrative television station licenses. In a move that helped make the Post's publisher, Katharine Graham, a journalistic legend, the Post decided to publish. But it is worth keeping that example in the context of those times. In the early 1970s there were only three commercial television networks and no CNN. Cable practically didn't exist. A computer wouldn't even fit in a car. The Internet was two decades away from popular use. Newspapers still enjoyed a solid grip on the news, information, and advertising business. Many publishers felt they could afford to take journalistic risks, sometimes enormous ones.

Which is not to suggest that the Post or any other newspaper would choose not to publish the Pentagon Papers a quarter century later. But as 1995 decisions by ABC and CBS show, when faced with actual or threatened lawsuits from deep-pocketed tobacco companies, some of the most powerful voices in American media felt they had to consider the financial implications of potentially costly litigation. And they backed off.

"What we're seeing is a merging of church and state,'' says Charles Eisendrath, director of the University of Michigan Journalism Fellows. He likens the cost squeeze on newspapers to the furious revolution in health care. "I was trained specifically not to think of my profession as a business," he says, "and so were doctors. The doctors think like journalists and the people who run the hospitals think like publishers. The doctors say we have to spend X dollars or the quality of care will fail. And the people who run hospitals say ‘We will spend only this amount and the quality had better be good.' ''

 Even the best-run newspapers with high profit margins feel the financial pressure of the Wall Street analysts through the continual expectation of increased profit margins. The Times's Roberts argues that newspaper companies let themselves get caught in the trap of convincing themselves - and the analysts - that they could defy the cyclical swings of the newspaper business and satisfy investors with more and more growth. Eventually that logic collapses.

Were the Baltimore Evening Sun and, in particular, New York Newsday victims of Wall Street? The Evening Sun had been dying for years and New York Newsday had lost an estimated $8 million to $14 million annually over a decade. Like The Houston Post, which also closed last year, New York Newsday was on the critical list. Tom Wolzien, a former broadcast network producer and now a media analyst at the investment house of Sanford C. Bernstein & Company, says the loss of New York Newsday "took a voice out of the market, but maybe the market wasn't demanding the voice. It's unfortunate to say, but maybe that was the case."

Wolzien says he worries about newspaper executives who recognize financial trouble too late and have no choice but to make deep cuts, and those "who rush to cut and are not smart enough to understand the system of news and the long-term value of it." Melissa Cook, a vice president and media analyst at Prudential Securities Inc., warns that "at the end of the day if you destroy the product you've destroyed the investment," adding, "As a daily reader I can make the decision to renew or not, but if I find it is a bunch of canned or rehashed wire copy, I'll watch the network news instead."

But the clout of Wall Street is growing, from the analysts themselves and from the newspaper companies who have invested in the quarterly thinking. One sign of that, Roberts says, is the annual budget process at many newspapers.

"It used to be that editors started off the process by submitting a budget they thought was necessary to do the job," he says. "They might get cut, but at least they could state their case. Now the corporation decides from a distance what the local paper should make and won't even look at a budget that doesn't meet their favor. As far down the road as I can see, the enemy is us and our own short-sightedness."

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