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Warren Buffett Tells Those Investors Complaining About The Dual-Share System at the New York Times, Washington Post And Wall Street Journal To Quit Whining – They Knew What They Were Getting Into When They Invested

Philip M. Stone May 8, 2007

Warren Buffett hasn’t had much good to say about newspapers shares for a very long time, and now he doesn’t have much good to say about those whining investors who put money into companies with dual-voting systems that basically maintain family control and don’t like the results.

It pays to play along with Warren

And Buffett has a pretty good right to state his case – his Berkshire Hathaway is among the largest non-family investors in the Washington Post Company that has such a dual voting system giving control to the Graham family. Even though he is a board member, Buffett knows first-hand what it’s like to be an investor in a family-controlled newspaper business.

At the Berkshire Hathaway annual general meeting last weekend Buffett said the dual-voting system had nothing to do with the woes newspapers find themselves in these days. He says the simple answer is that the newspaper business itself has “just gotten a lot tougher.”

And his partner, Charlie Munger, weighed in on the subject, too, specifically talking about the New York Times where there has been a lot of pressure by investors on the Sulzberger family to give up some control. He noted the dual system was set-up when the Times went public and investors should have understood what they were getting into.

“Once a contract has been made, the idea you can stamp your foot and change the contract strikes me as immature. You can’t blame the Sulzbergers for the woes of the newspaper business,” he said.

The heavy-hand used by Morgan Stanley Investment Fund manager Hassan Elmasry to get the New York Times to change its dual-class voting system has so far produced embarrassment for the Times’ management, perhaps some more effort to enhance shareholder value, but absolutely no change in the voting system. So it will be interesting to see how Rupert Murdoch goes about persuading the Bancroft family to give up the Wall Street Journal.

The likelihood is that Murdoch will tread softly-softly using his charm and salesmanship to persuade the Bancrofts that the editorial quality and heritage of the Wall Street Journal will be safe in his hands. And he knew that to even get their attention he had to do it with a bid high enough to get the family thinking and $60 a share was as good a place to start as any.

Murdoch has been through this type of sale before when he bought The Times of London from the Thomson family in 1981. At that point in his career Murdoch was known as the sleazy tabloid king – the very last person one would want running what was at that time perhaps the world’s most prestigious newspaper. Murdoch promised to keep his fingers out of editorial operations, he set up a separate newspaper board, and editors of the newspaper since then have said he really did keep his fingers out of the pie. 

At the same time Murdoch has invested heavily in the Times, which still loses millions of pounds each year. Its losses are made up, and then some, by the Sunday Times – a separate newspaper. And when it comes to investing in the newspapers, The Times has revamped its web site, opened more foreign bureaus and Murdoch is currently investing some £600 million ($1.2 billion, €880 million) in new printing presses for his UK properties. Judged by how he has handled The Times the odds are he would actually make much more new investment in the Journal than current management.  And remember the man is not stupid – he is not about to ruin what he would have paid so much to buy.

One thing on which there can be little disagreement is that Dow Jones’ financial performance over the past several years has not lived up to its prestige. Buffett says he can understand the frustration of those Bancroft family members who are unhappy that the company has not lived up to its financial potential.

“It’s like a eunuch that owns the world’s greatest harem – he doesn’t get a lot out of it. Find the most sexed guy to sell the property to, and they will pay, as it is the ultimate trophy property,” he mused at a dinner last week preceding his company’s annual meeting. Is there anyone more “sexed” to do that deal than Murdoch?

With all of the media anti-takeover protections in the news lately it’s worth reviewing a recent article written by Donald E. Graham, chairman and CEO of the Washington Post Company that was published by The Wall Street Journal. It was timed to appear   the day before the New York Times Company held its annual meeting where investors withheld voting 42% of their shares to show their displeasure with the dual voting system that gives control of the Times to the Sulzberger family.

The Washington Post and The New York Times have long had an editorial rivalry, and on the management side the relationship has been somewhat frosty since the Times forced the Washington Post out of its partnership in the International Herald Tribune. But for all that, Graham leapt to Sulzberger’s defense in upholding the need of the dual voting system to guarantee that management decisions are made for the good of the newspaper and not just to make a fast buck to satisfy Wall Street.

It was an interesting scenario – a publisher protected by a dual voting system standing up for a rival publisher protected by a dual voting system, writing in a newspaper protected by a dual voting system.

Graham took aim at those shareholder companies such as the Institutional Shareholder Service (ISS) that were recommending that the New York Times shareholders withhold their votes for directors. He noted that ISS had recommended three years ago that shareholders vote against Warren Buffett’s re-election to the board of Coca-Cola because of some alleged conflicts of interest.

“Presumably his $10-billion investment in Coca-Cola was not enough to ensure he would act in its interests,’ Graham wrote sarcastically. But then he zeroed in on how Buffett has been worth his weight in gold on the Post’s board.

“I am in a position to testify to Mr. Buffett’s value on a board of directors, since our board is now the only one he serves on outside of Berkshire Hathaway’s. Our market capitalization is just over $7 billion; Mr. Buffett’s recommendations to management have been worth – no question – billions. His value to any company’s board in incalculable. (ISS later explained that although it recommended a vote against Mr.; Buffett as a director, it didn’t really want him off the board. Presumably they counted on a majority of shareholders being too sane to follow their advice.)”

Buffett basically stopped The Post from making expensive media buys in the 1990s when prices were very high, and instead he had the company buy back its own shares. If Buffett had served on the New York Times Company board at the time perhaps he would have persuaded management not to have bought the Boston Globe for $1.4 billion in 1993. Last year The Times wrote down the Globe’s value to around $600 million.

Graham  noted that the Post warned its possible investors back in June, 1971 when it went public  that maintaining the newspaper’s  journalistic excellence would not necessarily be compensated for by increased revenues,  but that was how management saw their responsibility and if investors didn’t like that then don’t bother investing. 

He said those who now want the Times’ dual voting structure banished are after “a huge, quick profit.” He noted, “If the stock structure was eliminated, a line of buyers eager to purchase the company would form within minutes. No one could say no. The line would include private equity firms, high-ego billionaires, international media companies lacking a famous property and lots more.”

When newspaper shares were up the investors didn’t care much about their voting rights. Now when newspaper shares are down those dual share systems prevent investors putting profit before editorial quality.

“The current stock structure of the New York Times Company was established when the company initially went public …Every buyer who ever purchased a share of its stock has done so under those governance arrangements and a sophisticated buyer like Morgan Stanley understood those arrangements,” Graham wrote.

He said if the dual-system was abolished it “would lead to the New York Times Company being auctioned off like a side of beef.” There was no guarantee, he said, whether the new owner would continue protecting the Times’ editorial heritage or would be just interested in soaking the paper for whatever profits could be made.

And with the Post’s Q1 results just released, Graham is no doubt happy he has that protective dual-class system to defend the family from any angry investors. The company’s overall Q1 profits fell 16% year-on-year driven by a 10% drop in newspaper publishing revenues – blame weak advertising and circulation revenue drops – and Newsweek suffered an 18% decline in advertising revenues. But broadcast and the educational business saved the day with overall revenues up 4%.

Perhaps most worrying, however, is that the Post confirmed the trend seen elsewhere – that digital growth is slowing down. Digital revenues rose just 10% in Q1 compared to 34% a year back. Digital is becoming increasingly important to The Post because of the big drop in print’s revenues. Online advertising now accounts for about 17% of the newspaper’s total ad revenue, more than at most newspapers.

Buffett owns 18% of the Washington Post Company. He is known as a long-term investor and the fact the Post is the only company outside of Berkshire Hathaway on which he serves as a board member shows he has a particular interest there – perhaps it is his trophy. Maybe he has taken his own advice, “Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful’".

Mae West? Don’t’ ask.

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