Monday, 29 December 2008 23:00

Sometimes, to grow, you must stick to your core competencies

I don’t necessarily follow management consulting tomes religiously, since I feel that if they truly believed their advice was all of that, they would be out making money acting on the advice in lieu of selling the advice. After all, which is more valuable, the advice itself or the sale of the advice? The same could be applied to my burgeoning, found by accident, little blogging business. I am not an investment advisor, I am an investor. I decided to sell my research because it simply got too expensive and laborious to give it away for free. It does tend to offset the research expense component and lo and behold, it actually turned out to be a viable venture on its own. The fact still remains though; I would like to consider myself to be an investor more than a media company/website operator. Thus, I feel that the media that I do peddle is justified and the results vindicated by the fact that I eat my own dog food, nigh exclusively. Consumers of investment research and opinion products should keep that in mind when shopping offerings.

With that being said, occasionally those in the management consulting fields do come up with a very good idea; although sometimes these MBA laden, PhD polished ideas can be boiled down to the common sense advice grandma use to give me – sans the PowerPoint proficiency, of course. One such idea is that of Core Competencies. Core competency (sourced from Wikipedia) is something that a firm can do well and that meets the following three conditions:[1]

  1. It provides consumer benefits
  2. It is not easy for competitors to imitate
  3. It can be leveraged widely to many products and markets.

A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers (Mascarenhas et al. 1998). It may also include product development or culture, such as employee dedication.

Let’s keep this concept in mind as we pour over this recent Bloomberg article, then we’ll return to my ideas on a new MSM (main stream media) business model.

Macy’s, Gannett Face Debt Hangover From Buybacks in Good Times

Dec. 30 (Bloomberg) -- Macy’s Inc., Gannett Co. and New York Times Co.’s attempts to prop up their stocks with debt- funded buybacks have left them saddled with higher borrowing costs as they work to pay off loans. My comments will be focused the media companies here. I will offer commentary and opinion on shortable retailers (those with share prices over $15) I expect to risk bankruptcy hopefully sometime late next week to paying subscribers.

Standard & Poor’s 500 companies have spent $1.73 trillion on buybacks through September since the fourth quarter of 2004, according to the ratings company. With the U.S. in a recession, the companies face the threat of additional credit-rating downgrades after being punished for the earlier borrowing. I warned about the fallacy and foolishness of using corporate capital to play equity investor. Unless you are an investment advisory or management firm, you have no business buying stocks. It really is that simple. See my post from September of 2007, Rampant share buybacks bold ill for future growth.

“You had debt-financed share buybacks at a time when the market was good, their businesses were good,” said Edward Henderson, a senior analyst at Moody’s Investors Service in New York. “Then it turned real quickly.”

New York Times, with $1.1 billion in total debt, spent more than $1.8 billion buying shares from 2000 to 2004, enough to have retired all of its borrowings, said Mike Simonton, an analyst at Fitch Ratings in Chicago. Gannett could have paid down most of its long-term debt with the $3.44 billion spent on buybacks since 2004. Macy’s recently renegotiated its bank loans to erase doubts that it could repay loans due next year.

S&P cut the New York Times’ debt rating three levels to a BB- junk grade in October and has a negative outlook on the company, signaling further reductions are possible. Hey, we agree on something. A $400 million credit line is due in May.

To raise cash, the New York-based newspaper publisher slashed its dividend by almost three-fourths and is pursuing a $225 million sale-leaseback of its headquarters. It’s also trying to sell its 17.5 percent stake in the company that owns the Boston Red Sox baseball team, according to a person familiar with the discussions.

Trimming Buybacks

The company paid as much as $44.83 a share on average for its stock in 2003, according to filings. That is more than six times the current price. I don’t want to insult management and say that the use of leverage for a media company to speculate in the stock market during an obvious bubble was stupid, but it sure wasn’t smart! New York Times has reduced buybacks to about $110.5 million in total in the last four years to offset dilution from employee stock options, spokeswoman Catherine Mathis said in an interview.

Gannett, the largest U.S. newspaper publisher, had to draw on unsecured revolving credit in October to repay commercial paper. The McLean, Virginia-based publisher’s debt rating has slid six levels since 2000 to BBB-, one step above junk.

The company, which also operates TV stations, offered to purchase $750 million of notes maturing in May for 95 cents on the dollar. Holders of 13.5 percent of the notes accepted the offer. Spokeswoman Tara Connell didn’t return a phone call seeking comment.

Before lending froze, companies tapped relatively cheap credit to buy back stock and boost sagging share prices and earnings. Investors cheered the moves, at least temporarily… These are most likely the same silly, spreadsheet challenged “investors” that I have been selling (short stock and puts) to in the banking, insurance, and industrial, retail and real estate sectors. All I want to say is thank you for providing me, my family, and my readers with a very Merry Christmas joyous holidays!

Publishers’ shares have dropped as investors focused on the loss of readers, advertisers and revenue to the Internet. Again, I wish you thanks. New York Times has slid 87 percent since a peak of $52.79 in 2002, and Gannett is down 92 percent since its high in 2004.

“Companies failed to switch gears quickly enough, underestimating how much the shift of dollars to the Web would accelerate,” Ken Doctor, a media analyst at the consulting firm Outsell Inc. in Burlingame, California, said in an e-mail. I know this is a matter of hindsight being 20/20, but why in the hell couldn’t they see the Internet picking up steam and transforming media (and telecommunication) companies more than most? I thought it was the best thing since sliced bread since 1994. This is truly an issue of not seeing an entire forest because of that big fat tree sitting in the way.

With credit tight, buybacks slowed last quarter to $89.7 billion, down from the record $172 billion spent a year earlier, S&P data show. The S&P 500 Index has tumbled 44 percent since peaking at 1565.15 on Oct. 9, 2007. It’s a damn shame that tight credit had to usher in fiscal and managerial responsibility. Imagine if they would have had these disciplines during the boom times!

Now, let’s get back to the core competencies argument. The NY Times/Gannet is a media concern. They should be focusing on content production, distribution and advertising sales. That, particularly production and distribution, is their core competencies. They do it better than many competitors, they have mass, scale and experience that give them distinct and viable advantages over both extant competitors and startup organizations. What they are not are good stock investors. Thus, they should not be buying stock, whether their own or anyone else’s – outside of funding their employee compensation plans.

I feel that if they stuck to their guns and butter of content creation and distribution, it would have (should have?) been obvious that it was faster, easier, and cheaper to distribute through the Internet. As a matter of fact, it should have been inevitable that this would happen. I know that it is difficult to cannibalize your own revenues in an effort to chase a new thing or a prospective paradigm shift. The problem is, if you don’t cannibalize your own revenues, someone else will. They key is to make that initial cannibalization a smart investment into a new business, in this case a new media business. Gannet could have taken that $3.5 billion dollars (share price depreciation + interest) and funded a new media distribution service to compete with Google’s news distribution service (which will probably end up dominating MSM distribution over the internet), or creating the central distribution service that Blogger.com (again Google, who will have the MSM calling it Daddy very soon) or Six Apart offer for bloggers. This distribution platform could have been extended to other MSM, and the revenues could be used to further content generation, as well as offset the losses of margin in the transfer of resourced from print media to the Internet. I know the voluntary cannibalization of margin hurts, but look now – the margin is gone anyway AND you don’t have the increased Internet and new media presence.

More on my take on the transformation of the MSM, in reverse chronological order:

The Future of Main Stream Media, pt 3
(Reggie Middleton's Boom Bust Blog/MyBlog)

...iddleton on the Marginalization of Mainstream Media, pt 3 This following is a reply from the MSM official referred to in part 2 of this series. Since it is about a week or two old (I’v...

Saturday, 13 December 2008

Continuing the conversation of the future of main stream media..,
(Reggie Middleton's Boom Bust Blog/MyBlog)

...le of what I mean by the difference in between blog reporting (the higher quality blogs) and the MSM (mainstream media). As regular followers to the blog know, I have been bearish and all over G...

Tuesday, 09 December 2008

A change is gonna' come
(Reggie Middleton's Boom Bust Blog/MyBlog)

...t that is worth more than I am paying for - and one of those sites charges a lot... If I were a MSM (mainstream media exec) I would be pursuing successful blogs to imitate, or outright purchas...

Monday, 08 December 2008

Last modified on Monday, 29 December 2008 23:00

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