Monday, August 18, 2008

Goodwill Hunting

Newspaper companies are losing goodwill. And it's not just the good will of readers, who long ago ceased to care, as evidenced by decades of declining newspaper circulation and readership, but also the goodwill or value that is inherent in their newspaper assets.

Goodwill is the je ne sais quoi of the value of something you buy. It doesn't exist as something you can touch and feel. It's an abstract thing such as reputation or brand to which companies assign a dollar value when they make a play for your assets.

At least once a year, accounting rules set by the Financial Accounting Standards Board call for companies to "test" their goodwill and intangible assets for signs of "impairment." FASB requires this test of goodwill and intangibles to determine whether they are holding up or, to put it in FASB parlance, "reflect the underlying economics of those assets."

When newspaper companies went hunting for goodwill at the end of the second quarter, they found huge chunks of it had evaporated into thin air. In other words, there was significant "impairment" in the value of properties acquired earlier.

With the click of a calculator,
  • Tribune eliminated $3.8 billion in goodwill in the second quarter related to the purchase of the Times Mirror newspapers, including the LA Times, Baltimore Sun, Hartford Courant and others, for which Tribune overpaid. That's on top of $130 million in goodwill Tribune eliminated in 2007.
  • Gannett is expected to write off between $2.6 billion and $2.7 billion of goodwill in the second quarter. In 2007, it eliminated $130 million in goodwill from its financial statements.
  • McClatchy last year wrote down $1.37 billion in goodwill related to its buyout of Knight Ridder newspapers, which includes the Miami Herald. At the end of 2007, McClatchy only had $1 billion left in goodwill.

Now, this is not cash money. Heavens forbid. It's a paper loss. But the write down of goodwill is still very significant. It basically means your stuff isn't worth what you thought it was when you plunked down good money ($8 billion in the case of Tribune) to buy some properties or assets.

It's like acknowledging that the wonderful 3 bedroom, 2 bath house you just had to have and paid $150,000 for two years ago is now worth $50,000 -- if that. If you put the house on the market today, you would have to eat $100,ooo of goodwill. And so it is with newspapers.

Nobody would pay $8 billion for Tribune today, and especially not Sam Zell. I'd venture to say he probably has a voodoo doll of Dennis FitzSimons somewhere in his office in Tribune Tower. Zell and others had no choice but to write down the assets.

Newspaper stocks have tanked, and that's a sign of the value of a company. Tribune is not a public company anymore. But McClatchy, for example, is trading at $4.19 a share on very low volume (350,433). Most other newspaper stocks are in the toilet as well.

That's goodwill for you. Here one moment, flushed the next.


Anonymous said...

Why should Zell have a voodoo doll of FitzSimons? Sam is the supposed king of finance. He, his brilliant team and the banks performed the due diligence, and someone provided a solvency opinion to get the financing through. Sam knew about everything (including the executive severances packages and the failure to set aside money for the cash balance plan in 2007 that he blamed on DF).

Zell does not need a voodoo doll, he needs a mirror.

Maria Padilla said...

I see your point, but by your reckoning the entire industry needs a high magnification mirror. What do you make of McClatchy overpaying for Knight Ridder? McClatchy, after all, is a very old newspaper company that presumably knows the ins and outs of the industry. That says to me that McClatchy didn't see it coming, even with all its expertise. Let's face it, people want what they want. McClatchy wanted KR. By this standard, I wouldn't judge Zell too harshly.

Anonymous said...

I make of McClatchy this:

Pruitt bought into all the wunderkind nonsense heaped onto him by E&P and WSJ and went out and made a deal that no one thought made any sense at the time.
Leverages his company to the hilt and buys the pig-in-a-poke KR and was hero for the day. Alas, he could only give the MBA
bullshit "visibililty continues to deteriorate" type speeches for so long until his foray was exposed as the disaster many thought it would be from the start.

Similarly, we read about the king at Gatehouse, who was God's gift to newspapers for a year and a half. Now, they are on the verge of being delisted!

The common thread: DEBT. Trib, McClatchy, Gatehouse all maxed out the credit cards. Just like the folks who bought houses at their maximum debt to income ratio with no money down during the boom, now about to become homeless.

If a mid-level manager (at Tribune, anyway) missed a budget target by the amount these CEOs missed, he or she would have been fired on the spot. Still, all three of these masters of the financial universe sit atop their perches, while those who built their companies walk the plank.

Many other newspaper companies are dealing with the same challenges. They just don't have the unmanageable debt that makes it almost impossible to get through the downturn.

No passing the buck here. These CEOs are highly compensated precisely because they are the ones who are supposed to see the iceberg and lead the way around it, not run the ship smack into it.

sarahicp said...

Agreed. The CEOs are responsible, and the debt is what's killing the Tribs and McClatchys of the world. If McClatchy's share price goes any lower, it will be traded as a penny stock, on what people used to call "the pink sheets."