The media, the market & McClatchy

SN&R examines the deal that made a local company the second largest newspaper chain in America

igger is better, and biggest is best. It’s the law of the jungle, the wisdom of Wall Street, the invisible hand guiding the McClatchy Company’s recent acquisition of Knight Ridder newspapers. Those who pass by the Sacramento Bee’s red-brick bunker on 21st and Q streets will note no discernible difference on the outside, but deep within its bowels now stirs the nation’s second largest newspaper chain. The law of the jungle has come home.

McClatchy CEO Gary Pruitt, one of the newspaper industry’s most admired chief executives, has risked both his professional reputation and his company’s fortunes on the $6.5 billion deal. If Pruitt succeeds, his status as industry golden boy will be secured, along with the legacy of the McClatchy family, which first published the Sacramento Bee in 1857 and still maintains a controlling interest in the eponymous company.

“We felt this is a deal that makes the company stronger and better,” Pruitt told SN&R. “It strengthens the company. Any deal has risk to it, but we thought this would enhance the company.”

However, success is by no means guaranteed.

The Knight Ridder deal flows against an economic current that has grown increasingly turbulent during the past two decades. Newspaper circulation has declined as readers and advertisers fled, first to television then to the Internet. Wall Street has grown increasingly bearish, insisting that newspapers return relatively astronomical margins of profit to make up the difference.

McClatchy Vice President of news Howard Weaver calls the forces roiling today’s newspaper market “the dynamics of the modern media imperative,” a process that washes away the “slow and the brittle” companies even as the cream rises to the top. “It’s kind of Darwinian, and I think that’s OK,” Weaver said. “I tell our employees, ‘That’s the water and we’re the fish. We learn to swim in that or we die.'”

Sink or swim
Last year, McClatchy posted a 29 percent profit—defined as net revenue minus operating cost—for the 12 newspapers it operates across America, from Raleigh, N.C., to Minneapolis, Minn., to Anchorage, Ala. Knight Ridder posted a 16 percent profit for its 32 newspapers, an enviable return for just about any other industry. (See graph on page 27.) Knight Ridder’s stockholders rewarded owner Anthony Ridder by forcing him to sell the family business to McClatchy.

“I think we’re at a point where we can be fairly blunt,” said Rick Edmonds, researcher and writer for the Poynter Institute, the respected journalism school. “Knight Ridder lost the confidence of Wall Street. Over the past 10 years, the company has not had good results. Its stock was trading for a lower multiple. McClatchy, on the other hand, has been among the best performing for the past five or six years.”

As Weaver tells it, McClatchy wasn’t exactly wringing its hands at Knight Ridder’s demise.

“I heard Gary Pruitt tell Tony Ridder that, ‘Our first choice is for you not to sell,’” Weaver said. “It’s never a good thing when a respected newspaper or newspaper company goes away.” Nevertheless, Weaver accepts Wall Street’s judgment. “The only security you have comes from the market,” he said. “When we say good journalism is good business, we also say that good business is good journalism.”

Some critics aren’t so sure that business and journalism make such a great mix.

“It’s a negative environment for Wall Street,” Edmonds said. “Newspapers are considered to have a high cost structure. One of the things that has been a big concern is circulation. Newsroom employees have been cut. That eats away at a newspaper’s ability to do the most time-consuming work [such as investigative reporting]. The risk can be very negative for what we expect a newspaper to do.”

During the second C.K. McClatchy’s reign in the 1970s, the Sacramento, Modesto and Fresno Bee newspapers developed a reputation for fearless news and investigative reporting; credibility measured for some by the dozens of libel suits filed against the company. Pulitzer Prize-winning author Dale Maharidge, now a visiting professor of journalism at Columbia University, worked at the Sacramento Bee from 1980 through 1991, when the company’s philosophy shifted from C.K.’s hard-nosed, old-school journalism to the business-orientated model gradually implemented by general manager Erwin Potts, who some perceived as hostile to unions (see “McClatchy and the unions,” page 26).

“Good journalism is expensive,” Maharidge said. “When I came there in 1980, they wanted to be good, even great. But every time they tried to do that, they fell short. It’s always been a company where once you hit a certain level, they’re happy. Having said that, they still produced some pretty good journalism.”

McClatchy hired Pruitt, a University of California, Berkeley, graduate who holds a master’s in public policy and a law degree, as the company’s First Amendment attorney in 1984. Pruitt quickly moved up the ladder, becoming McClatchy’s CEO at the age of 38 in 1996. Along the way, he developed his now-admired formula for acquiring new publications: Rather than purchasing newspapers based on their quality, Pruitt focused on buying papers in rapidly growing markets where few, if any, competing publications existed.

“We have confidence in our ability to run a newspaper and our ability to change a newspaper,” Pruitt said. “We have no confidence in our ability to change a market.”

Photo By Larry Dalton

When McClatchy bought the moribund Minneapolis Star Tribune for $1.4 billion in 2001, critics scoffed at the high price. But by taking advantage of rapid growth in the Minneapolis-St. Paul region, McClatchy quickly turned the paper around. The Star Tribune easily generated enough revenue to pay off the money borrowed for its purchase, validating Pruitt’s strategy and assuring his status as one of the industry’s rising stars.

It’s that same strategy that McClatchy says prompted it to immediately sell 12 of the 32 papers it acquired from Knight Ridder, including the award-winning San Jose Mercury News, Philadelphia Inquirer and Akron Beacon newspapers, which are not located in high-growth markets (see “One size fits all,” page 23). Pruitt’s approach, while financially successful thus far, is not without its detractors. When he heard that McClatchy was putting 12 papers, including the chain’s most prestigious ones, up for sale, Ridder said he was stunned. “It’s terrible,” he said, “The whole thing.”

In a 2003 American Journalism Review article, “Is McClatchy Different?,” Susan Paterno writes: “Today, McClatchy papers are thoroughly modern and professionally designed newsgathering machines, heavier on features, sports and projects than they were, and far less willing to take down the big players that control the economic development of the markets McClatchy dominates. If C.K. McClatchy was a cowboy, then Gary Pruitt is a dairy farmer, more inclined to see his high-quality products graze and grow, with editors embracing the industry’s latest trends—teams, public journalism, civic mapping, easy-to-read digests—anything to boost circulation and the company’s reputation in the world of modern newspapers.”

Milking the McClatchy cash cow has its rewards. With annual compensation approaching $2 million and millions more in stock options, Pruitt is undoubtedly an extremely high-paid dairy farmer. And he disagreed that McClatchy’s papers don’t cover growth issues in their communities.

“I think that’s not true,” he said. “The McClatchy papers have been quite aggressive in covering growth issues, and the Sacramento Bee has been a good example of that. Growth is a double-edged sword. It can bring economic vitality, or it can ruin the quality of life. A newspaper has to cover all aspects of that, the good, the bad and the ugly.”

Weaver called the charge that the company doesn’t cover growth issues a “cheap shot.”

“We have to speak truth to power,” he said. “I’m proud of the way our papers take on their local watchdog responsibility. … We don’t do everything right, but kowtowing to local pressure is not one of our sins.”

On the whole, industry observers perceive McClatchy as more saint than sinner, often singling out the leadership provided by Pruitt, who by most accounts has achieved an ideal balance between business and journalistic values in an era in which the latter have been seriously eroded.

“I think that it’s true that Wall Street doesn’t care about anything but the bottom line,” said Edmonds. “But Gary Pruitt has said quite often that if it’s part of your company’s strategy to have a strong editorial product, Wall Street will go along with it.”

Although Maharidge believes the quality of the Bee has declined (for example, he called its Capitol coverage “stenography”), it’s far from the worst newspaper in the country, and he gives Pruitt credit for that.

“The paper is weaker, but compared to what’s out there, it’s not bad,” he said. “I travel a lot, and I’ve seen what’s out there, and it’s shocking. Gary Pruitt is a straight shooter. That would never happen with him. Not only would it be against his own moral code, it would be bad business. But if Gary Pruitt ever steps down, who knows?”

On the high wire
Former Sacramento Bee movie critic Joe Baltake worked at the Knight Ridder-owned Philadelphia Daily News before joining the Bee staff in the late 1980s. Although he’s now out of the newspaper game, Baltake still has plenty of colleagues at both companies, and the news they report back to him is not good. Layoffs, buyouts and takeovers have rattled employees.

“These situations, make me sad and also glad to be on the outside looking in,” Baltake said. “I adore newspapers and I’m disturbed by their shared uncertain future. I still have a lot of friends at both McClatchy and Knight-Ridder and the pervasive mood among them is one of confusion. They feel that they have only a tenuous hold on their careers and futures.”

In industry circles, Knight Ridder’s pending sale was seen as a litmus test for the future of newspapers. Despite the relative profitability of newspaper chains, investors remain skeptical, writes Steve Lovelady in the Columbian Journalism Review Daily: “The reason the Street is hammering newspaper stocks has nothing to do with current margins; it has everything to do with the fact that analysts perceive that readers are fleeing to the online version of newspapers far faster than ad dollars are.”

If the Knight Ridder deal is approved, McClatchy will acquire some important online properties, including a potential share in Career Builder, the newspaper industry’s answer to, and the RealCities network, a portal to all of the cities where Knight Ridder operates newspapers. It’s a step in the right direction, but most observers agree that the riddle of making money on the Internet remains to be solved.

“Most newspapers have recognized that readers and advertisers are moving online,” Edmonds said. “I don’t know of anyone who says they have the proven answer.”

McClatchy takes a much more upbeat view of the newspaper industry.

<a href="" target="_blank">Click here</a> for a larger image.

“The printed newspaper is a very strong product and will be around for a very long, long time,” Weaver said. “We feel we were able to buy these 20 papers at a very attractive price because a lot of people aren’t as optimistic about newspapers as we are.”

Weaver spoke as if the 12 papers McClatchy is trying to unload, including four to William Dean Singleton’s MediaNews Group, had been sold. That deal is still pending, but it’s a tribute to McClatchy’s reputation that many employees at the dozen papers on the block wish they were staying within the McClatchy fold.

“If the devil is going to buy your newspaper, the McClatchy devil is better than the Gannett, Knight Ridder or the Singleton devil,” Maharidge said. “Singleton, that son of a bitch, he cut, cut, cuts.”

Assuming the deal is finalized as expected in late June, McClatchy faces significant challenges, not the least of which is paying down the $6 billion debt it has accumulated through the acquisition.

“These are difficult times for newspapers,” Edmonds said. “The last two years, their [McClatchy’s] circulation has fallen too. McClatchy believes in the industry, but not everybody would bet on newspapers right now. Their stock price has dropped a fair amount. In some circles, they don’t think it’s a good idea to embark on such a big expansion. It’s going to be very interesting the next couple of years.”

To say the least, Maharidge concurred.

“It’s a high wire act,” he said. “I hope Gary doesn’t fall. If anyone can walk the wire, it’s Gary. It’s ballsy.”

Pruitt refers to McClatchy newspapers as “athletic,” a metaphor that he says is evoked literally. “I wanted to convey the idea that we can be efficient financially and still have high quality journalistic standards,” he said. Like a certain famous body builder currently occupying the governor’s office, the company believes it can cut fat and build muscle at the same time. Weaver added that it’s necessary given today’s economic reality.

“From 1950 to 2000, newspapers had kind of a monopoly franchise on classified ads,” Weaver said. “No one could compete with them. Some people call it a Golden Age. I refer to it as the age of being fat, dumb and happy.”

Classified-ad Web sites, such as Craigslist, Monster and HotJobs, cut into the fat, gouging out significant revenue and forcing newspaper companies to diversify. Today, in addition to operating 12 newspapers—soon to be 32—and their associated Web sites, McClatchy runs a thriving direct-mail business (now you know who to blame for all that junk mail in your box), foreign-language publications such as Fresno’s Vida en el Valle and a host of other publications designed to vacuum up every last scrap of local-advertising revenue.

“Our strategy is to be the leading local media wherever we can,” Weaver said. In Sacramento that has resulted in a scorched-earth policy that drove the Bee’s only daily competition, the Sacramento Union, out of existence. In the spirit of full disclosure, it should be noted that weekly Bee publications such as Ticket and Encore are aimed directly at this newspaper’s audience and advertisers. It’s nothing personal. The market makes them do it.

“Freedom of the press is relatively meaningless if you don’t have the revenue to pay the printers,” Weaver said. “To be fearless, you have to be financially secure.”

Or, to paraphrase Janis Joplin, have nothing left to lose. That’s the wisdom of Wall Street, the law of the jungle, the irrefutable logic of the last man standing.

“We’re going into a period where someone has to define what the 21st century newspaper is going to be,” Weaver said. “I think we’re in as good of a position as any company to build that model.”

This model, Weaver noted, will provide us all with a common civic vocabulary, a necessary middle ground we can all agree upon.

It’s nice work if you can get it.

“I know Gary Pruitt, I like Gary Pruitt,” said Maharidge. “I don’t like corporate guys, but I like Gary Pruitt. But I wonder if C.K. McClatchy came out of the grave, what would he say?”

To which Pruitt has a ready answer.

“I hope he’d be proud of what the company has achieved while at the same time retaining its values and quality.”

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