Issues & Opinions

The News Corp pursuit of Dow Jones had gotten rather quiet, and then at the beginning of June, grew louder, with news that the Bancroft family had chosen to engage in discussions with Mr. Murdoch. Predictable concerns arose after that meeting, centered around the legacy of the paper, and the (absurd) possibility that Murdoch was willing both to buy it and to destroy that legacy. Nearly two weeks later, the Bancrofts put forth a plan to “safeguard The Wall Street Journal’s editorial independence”, and it wasn’t met with the wholehearted approval the Bancrofts might have hoped for.

Minor stalemate.

But the game remained afoot last week, with the Bancrofts “fine-tuning” their proposal. Earlier that same week (last Monday, June 11), came the news that “GE, Microsoft Discussed Buying Dow Jones“, including the fact that “…the two sides couldn’t reach an agreement…”.

Another minor stalemate.

Undaunted, however, GE remains in the game. Today we find that “GE and Pearson Discuss Joint Bid For Dow Jones“. All well and interesting, not least because GE, unlike Pearson, can actually afford such a transaction. Pearson, like GE, a fine company, and unlike GE, part owner of one of my other favorite periodicals, the Economist, doesn’t have anything like the financial muscle to overpay for Dow Jones, while Murdoch does.

Like Pearson, GE’s interest is strategic:

Both GE, which is based in Fairfield, Conn., and London-based Pearson have reason to fear a Murdoch-Dow Jones tie-up: News Corp.’s global presence would help The Wall Street Journal compete with the FT in Europe and Asia; and the Dow Jones imprimatur would be likely to help News Corp.’s planned Fox News business channel compete against CNBC.

Even with that in mind, I can’t assess how much either of them, let alone what I’d presume to be the “big brother” in the transaction, GE, might really care to dangle over the edge on a strategic acquisition. Specific to GE, their television broadcast business is a potentially transient asset, and might be better off sold than augmented by acquisition. And if GE should happen, for some reason, to bow out of the bidding, Pearson surely doesn’t seem able stay in on its own as a principal.

So, it seems, the end result of this recent surge of interest (or pretense to interest) in a Dow Jones acquisition might best be judged by likelihood that GE can find reason to remain within a consortium attempting to outbid Murdoch.

Before I hit the button to publish this entry, I’ll be going to check the newswires for any recent developments in the matter, the better to avoid unnecessary embarrassment. So if you’re reading this, that means I’ve failed to find any mention, so far, of new developments.

And here’s the thing - Murdoch’s offer of $60/share is not only a fair offer, it’s absurdly so, based not on the gleaming brand that is Dow Jones and the Wall Street Journal, but on that brand’s ability to generate revenue, earnings, and cash flow. While I can’t presume to speak for anyone but myself, I don’t know that anyone seriously expects Murdoch would do anything to harm that brand. Therefore, aside from intransigence, there’s no compelling argument that Murdoch’s made anything but a fine offer.

In a vacuum, GE can throw money around with the best of them. But GE never operates in a vacuum - it didn’t become the world’s second largest company (by market value) through misguided acquisitions. Outbidding someone who’s offering 40X earnings and 16X EBITDA might classify as misguided. Even with that in mind, GE could still get away with it, but for another lingering problem, highlighted last month (May 22) in a Breaking Views commentary, coincidentally published in that day’s WSJ.

General Electric’s planned sale of its plastics business to Saudi Basic Industries is a double-edge sword for the conglomerate. The $11.6 billion the division fetched is good news. After all, investors valued the unit at as little as $8 billion when they added up GE’s parts to come to a valuation for the whole shebang, according to Deutsche Bank. So the price GE achieved unlocked 45% more value for shareholders.

GE remains a well run company, an exemplar of the diversified-yet-flexible conglomerate. Too many transactions like the sale of GE Plastics to SABIC at a premium to their captive value within the GE conglomerate, however, and the flexibility to take a flyer on deals, which is precisely what a Dow Jones bid might represent, will disappear.

Breaking Views’ commentary is certainly better informed than my own, but by coincidence, they, too seemed to think that broadcast television might be good for GE to jettison:

Companies that trade at a discount to their parts are prime targets for activist investors. Mr. Immelt should consider spinning off businesses such as GE Money and NBC Universal, before uppity investors dictate a more-Draconian corporate strategy for him.

It’s quite unlikely that GE can both strategically acquire to protect its NBC assets and simultaneously consider selling them on to unlock value. The choice they make in that regard, or with regard to other, non-broadcast assets, will need to be intellectually consistent with whatever they choose to offer for Dow Jones. Conglomerates, like individual market participants, prefer to sell overvalued assets and purchase undervalued ones. Selling anything in the GE portfolio and buying Dow Jones at a price high enough to beat News Corp’s offer seems sure to violate that preference.

And therefore, I doubt GE will do it. So News Corp still seems likely to win the race.

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Addendum - 10:00PM, Jun 18 - In a story from tomorrow morning’s WSJ, several interesting things, including the statement that cost synergies between WSJ & FT would only be about $50 million, as of the last look taken at the matter “several years ago”. Given the greater need for Pearson to generate a return on any DJ investment than for Murdoch, the article also highlights the obvious, which hadn’t occurred to me: The 700 editorial staff of the WSJ + the 500 editorial staff of the FT = too many staffers. Which raises the concern about mass layoffs, and the presumption (simple-mindedly ignoring obviously overlapping remits) that editorial quality would drop as a result.

So it’s not just GE who faces a potential impediment based on market expectations.

“I think most shareholders probably would have preferred a decision by Marjorie Scardino (ed: Pearson’s CEO) to concentrate on what they are good at, which is education, and dispose of some marginal interests,” says Ted Scott, a portfolio manager at F&C Asset Management PLC, which owns £136 million ($268.6 million) in Pearson shares, according to filings.

“It may come [as] a bit of a surprise that they may want to defend their investment in the FT.”

If she goes ahead with a bid and fails, that poses risks for Mrs. Scardino, a former journalist from Texas who was knighted by Queen Elizabeth II in 2002. Private-equity firms, which covet Pearson because the company could easily be broken up and sold off, would likely try to take advantage of the turmoil.