For long-suffering shareholders of News Corp., there may be a silver lining in the phone-hacking scandal: A chastened Rupert Murdoch.
A sort of real-life Citizen Kane, the 80-year-old CEO has amassed dozens of newspapers and TV businesses around the world. To politicians and pundits, the power of his media holdings elicits a mix of awe and fear.
But on Wall Street, the response is mostly fear —fear that Murdoch is going to orchestrate another dubious deal that weighs on the company's stock. Indeed, Murdoch's critics say he has focused too much attention on expanding his empire with little regard for Wall Street's chief measure of success: a rising stock price.
The concern is well-founded. His empire building has included several clunker deals — a hefty $5.6 billion for Dow Jones & Co, for instance — that have hurt News Corp. Including dividends, the company returned just 13 percent to holders of its widely held class A stock the past 10 years. The safest, most boring securities around — short-term Treasury bills — returned 42 percent.
"If Murdoch were to leave, the first thing that would happen is that the stock would go up," says Donald Yacktman, president of Yacktman Asset Management, a money manager in Austin, Texas, whose 53 million class A shares is its largest holding. He calls Murdoch a "kingdom builder," and suggests the scandal might be a "blessing in disguise" — even if Murdoch doesn't depart — if it dampens his appetite to buy more.
Starting with one newspaper in Australia, Murdoch built News Corp. into a global powerhouse with stakes in media businesses that include broadcast and satellite TV, cable programming, books and films. News Corp. owns the Fox TV network, along with 27 local Fox stations. Its 20th Century Fox studio is behind blockbusters such as Avatar, which brought in a record $2.78 billion worldwide. In Britain, it has a 39 percent stake in British Sky Broadcasting, the country's biggest commercial TV company. News Corp. also owns 146 newspapers in Australia and three in Britain. In the U.S., it publishes The Wall Street Journal and New York Post and 23 smaller newspapers from Maine to California.
In its fiscal year ended June 2010, the last one for which figures are available, News Corp.'s 52,000 employees generated $33 billion in revenue. Its net income was $2.5 billion.
That is both impressive and disappointing. Most investors in News Corp. focus on its 1.8 billion shares of class A stock. Though they've risen 25 percent in the past twelve months on strength of the company's cable network business, they've lagged the broader market and rival media companies for years. News Corp. has a second class of stock, known as B shares, which confer voting rights and are tightly held by select groups. Murdoch and his family control nearly 40 percent of the Class B stock.
"Murdoch has been more focused on growing the size of the company than maximizing returns for the company," says Christopher Marangi, an associate portfolio manager at Gabelli Funds, which owns 5 million class A shares.
News Corp. declined to comment for this story.
Even before the scandal broke, analysts complained that Murdoch's love of newspapers was dragging down the company. In its last fiscal year, the company's newspapers generated $530 million in operating profits on $6.1 billion in revenue. But that was less than a quarter of the $2.3 billion operating profit generated by News Corp.'s cable network business, which had slightly higher revenue of $7 billion. Cable is growing operating profits faster, too — up 36 percent last fiscal year versus 14 percent for newspapers. Cable gems include Fox News, basic cable mainstay FX and regional sports networks that carry Major League Baseball and college football games.
In a report last week, Michael Nathanson, an analyst at Nomura Holdings, suggested shareholders might be better off if News Corp. kept its TV operations — cable, satellite and broadcast — and shed everything else. That would mean getting rid of 60 percent of the company's assets, including 20th Century Fox. Yet he wrote that investors would likely value the smaller company almost as highly as they do the whole business today — an estimated $14.54 a share. On Thursday, the stock closed at $16.11
Though it's not clear Murdoch will slim down the company, he might not be able to add to it. Already, allegations that reporters for the company's News of the World tabloid had bribed British police for information and hacked voice messages of politicians, celebrities and crime victims, have stopped Murdoch from completing one deal. Earlier this month, News Corp. announced it wouldn't go through with its plan to buy the 61 percent of British Sky Broadcasting that it doesn't own. The deal required regulatory approval that was unlikely given the scandal.
As the phone-hacking investigation continues, News Corp. investors worry it could hurt business in the U.S., too. One possible outcome: Trouble renewing federal licenses for News Corp.'s TV stations. The stations are a big outlet for the news shows, sports programs and TV series that the company produces. Investors are also worried the Justice Department could investigate whether News Corp. broke a U.S. law prohibiting companies with U.S.-listed shares from bribing foreign officials.
But investors have begun to speculate about the upside, too. Some talk about the possibility Murdoch could sell his U.K. newspaper business, or even break up the company. Others have raised the possibility that Murdoch might step down as CEO, possibly in favor of his son, James, who oversees News Corp.'s European and Asian businesses, or the company's respected chief operating officer, Chase Carey.
Carey's odds appeared to rise late last week after two former newspaper executives said that they had told James in 2008 about an email suggesting that phone hacking at News of the World was widespread. In testimony before U.K. lawmakers, James had said he was unaware until recently that the eavesdropping tactic was used by more than a single rogue reporter.
For his part, the elder Murdoch has dismissed the idea that the CEO job is in play or that he might break up the company. Appearing alongside his son last week he told lawmakers that he had no plans to step down. He said he was not to blame for the scandal and was the best man to clean it up. And in an interview with The Wall Street Journal, which is owned by News Corp., he called reports that he is considering a sale of his British newspapers "pure rubbish."
Since the latest phone-hacking allegations surfaced on July 4, News Corp. stock has fallen 11 percent.
For financial analysts and investors, no deal shows Murdoch's willingness to overpay and overload the company with a slow-growing business than the $5.6 billion he paid for Dow Jones & Co., owner of The Wall Street Journal, in 2007. Analysts say the move increased the company's holdings in newspapers when Murdoch needed to pare them. Two years later, News Corp. took a $2.8 billion write-down for Dow Jones.
News Corp. also paid $580 million for social networking site MySpace in 2005, outbidding Viacom by $80 million. Facebook and Twitter soon made MySpace seem outdated. News Corp. sold the company for $35 million in late June, 6 percent of what it paid for it. MySpace lost $1 billion in the previous three years.
Another black eye for News Corp. was its stake in digital media outfit Gemstar-TV Guide International, which it wrote down by $6 billion before selling in 2007. In February, Murdoch drew criticism from Wall Street for agreeing to pay $675 million for Shine Group Ltd., a TV production company run by Murdoch's daughter, Elisabeth. She stands to get $214 million from the deal. A shareholder lawsuit says Murdoch overpaid and accuses him of running News Corp. like a "family candy store." The company had no comment.
Those worried Murdoch might buy big again note that he's got plenty of firepower to pull it off — News Corp. is holding $12 billion in cash.
Allaying that concern is News Corp.'s announcement on July 12 that it plans to spend $5 billion buying back stock. That means less money available for acquisitions. Another drain will be legal bills to defend the company in the phone-hacking cases, along with possible fines and judgments. Last week, Standard & Poor's said it was reviewing its credit rating for News Corp. because of the risk of litigation and a hit to the company's reputation. Rival agency Moody's Investors Service said it believes News Corp. has enough cash to pay legal bills.
Michael Corty, a Morningstar analyst, says investors pay far too much attention to Murdoch. He notes that Murdoch isn't involved in the day-to-day operations of the most important parts of the business, like cable. And regardless, he thinks Murdoch and his top executives aren't likely to overpay for businesses after recent fiascos.
"They had some missteps with Dow Jones, and they realize that they have to be more careful in the future," he says.
Corty isn't recommending investors buy the stock, but he doesn't think people who already own it should sell because it may have beaten down too far in the scandal.
For all their criticisms of the company, other analysts and investors agree with Corty. Nomura's Nathanson says the stock is worth 24 percent more than investors are valuing it. Money manager Yacktman says as others have been selling their shares, he's been buying, adding to his already sizable class A stake.