The perils of going public – Big changes await Journal Communications
By Andrew Weiland, of SBT
Under new scrutiny as a publicly traded company, Journal Communications Inc. will undergo extensive changes in its corporate operations and culture, according to several media industry analysts.
Executives at the Milwaukee firm will face intense pressure from investors to maintain and increase profitability to levels that weren’t demanded when the company was locally owned, analysts say.
Those demands could force the company’s management to cut costs, which also could diminish the quality of the news product provided by the Milwaukee Journal Sentinel, CNI Newspapers, Lake Country Publications, radio stations WTMJ and WKTI, and WTMJ-TV Channel 4, according to several media analysts.
"There’s always that implication when media companies are bought up and become public companies," said Josh Silver, managing director of Free Press, a Northampton, Mass.-based nonprofit organization that advocates for reforms in the media. "When profits become essential, publishers will cut news staff, they will use more wire stories and the localism declines. It’s a consistent pattern you can see throughout the industry."
"I think in the long run it will probably happen" to Journal Communications, said Lawrence Soley, Colnik professor of communications at Marquette University. "I don’t think it will be observable in the short term."
It will be up to Journal Communications executives to figure out ways to allocate enough resources to news reporting and still please investors interested primarily in the bottom line, some media observers say.
"It’s all in the hands of the management. It depends on what they want to do," said Gilbert Cranberg. The former editorial page editor of the Des Moines Register, Cranberg co-authored a book titled "Taking Stock: Journalism and the Publicly Traded Newspaper Company."
Journal Communications executives declined to comment for this report, because the company is in the midst of a federally mandated "quiet period," during which the Securities and Exchange Commission prohibits the firm from discussing its initial public offering.
In May, Journal Communications executives announced their plans to sell company stock to the public. On Sept. 24, 17.25 million shares in Journal Communications were offered in an initial public offering of $15 per share on the New York Stock Exchange.
Trading under the ticker symbol JRN, the company’s stock has been generally well received on Wall Street. The JRN stock price quickly rose to more than $17 per share, and one stock analyst issued a "strong buy" recommendation on the stock.
Journal Communications executives previously said they decided to sell stock to the public to generate capital to grow and acquire other media outlets. Company executives also said they want to reduce their debt exposure created by the firm’s employee ownership structure.
Last year, Journal Communications reported $801.4 million in operating revenue and net earnings of $57.9 million.
The company’s operating profit margin was 14.2%, compared with publicly owned newspaper companies that have an average margin of 21.1%, according to John Morton, a newspaper industry analyst and president of Morton Research Inc., Silver Springs, Md.
Investors will put pressure on Journal Communications to improve its profit margin, regardless of the advertising business cycle that affects newspaper and broadcasting revenues, several media industry analysts said.
"(Investors) have very little sympathy for the business cycle," said George Harmon, associate professor in the Medill School of Journalism at Northwestern University in Evanston, Ill. "They don’t even have sympathy for a reasonable downturn."
Publicly traded newspaper companies often cut back on expenses to make sure profit margins satisfy investors, Cranberg said.
"(Investors) don’t give a hoot about the quality of the papers at all," Cranberg said. "They only care about the quality of the financials. They’re not going to buy stock because they are interested in the First Amendment."
If Journal Communications uses the capital gained from its IPO to acquire other companies and further diversify the corporation, it could help buffer the impact of the ups and downs of the advertising business cycle, Harmon said.
Some members of the Milwaukee Newspaper Guild, which represents about 275 Journal-Sentinel employees, are concerned the company will be forced to skimp on expenses, which will ultimately diminish the news product at the Journal Sentinel.
Newsroom employees are particularly alarmed about a line in the company’s prospectus regarding plans to streamline the publishing operations, said Lauria Lynch-German, president of the Milwaukee Newspaper Guild. The union’s current contract expires on Dec. 31, 2004, Lynch-German said, and negotiations are expected to begin next year.
"We want the resources to do the best journalism we can," Lynch-German said. "The first major obstacle we face is a change in corporate culture. You are going to be expected to be a top-performing company."
However, publicly traded companies can operate top-notch newspapers, Morton said. The New York Times, Washington Post, Chicago Tribune and Los Angeles Times are all owned by publicly traded companies.
Last year, Journal Communications, in a cost-saving move, eliminated home delivery of the Milwaukee Journal Sentinel in all but 12 counties in southeastern Wisconsin. That cost-saving move may have been made in preparation of the public stock offering, Morton said.
However, Journal Communications also has shown a willingness to spend money to improve its newspaper product.
This year, the company opened a new $112 million, 448,750-square-foot print production center with three presses at 4101 W. Burnham St., West Milwaukee.
Executives with the company wanted more than 40 acres for the center and possibly for other facilities in the future, such as warehouses, said Timothy Freitag, West Milwaukee village administrator.
"They had always told us that their intention was to keep the corporate office downtown (Milwaukee)," Freitag said.
In addition to changes in the Journal Sentinel, media analysts also foresee impact on the broadcast product provided by Journal Communications’ Milwaukee television station, WTMJ-TV 4, and its two local radio stations, AM-620 WTMJ and FM-94.5 WKTI.
Over the past six years, the Project for Excellence in Journalism conducted a study to examine the changes in performance of the news media as consolidations have consumed the industry.
According to the study, which examined 50 local television markets and 154 stations, "What we are seeing is a clear pattern of stations being asked to stretch their products thinner and to do more with less," said Amy Mitchell, associate director of the Project for Excellence in Journalism, at the Forum on Media Ownership held by Columbia University in January.
"In sum, what we find in a variety of different media and a range of research instruments is a sizeable shift away from traditional, hard news and toward lighter, softer news; an emphasis toward product placement in network news content; a growing demand to produce more with less; and a sense of corporate influence on news content," Mitchell said.
In addition to its 90 publications, 36 radio stations and six television stations, Journal Communications owns commercial printing operations, offers direct marketing services and owns Norlight Telecommunications Inc.
Norlight has been a strong performer for the company. Last year, Norlight provided 18.6% of Journal Communications’ operating revenue. However, the future of the Norlight division is in question because two major customers, WorldCom Inc. and Global Crossing, have filed for Chapter 11 bankruptcy protection.
Morton said he thinks Journal Communications may decide to unload some of its less-profitable entities.
"They might decide to get out of some businesses," he said. "They might spin off the weeklies. If you look at their financial documents, their other publications (besides the Journal Sentinel) don’t have very good profit margins."
Local advertisers also will be closely watching the impact of Journal Communications’ transformation into a publicly held company, according to Ginny Stuessel, media director at Eichenbaum & Associates Inc., Milwaukee.
"As advertisers, we are worried that Journal Communications will become a big media conglomerate that is less responsive to needs," Stuessel said. "We’re concerned because we have seen media companies get bigger, and there has been less competition in the market for advertising dollars."
"The biggest difficulty will be, no matter how prepared the management is, the market works its own way," said William Thorn, professor of journalism at Marquette University. "Numerous companies have gone public with the best of intentions and wind up getting caught in some situation in the market that makes it at best a thrilling ride and at worst a bad experience."
SBT reporter Elizabeth Geldermann contributed to this report.
Oct. 31, 2003 Small Business Times, Milwaukee
