Paper Money

Each time a newspaper company closes or files for bankruptcy—as Sun-Times Media, the owner of the Chicago Sun-Times and 58 other newspapers, did this week—analysts are quick to hammer another nail in the coffin of the printed word. Roughly coinciding as they do with the advent of the Kindle 2, the failures give ammunition to voices who say newspapers are obsolete. Now that both of the Second City's major newspapers are operating under the umbrella of Chapter 11, and with papers in Denver and Seattle shutting down, it's tough to argue with those who say the industry has useless management, a fundamentally unviable business model, and not much of a future.

While newspapers have serious problems, the recent failures of several newspaper companies (here's a list of list of four others that have gone BK in recent months) shouldn't necessarily lead to visions of the apocalypse. Virtually every newspaper in the country has experienced a sharp drop in advertising and is suffering losses. But not every newspaper company in the country has gone bankrupt as a result. And the failures may say more about a style of capitalism than an industry. Each company was undone in large measure by really stupid (and in one case criminal) activities by managers.

Let's review. Sun-Times Media is the name given to the company formerly run by convicted felon Conrad Black. Black and his colleague, Publisher David Radler, who confessed to his crimes, improperly took tens of millions of dollars in fees from the company and caused it endless legal heartache. Jeremy L. Halbreich, the interim CEO of the company, blamed the bankruptcy filing on "this deteriorating economic climate, coupled with a significant, pending IRS tax liability dating back to previous management."

The actions of the top executives in other bankrupt newspaper companies were criminal only if you consider gross financial stupidity and recklessness to be jailing offenses. Who loads up newspapers—cyclical companies whose revenues are in secular decline thanks to the disappearance of classified advertisements and the rise of the Internet—with tons of debt at precisely the wrong time? Financial geniuses, that's who.

In 2007, legendary real estate investor Sam Zell decided that a talent for good timing in flipping office buildings made him an expert on the ailing newspaper industry. In December 2007, he closed on the $8.2 billion purchase of the Tribune Co., which owned the Los Angeles Times, the Chicago Tribune, and the Chicago Cubs. Zell put down just 4 percent of the purchase price—$315 million—and borrowed much of the rest, leaving the company with a $13 billion debt burden. This deal was the purest expression of the "dumb money" mentality. The only hope Zell had of making a dent in the debt load and keeping current on the $800-million-plus annual interest tab was to sell off trophy properties like the Cubs, office buildings, and big-city newspapers—assets that themselves don't throw off lots of income but whose purchase requires tons of cheap credit. Tribune Co. filed for bankruptcy Dec. 8, 2008.

Two of the other large newspaper companies that went bust in recent months have similar back stories. A bunch of private-equity types bought the company that owns the Philadelphia Inquirer and Philadelphia Daily News in June 2006, borrowing about $450 million of the $562 million purchase price. The company filed for Chapter 11 bankruptcy protection in late February but not before paying top executives $650,000 in bonuses in December. Among those getting a bonus: Brian Tierney, the former public relations executive who was one of the architects of the deal. The Minneapolis Star Tribune, which filed for Chapter 11 in January, was another private-equity train wreck. About two years ago, Avista Capital Partners bought the paper for $530 million, loading well over $400 million of debt onto the company.

In other words, the newspaper companies that have failed wholesale were essentially set up to fail by inexperienced managers who believed piling huge amounts of debt on businesses whose revenues were shrinking even when the economy was growing was a shrewd means of value creation. A similar dynamic is playing out in other industries. Several mattress companies have filed for bankruptcy or are near it. It's not simply because sales are down due to the economy or because mattresses, which rely on an inferior technology, are being displaced by futuristic futons. Rather, as the Wall Street Journalreported (subscription required), the companies are going bust because private-equity types loaded them up with absurd levels of debt at the wrong time.

It's true that plenty of smaller newspapers without huge debt loads are in trouble. But lots of newspapers are muddling through, in part because, like our sister publication the Washington Post, they're owned by a parent company that has other lines of profitable businesses; or, like the New York Times, their parent companies have the financial flexibility to take dramatic action to raise capital; or, like Gannett papers, the parent company manages expenses aggressively. All newspapers—all print media—have been hit hard in this recession. All face an existential crisis and may ultimately face the prospect of bankruptcy. Those whose owners saw papers as assets to be flipped, leveraged, and stripped are already bankrupt.

© 2009