With News Corp. (NASDAQ:NWSA) shares tanking after news broke of a hacking scandal, and with its CEO Rupert Murdoch in the spotlight for questionable practices at the company’s News International division, I asked Yahoo! Finance (NASDAQ:YHOO) columnist and economics editor Daniel Gross about the the company’s future viability.
Emily: Taking into account the recent hacking scandal, as well as the declining value of News Corp.’s newspaper unit and declining readership for print news in general, would News Corp. do best to divest itself of News International? What sort of ramifications or rewards might come from so doing?
Dan: I’m not sure a quick divestment would be of much help. Legally and [in terms of its reputation], the damage has been done to News Corp. (NASDAQ:NWSA) If there are lawsuits and legal actions, it’s not as if they will go away or be resolved just because the company is sold. In addition, people forget that outside the U.S., print (i.e. magazines and newspapers) can still be a very lucrative business. As I understand it, News of the World was making money. Selling off newspapers wouldn’t necessarily improve the overall company’s cash flow, and might hurt it.
Finally, you have to consider the market. Tabloids have a poor reputation in the marketplace right now. There may be more regulation coming. Advertisers and readers may finally revolt from their style. Would Murdoch be able to get a premium for News Int’l? Or would he have to accept a low-ball bid. If he really needed to sell, I’d guess it would be the latter. So I don’t see any real upside for simply selling off the problematic unit. News Int’l has several properties that are of good quality, including the Times, and that are worth holding onto.
Emily: Over the years, Murdoch has made many strategic and intelligent moves that have built News Corp. into the media giant it is today. Despite recent under-performance, is Murdoch still a valuable asset to the company? Or are his recent missteps, particularly his acquisition of the Wall Street Journal and his running of the paper thereafter, a sign that he no longer has the understanding of the media industry he once had?
Dan: That’s a complicated question. He’s still an asset in the sense that he really created, on his own, some of the most valuable components of News Corp (NASDAQ:NWSA): the Fox TV network, Fox News Channel, BSkyB, etc. You have to place some value on that going forward. It’s not like he just bought those businesses from somebody else. In many instances he created them from scratch. But on the whole, I’d have to say that at this point his being in charge is something of a liability, certainly for the stock. He has voting control, which means investors really have little say in what happens and have no way to express disapproval other than to sell their stock.
From a corporate governance standpoint, News Corp. is a clown show. The board is supine. He runs it like a family business. He spent hundreds of millions of dollars to buy a production company run by his daughter, a move that wouldn’t pass the sniff test at most companies. He’s intent on having his son succeed him. And last I checked, DNA isn’t a great method to choose CEOs. The acquisition of Dow Jones, in and of itself, wasn’t such an awful idea. Who wouldn’t want to own that franchise? But paying an insane premium for it will likely turn out to have been a bad idea. I think Murdoch understands many components of the media world perfectly well — TV, cable, satellite TV, newspapers, publishing. With the internet, like pretty much every other executive, he’s had difficulty figuring out what to do with it. It’s very difficult for people in their 40s to keep abreast of everything that’s going on in the media [industry] and to grasp it intuitively. It’s much harder for 80-year-old people to do so.
Emily: Given Rupert Murdoch’s level of visibility as chairman and CEO of News Corp., how would the company be affected if he were to step down or his role were to be diminished? Do you think shareholder confidence would be re-affirmed or might it seem as though Murdoch were jumping a sinking ship? Who might replace him?
Dan: I think short-term, the stock would actually rise a bit if he were to leave. But it’s all about the circumstances. If he leaves and simply appoints his son, James, as CEO, I think that’s a negative. James hasn’t exactly covered himself in glory in the hacking case, and it’s difficult to see what he’s done to merit running a giant global corporation other than going to the trouble of being born. If an internal candidate is promoted (speculation centers on Chase Carey), or if some other highly regarded media executive is brought in (that’s a very short list), it might be another story. The reality is that even if Murdoch steps down as CEO he will still have effective voting control of the company. That wasn’t the case when, say, Jack Welch, stepped down from GE (NYSE:GE).