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Knight Ridder CEO's nightmare came true

March 2006

Knight Ridder CEO's nightmare came true

Speech in 1996 showed concern about a takeover of company.

By Dale Kasler -- Bee Staff Writer

Monday, March 13, 2006

Knight Ridder Inc. was the envy of the publishing industry not too many years ago, its newspapers generating profits and Pulitzer Prizes.
Then the world changed, first gradually and then with remarkable speed. The competition got tougher. Profits softened - yet Wall Street demanded more. Knight Ridder eliminated jobs at the San Jose Mercury News, Miami Herald and other prestigious papers, but earnings didn't improve enough to satisfy investors.

Finally, the nation's second largest newspaper chain reportedly agreed Sunday to be sold for about $4.5 billion to The McClatchy Co. of Sacramento - a company with one-third its revenue but with a better record of balancing the competing interests of journalism and finance.
McClatchy, publisher of The Bee and 28 other daily and nondaily papers, may have been a surprise winner in the bidding for Knight Ridder. But the sale of Knight Ridder wasn't a shock.

Its embattled chairman and chief executive, Tony Ridder, had been telling employees for years that the San Jose-based company was in danger of losing its independence.

"It was a perfect target; Tony Ridder has known this for years and that's why he was pounding for the need to improve profitability," said industry analyst John Morton, head of Morton Research in Maryland. "His worst nightmare came true."

Three factors played key roles in Knight Ridder's downfall:

* The company was heavily dependent on big-city papers such as the Philadelphia Inquirer.

That made Knight Ridder vulnerable because competition for advertising dollars is so much more intense in big cities, said Tom Bolitho, president of a newspaper brokerage firm called National Media Associates.

* It failed to convince investors it had a long-term strategy for growth at a time of increasing competition from television, the Internet and other sources.

"It's survival by continuous amputation," said Ken Marlin of Marlin & Associates, a New York investment banking firm that specializes in media deals. "Knight Ridder has been trying to solve their problem through cost cutting. You can't get there through cost cutting. You have to get there through revenue enhancing."

* Knight Ridder had no buffer.

It lacked the two-tier stock structure that's enabled McClatchy and several other publicly traded newspaper companies to keep the quarter-to-quarter demands of Wall Street at arm's length (The McClatchy family, for instance, owns only 56 percent of The McClatchy Co. but controls 93 percent of the voting power, although the terms of the Knight Ridder deal could change those percentages).

At Knight Ridder, company insiders owned but 4.2 percent of the shares, while the real power rested almost entirely with outside, unsentimental shareholders like Private Capital Management, the Naples, Fla., investment firm that first demanded in November that the chain put itself up for sale.

Selling stock to the public without a two-tier structure, as Knight Newspapers and Ridder Publications did in the late 1960s before they merged, undoubtedly raised more money (shareholders often avoid stocks that have little or no voting power). But it put Knight Ridder on a collision course with Wall Street.

"These guys cashed out big time, made a lot of money by taking their company public," said Conrad Fink, a professor of newspaper management at the University of Georgia. "Little did they know or care that they were inviting into the house major private capital investment companies that were going to put pressure on their future management."

Knight Ridder's history dates to 1892, when a German-language newspaper in New York, the StaatsZeitung, was purchased by a former insurance salesman named Herman Ridder. In 1903, former lawyer Charles Knight bought the Akron Beacon Journal in Ohio. Their respective heirs acquired papers and merged in 1974.

For years, all was well. In the 1980s the company, then based in Miami, was arguably the most celebrated of all newspaper chains. The Philadelphia Inquirer won Pulitzers nearly every year; even its smaller papers, like the St. Paul (Minn.) Pioneer Press and Lexington (Ky.) Herald-Leader, won them.

Things began to change when Tony Ridder, a descendent of the founders who was publisher of the San Jose paper, became head of the newspaper division in 1986. According to a Fortune magazine profile, he began cutting costs at papers like the Inquirer, where newsroom budgets had once been sacred.

In 1995 Ridder became CEO and continued cutting. Newsroom staff levels, among the industry's most generous, shrank.

Ridder made the case for higher profits in a 1996 speech to the American Society of Newspaper Editors, warning that the company's stock price would fall if investors became disenchanted.

"It could fall to the point where someone else might find it an attractive proposition to buy those assets," he said. "And that person, a takeover shark perhaps, would not necessarily have quality journalism uppermost in mind."

Ridder became a pariah in the journalism world. Some prominent journalists and executives resigned in protest, including San Jose Publisher Jay Harris. In July 2001, an obscure, laid-off reporter in Akron sent Ridder a memo calling him a "witless dolt." The memo was leaked to the national media.

At the same time, Ridder was getting relatively little credit on Wall Street. Profit margins moved up - from 10 percent in 1995 to 19 percent in 1999 - but still lagged some other chains, including McClatchy's (McClatchy reported a 21 percent profit margin in 1999).

And investors were skeptical about the future. Cutting costs was one thing, they said, but what about long-term growth?

Ultimately, Knight Ridder couldn't convince Wall Street that it had a plan, analysts said.

It was saddled with some slow-growth markets, like Philadelphia, and it wasn't making a bold enough move into the digital era, even though it operated Web sites and moved its headquarters to San Jose in 1998 to tap into the Internet culture, said investment banker Marlin.

"I think that Knight Ridder was unable to develop and implement a strategy that would allow it to meet the promises it made to investors," said Harris, the former Mercury News publisher, in an interview with The Bee.

Harris, who resigned in 2001 to protest newsroom budget cuts, said the cost-cutting drive actually backfired. "I think that their cost-reduction moves weakened their position in the markets that they served, both with their readers and with their advertisers," said Harris, now a University of Southern California professor.

Things accelerated last year. Circulation fell as newspapers - Knight Ridder's and others - lost readers to the Internet and other competitors. Advertisers took dollars to the Web. Knight Ridder's profits from continuing operations fell 15 percent.

In early November, its stock price was also down 15 percent for the year. It was a sitting duck when its largest shareholder, Private Capital Management, demanded that Knight Ridder put itself up for sale. Smaller shareholders joined in, and within two weeks the company announced an auction.

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