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Diversify, Hire Wisely
And Watch Your Cash |
The company started out small and ended up relatively small compared to its peers when it fell victim to an unwanted, but successful, takeover bid.
That, in a nutshell, is the history of Dow Jones, and its flagship global financial newspaper The Wall Street
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From "Flimsies" to Financial Genius
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Dow Jones may have wound up a national institution, with The Wall Street Journal as its crown jewel, but its beginnings were slightly more humble. Here are some historical highlights:
| 1882: Charles Dow, Edward Jones and Charles Bergstresser founded the company in a basement office on Wall Street. The company hand delivered to its subscribers handwritten business news updates called flimsies. |
| 1889: Dow Jones & Company's "Customers' Afternoon Letter" becomes The Wall Street Journal. It contains four pages and sells for two cents. Advertising was 20 cents a line. At that time, the Company had 50 employees. |
| 1902: The Journal had 7,000 subscribers and correspondent Clarence Barron bought control of the company. Barron believed, despite the prevailing thinking of the time, that financial news would be valuable even to people who didn't work on Wall Street. Control of the company eventually passed to the descendants of the eldest daughter of Barron's wife from a previous marriage, Jane Barron Bancroft. |
| 1930s and 1940s: The real success of the Journal began after World War II, when then managing editor Barney Kilgore decided that a businessman on the West Coast should be reading the same news as one in the Midwest or on the East Coast. Kilgore devised the technology to do this and created the "What's News" and "Washington Wire" columns. He was also responsible for the editorial policies and the distinctive front page of six nearly unbroken columns of type with no advertising, which remained unchanged until 2006. |
| 1966: Kilgore boosted circulation to 1.1 million in and completed his last full year as president. (Circulation was 33,000 in 1941 when he became managing editor.) Earnings jumped to more than $13 million in 1966 from $211,000 in 1945, the year he took on the role of president. |
| 1979: The Wall Street Journal becomes the largest paid-circulation newspaper in America. |
| 1990s: Rising newsprint costs and declining advertising lead to the Journal's first annual losses. The company launches an online version in 1996. |
| 2007: Dow Jones agrees to sell to Rupert Murdoch's News Corp. | | Journal. But the story of the family-controlled business, its failures and its eventual sale to Rupert Murdoch's News Corp., another family company, contains lessons for every business -- regardless of ownership or size.
Twenty years ago, Dow Jones's market value was about $2.6 billion, compared with News Corp.'s $3.3 billion. Currently, News Corp is valued at about $66.7 billion, while Dow Jones languished at approximately $1.86 billion and traded at less than $40 a share before Murdoch offered a 65 percent premium for the company for a total bid of $5.6 billion.
Dow Jones's languid market capitalization has long been cited as an indication of corporate mismanagement. That is one of the lessons to be learned from this saga as well as:
Diversify wisely and in a timely fashion.
Put the right people in the top jobs.
Take a cautious approach to dividends, reinvesting when possible to enhance growth and value.
Diversify Wisely and Know Your Competition
Too much focus can be disastrous for a company, regardless of size. Although Dow Jones did have other interests, it was essentially a one brand company, and that brand was the Journal. The newspaper, and its online edition, accounted for about 55 percent of revenues and 70 percent of profits.
Single-product companies run the risk that the product will come to the end of its life cycle. Ultimately, there will be only two choices -- go out of business or pass the business on through a sale or merger.
Prudent business people not only work to improve the bottom line but also to enhance their company's value. Profits revert to zero on the income statement the first day of every business year, whereas value has a long-term lasting economic effect.
Dow Jones's lack of diversification left the markets unimpressed. While some of the company's flaccid stock price could be attributed to the troubled newspaper industry, the Journal, despite its huge national circulation of two million and a staff roughly half the size of the Los Angeles Times, still lagged industry profitability.
Adding to the company's problems were some highly visible failures to enhance value by diversifying into electronic data publishing and cable television. Among the failures:
In 1982, Bloomberg jumped into the scene with a company offering a quick and easy-to-use system to analyze electronic securities data. Dow Jones waited three years before it tried to meet the competition by investing in Telerate, at the time a leader in digital market data. In the early 1980s, Telerate's annual earnings grew more than 50 percent for five consecutive years.
The company needed millions in investment, and it wasn't until 1997 that Dow Jones budgeted $650 million for a total revamp. But it was too late. Bloomberg, as well as Reuters, had long been investing in their services and had surpassed Telerate. The company had cost Dow Jones more than $1 billion by the time it sold it a year later.
In 1991, Dow Jones attempted to get into television in a venture with Westinghouse to buy the Financial News Network. But after a bidding war the network was bought by General Electric's CNBC unit. Since then, CNBC has become the leader in business television and Dow Jones, rather than being one of the venture's owners, merely has an exclusive deal for the network to use the name and news reports of the Journal.
Dow Jones tried again in 1995, purchasing a New York City TV station in a venture with ITT. The company pumped in millions of dollars only to sell the station a year later and lay off more than 200 employees. That was the year Dow Jones posted its first annual loss.
Put the Right People at the Helm and Practice Active Management
It is often noted that Dow Jones's dismal market performance and failed attempts at diversification were linked to the hands-off management approach of the controlling Bancroft family and the long tradition of letting journalists run the company and its divisions. While journalists are capable of making difficult editorial decisions, they may not be the best choice when it comes to making tough business decisions.
Again, the stock price is cited as a measure of the company's mismanagement. By that measurement, Wall Street was merciless. And its positive reaction to the huge premium Murdoch offered was a measure of its recognition that Dow Jones needed new blood, notwithstanding debates about journalistic standards.
But to the company itself, those standards ruled. Former CEO –- and award winning journalist --- Peter Kann defended the practice of letting journalists guide the corporation. He once noted that while share price is certainly a fair way to judge a CEO's performance, if part of the job is "to enhance what the company does best, then I think I have at least helped create an environment where a content company produces great content."
Market players may have agreed that the content was extraordinary, but they surely didn't agree that the company was putting the right people in charge.
Consider Dividends Carefully
Corporate financial decisions should be based on maximizing the value of a business, not supporting elaborate shareholder lifestyles. The underlying principles of corporate finance are:
- Investing, which determines where to put resources.
Financing, which governs the mix of resources used to finance the investments.
Dividends, which determine how much, if any, money should be returned to the owners of the business, either as cash payouts or stock buybacks.
So, on the one hand,
there are companies like Microsoft, which reinvested earnings for growth, enhanced value and paid no dividends for years, until it was a $350 billion company and its founders and shareholders became extraordinarily wealthy.
On the other hand, there are mature companies like Dow Jones, which paid the Bancrofts hundreds of millions of dollars in dividends. Over a 12-year period, while earnings were slumping, the company raised its dividend 12 percent.
Those payouts meant less money available to reinvest and meet growing competition from Bloomberg, Reuters and News Corp., not to mention increasing pressures as general newspapers and television started to cover business news.
Bottom Line: Successful companies manage rigorously, pay attention to the needs of the operation, and listen to shareholders. If your goal is to sell your business during the next five years, consult with your accountant now, long before putting it on the market, to devise a strategy that will justify its maximum value to the purchaser.
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