McClatchy strategy

Bigger 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.

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 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 company.

“We felt this is a deal that makes the company stronger and better,” Pruitt said. “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.

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. 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.”

McClatchy hired Pruitt, a UC 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.”

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.

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.

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.”

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 Monster.com, and the RealCities network, a portal to all of the cities where Knight Ridder operates newspapers.

In addition to the newspapers and their associated Web sites, McClatchy runs a thriving direct-mail business, foreign-language publications such as Fresno’s Vida en el Valle and a host of other publications designed to vacuum up local-advertising revenue.

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

Or, to paraphrase Kris Kristofferson, 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.