News Corp: Surrender to Win
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News Corp (NASDAQ: NWS) stock keeps rising. Part if not all of that likely has been due to the rumors that the company could be splitting itself into two. One would be the distressed publishing business which includes media properties such as THE WALL STREET JOURNAL and TIMES OF LONDON. The other would be the more profitable entertainment business which includes Fox News.
Always shrewd chief executive officer Rupert Murdoch could be following the oldest option in war: If you are losing, surrender to win. That's what the Japanese did in World War II and went on to create an economy that held the U.S. car industry hostage in the 1970s. The two rules for the surrender process are: Lay down your gun and do what you are told. In the early 1990s, IBM did that, the inward-looking company taking orders from an outsider.
The Street is telling Murdoch that the ink in his veins is clogging the flow of revenue. The common perception among shareholders is that the stock is undervalued because of the “newspaper” business. The push for getting rid of it had taken on urgency with the allegations about hacking and bribery in the international branch of publishing. Continually there had been rumors that the international piece would be sold. That, some hoped, would be the beginning of the end of the publishing part of the empire. The obstacle to that happening had been Murdoch. The issue is how will The Street and shareholders respond to the split approach? It’s probable that this information has been put out there to test that out. If the response isn't positive then News Corp leadership might have to go back to the drawing board and consider selling that part of the global corporation.
Should there be an announcement of a split this week, as the grapevine indicates there could be, publishing would have to earn its keep. No longer would it be artificially propped up by the earnings from other businesses. Eventually shareholders at other media companies which are diverse, such as The Washington Post (NYSE: WPO), could also demand similar action. The Street could punish companies which don't fall into line.
How could a split play out at other media companies? Like News Corp, The Washington Post is a mixed business not primarily dependent on a flagstaff newspaper. Its cash cow has been for-profit education and training business Kaplan. However, as with much of the for-profit higher education sector, Kaplan is struggling to adjust to the oldest reality in business: Everything changes.
The whole sector, once representing a successful line of business and hailed as the salvation of education, had been hit hard in 2011. That was because of the perfect storm of a recessionary economy along with bad publicity about graduates without jobs defaulting on student loans. Making Kaplan a stand-alone public company could accomplish two things. One, there would have to be more attention paid to the business of Kaplan per se. Like the wildly successful for-profit Grand Canyon Education (NASDAQ: LOPE), Kaplan might decide to hunker down and create unique brand differentiation. And, two, the publishing arm of the company would also be forced to be totally accountable for profits. WaPo would sink or swim amidst competition like POLITICO.
Meanwhile, of course, Berkshire Hathaway (NYSE: BRK-A) continues to purchase newspapers. That profitable company can afford to “carry” that low-growth line of business. However, should News Corp split off publishing, Berkshire Hathaway shareholders could rise up in revolt and also demand those newspapers be aggregated into a separate public company. Like Murdoch, cagey Warren Buffett might have to surrender to win. Some investors weary of his folksy performance art would be delighted to observe his putting down his gun and obeying orders.
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