Wednesday, June 20, 2007
GE's & Pearson's Reported Bid for the Wall Street Journal
It's hard to know just where to begin this post. It has so many interesting angles.
To begin with, let's take a look at this Yahoo-sourced price chart (click on the chart to view a larger version) for Pearson, LLC, GE, Dow Jones, and the S&P500 for the past five years. Ironically, of the three companies, Pearson has had the best five-year record of stock price performance (which I'm using here as a quick proxy for total returns), followed by GE and Dow Jones.
Even with Dow Jones' recent uptick in price, due exclusively to the acquisition offer by Rupert Murdoch (discussed here), it still badly trails the S&P. As does GE, despite its recent runup. The latter's price gains, by the way, are confined to about three weeks in the past five years, all of those weeks being in the past three months. If anything, it could well be some institutional investors pre-positioning for an eventual GE breakup.
However, back to the subject of the Dow Jones offer. Last month, I wrote, in part, in that linked post,
"The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.
No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities.The likely best outcome for the Journal and the rest of Dow Jones' media assets is to join a modern, global multimedia entity which can leverage their values further than is possible currently, while affording investment in them to retain their current competitive attributes. More than anyone else in media, Murdoch fits this description.
The crocodile tears over a potential loss of editorial independence and a standalone media presence are misplaced. This is about a too-small, old media company which has failed to properly take advantage of its best brands to create shareholder value. It's time for the Bancrofts to put up or sell. Either commit to investing in Dow Jones to enable it to consistently earn superior returns and realize its brand values, or sell it to someone who can."
Seen from this perspective, my own analysis of the recently-revealed GE-Pearson plans for a joint takeover of Dow Jones is as follows.
First, as the Wall Street Journal article published yesterday noted, most M&A deals are done from weakness, not strength. This one is no exception. Dow Jones isn't courting any suitors.
Rather, Murdoch wants the world's premier business print news brand to fuel his multimedia plans for the business news sector.
As such, it's difficult to see what Pearson adds, because it is a print publisher. In fact, according to various sources, its shareholders have rewarded it for reducing emphasis on its Financial Times unit. In fact, it's no accident that Pearson and Dow Jones both lag the S&P. Expensive, print-based business news organizations in the multimedia, YouTube and cable world, are just waiting to be cannibalized via Schumpeterian dynamics.
Now we turn to GE. Where to start? Here's a company that can't get out of its own way to reward investors with consistently superior returns for nearly six years under CEO Jeff Immelt. Now, it wants to form a closely-held joint venture with a European-based company, to merge print businesses.
What flavor of Kool-Aid are they drinking over at GE and NBC/Universal these days? You've got different social cultures, plus business cultures to merge, and a third-party entity to form, answering, one presumes to both parents.
Yeah. That's a surefire recipe for success. What Immelt's merry band can't manage with their own, wholly-owned assets, they will now fix by sharing a completely new business with a third party partner. Oh, and did I mention that the nascent bid is reported to allow for the Bancrofts to continue as minority shareowners?
Yes, that's going to make running or eventually disposing of the unit a lot simpler! Right!
Here's where the part about merging/acquiring from weakness comes in. The only reason GE is doing this is to try to keep The Wall Street Journal out of Murdoch's hands. Everyone knows that Murdoch wants that brand to fuel his imminent cable business news channel. What better brand name to use than "The Wall Street Journal News Channel," or somesuch moniker?
Ironically, whereas Murdoch pledges to invest in The Wall Street Journal, should he buy the parent company, most observers are fairly sanguine about the need for Pearson and GE to cut costs at Dow Jones in order to justify their bid. So not only are the two companies conglomerating an expensive new asset, but they plan to gut it while they attempt to manage it with some sort of trans-Atlantic management structure.
Will GE/Pearson get a credible bid together, and/or win Dow Jones? I have no idea. I will offer this insight, though. If they are successful in acquiring Dow Jones and, thus, The Wall Street Journal, look for it to be a financial non-event, at best, and failure, at worst, over the next decade.
Here's a funny little aspect of media businesses that seems to have escaped everyone. Everyone except, I am guessing, Rupert Murdoch. The key assets walk out of the door each night. Or email their work in from assignments each day.
If GE/Pearson buys Dow Jones, look for Murdoch to spend richly to buy a list of key Wall Street Journal talent, and distribute their well-regarded efforts via his multimedia empire.
Ironically, if GE were to spin NBC/Universal to shareholders, then it could cleanly pursue the Dow Jones acquisition as a media pure play, dispensing with the complexity of the Pearson angle. Perhaps even sell CNBC to Murdoch, and let him have Dow Jones, too, while reaping an enormous profit on the sale.
As with so much Jeff Immelt has touched since he became CEO of GE in late 2001, I think this business move will fail to lift the company's total returns to a consistently superior performance, relative to the S&P500. At best, it will prop up NBC/Universal, which may, when the unit is spun off under Immelt, or as part of a private equity de-conglomeration of GE, fetch a better price. But it's unlikely to be worth the price paid, especially if it leaves the Bancroft's with a say in management or editorial affairs.