PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Could there be a rosier time for Douglas H. McCorkindale to take the helm of Arlington (Va.)-based Gannett Co.? A 29-year veteran of the newspaper company who became CEO on June 1, he's assuming the top job during a period of double-digit ad revenue growth, cheap newsprint prices, and a 22% gain in earnings in the first quarter.
As if to celebrate his promotion, McCorkindale, 61, is wasting no time making major moves with a pair of huge acquisitions. On June 28, he announced the $2.6 billion purchase of Phoenix-based Central Newspapers Inc., which owns The Arizona Republic and The Indianapolis Star. The move comes less than three weeks after Gannett, already the country's biggest newspaper chain, announced its $1 billion purchase of 21 papers from Toronto-based Thomson Newspapers Inc.
The two deals, if approved by regulators, will bring the number of Gannett dailies to 116 worldwide, including its flagship USA Today. "The newspaper business is an excellent business if run correctly," McCorkindale told Business Week, in his first interview as CEO. "It's going to be around for a long, long time."
SMALL STAKES.
No one disputes that view, but what's unclear is whether newspaper readers will want to get their daily content online. For now, McCorkindale's approach is notably old-fashioned and lacks New Economy sex appeal investors that are clamoring for these days. Other than the Web site for USA Today and sites for its smaller newspapers and broadcast stations, Gannett's Internet investments have been relatively small: a 6% stake, for example, in career management site CareerPath.com. (Knight-Ridder and New York Times Co., on the other hand, each own 19%, according to an analysis by Merrill Lynch & Co.)
At the same time, other competitors, have been pouring hundreds of millions into dot-coms. Chicago-based Tribune Co. isn't just relying on its recent $6 billion purchase of Times Mirror to grow. It's also spending $1 billion to invest in online ventures and to create its own dot-coms. The company has major stakes in America Online, Excite@Home, and Digital City. Its ChicagoSports.com uses editorial material from The Chicago Tribune, video from WGN-TV, and audio from WGN radio. "To punch through the clutter that's out there right now," says Dennis J. FitzSimons, Tribune's executive vice-president, "you need size across multiple media."
To be sure, many of these endeavors have yet to pay off. New York Times Co., for one, recently shelved its plan to spin off New York Times Digital into a separate company. In February, 1999, the Times took a 7.5% stake in TheStreet.com by investing $15 million in the financial news Web site. But recently, Wall Street has been especially cruel to the unprofitable new-media companies. TheStreet.com, which went public last year, has seen its stock price beaten down 84% from its July, 1999, high of nearly $38. Dow Jones & Co., which has a content agreement with CNBC, had planned a tracking stock for its Internet properties but pulled back on June 26.
NO NET BET.
That puts McCorkindale in a tighter bind because investors continue to take a dour view of old-line newspaper companies that have been slow to articulate an Internet strategy. Gannett makes money: This year, Merrill Lynch projects net income will rise 12%, to $995 million, with sales increasing 24%, to $6.5 billion. Still, with its lack of an aggressive Net strategy and Wall Street's overall distaste for Old Economy newspaper stocks, Gannett's share price is down 29% from its peak of almost $84 last December.
The stock is now trading at 17 times earnings, a significant discount to the more wired New York Times, Washington Post, and Dow Jones. "Gannett hasn't bet its future on the Internet," says Lee Dirks, chairman of Dirks, Van Essen & Murray, a newspaper M&A firm in Santa Fe. "That's not the type of approach Wall Street approves of at the moment."
Worse yet, the newspaper industry could be headed for a rough patch. The shakeout in dot-coms and the effect that will eventually have on the newcomers' huge advertising budgets means fat ad revenues for newspapers can't last forever. Gannett is somewhat insulated from this because most of its papers rely on local advertising. But newsprint prices are expected to start climbing again in the second half as worldwide demand increases.
"SMALLER APPETITE."
Then there's the issue of shrinking readership. According to a June 11 survey of 3,000 people nationwide by the Pew Research Center, an independent Washington research firm, the percentage of daily newspaper readers dropped from 48% to 46% in the past two years, continuing a decade-long slide. "There's a smaller appetite for news these days, and more news sources," says Andrew Kohut, Pew's director.
That's why some of the biggest names in the industry -- from The Los Angeles Times' Chandler family to The Arizona Republic's Eugene C. Pulliam Trust, which controls 78% of Central Newspapers' voting shares -- are throwing in the towel and selling their newspaper chains.
But not Gannett. McCorkindale did tell analysts in a June 28 conference call that the company plans to take a breather from its current shopping spree. But analysts predict the company will continue to prowl for more small and midsize newspaper chains and pieces of larger ones. Possibilities include U.S. and Canadian community papers owned by Hollinger Inc., as well as some owned by New York Times Co. and Trenton (N.J.)-based Journal Register Co. And, in the Gannett tradition that makes shareholders happy, it's a sure bet McCorkindale will slash costs by centralizing printing and back-office operations.
ONLY OUTLET.
What makes McCorkindale a buyer when everyone else seems to be running the other way? For starters, he's convinced that local news is where the action is. If he can continue to gain efficiencies through acquisitions and drive up revenues by penetrating further into small markets, profits will keep rolling in, he argues. Indeed, smaller papers tend to be more profitable than their big-city counterparts because small-town advertisers usually have only one outlet in which to market their products, says merger specialist Dirks.
McCorkindale, who rose to the CEO post after two years as president and 12 years as chief financial officer, isn't ruling out non-newspaper investments altogether. He insists he'll buy more news, information, and perhaps even add entertainment properties to Gannett's current holdings of 22 TV stations. Ask him what his focus is, and he answers with a big list. "We're clearly focused on using our resources to create a new line or a related line of businesses on the Internet, however you want to define that, whether it's a source of news or a source of advertising or whatever," he says. But he's quick to add, "at the same time, we're still obviously focused on improving our newspapers, improving our broadcasting stations, looking at other lines of business."
True to form, a move in any direction will be cautious. In fact, McCorkindale, the first Gannett chief who didn't start out as a journalist, used to own a stamp with the letters "wimm" -- short for "Will it make money?" "Gannett has never done an acquisition just to get bigger," insists the sharp-tongued McCorkindale. "It has to add to the family, and it has to make some value for the shareholders."
BELLS AND WHISTLES.
That may be why Gannett's Net strategy has been so conservative. It has 65 newspaper Web sites in the U.S. that offer mainstream fare, such as news and classifieds, though some do offer some bells and whistles, including links to online vendors, such as eToys Inc. and cdnow Inc. Gannett gets a piece of every transaction on its sites. McCorkindale says Gannett should tally $60 million to $70 million in Internet revenue in 2000, up from $40 million last year.
These numbers are above what its competitors will be getting, according to an analysis by Merrill Lynch. For example, Knight-Ridder is projected to generate between $50 million and $55 million in Net revenues this year, New York Times Digital should make $40 million to $45 million, and Dow Jones will make $53 million.
Still, only about a third of Gannett's newspaper Web sites are profitable. McCorkindale insists more of them will make money within a few years. Meanwhile, the company appears to be slowly investing in Internet companies, although the CEO says not every move has been made public. One that has is a $270 million investment in entertainment concern ZapMedia.com Inc., which makes VCR-like devices that will provide access to movies, music, and videos via the Web. A Gannett spokeswoman says the investment was made up of $19 million in cash, and the rest is an advertising swap over several years. For a company with $5 billion in revenues, that's a "very, very small piece," concedes McCorkindale. "But it's growing."
McCorkindale's approach will continue to work as long as ad budgets stay fat, print stays cheap, and readers stay interested. But that's a lot to ask for in a world that's increasingly wired with each passing day.
By Laura Cohn in Washington, D.C.
EDITED BY BETH BELTON
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
