News Corporation is breaking up. The process will take about 12 months and is subject to shareholder approval. The de-merger will separate News Corporation’s publishing assets from its media and entertainment assets. It is not an even split. The entertainment division will have about ten times the revenue of the publishing company and more than ten times the value.
The key question to ask about the News Corporation de-merger is: why?
Often, a corporate break-up is a sign that things are going badly within the company. The break-up may be driven by a perception that one poorly performing division is dragging the rest of the company down. The obvious answer is to sell the poorly performing division – as long as someone can be found to buy it. If no buyer can be found, then a de-merger is the alternative.
The News Corporation press release suggests that this is the reason for the de-merger. The aim is to “enhance strategic alignment and increase operational flexibility”. This is business-speak for “cutting off an infected limb before it kills us all”.
This “separate out the poor performers” reason has some merit. News Corporation’s share market performance has been weak in recent years, but it is not alone. Its share price fell sharply during the global financial crisis. However, its recent pre-speculation share price of $US20 is not far off its 2007 highs of $US24 and a long way from its price of around $US6 in 2009. However, the publishing part of News Corporation has faced a significant drop in advertising revenue and faces harsh competition from internet-based media. The newspapers are trying to reinvent themselves behind electronic pay walls but it is unclear if this will be successful. So the de-merger might be News Corporation’s way of separating out its newspapers so they can have a quiet and peaceful death.
If this is the strategy, what are we to make of recent moves by News Limited, News Corporation’s Australian arm, to bring its publishing and media assets closer together? News Limited appears to be following the exact opposite strategy to News Corporation. News Limited will be kept as a single entity but as part of the “publishing company” despite its Foxtel media assets being aligned with the “media and entertainment” company.
Keeping News Limited together should make its CEO, Kim Williams, happy. However, it should also make him nervous. The Australian assets will provide about 25% of the revenue for the new publishing business, with the UK providing another 25% and the remainder from the US assets. So News Limited will be an integrated media business that is part of a global newspaper business and it will not be calling the shots.
The different strategies – integration for News Limited and separation for News Corporation – raise a second question. Who is right, Murdoch or Williams? Personally, I put my money on Williams. At a time when the divisions between video, entertainment, movies, and publishing are being blurred by digital communications and the internet, it seems odd that News Corporation is dividing itself along traditional lines. If the benefits from integration are increasing why would News Corporation choose separation?
Perhaps there is another answer. There has been speculation that the de-merger is an attempt to distance the majority of News Corporation from the UK phone-hacking scandal. If this is the case, then the cure appears worse than the disease. The publications division will include some of the world’s best-known newspapers, such as the New York Post and the Wall Street Journal. If the UK newspapers are so tainted that they need to be separated from the rest of the company, then a sale would have been appropriate. In this case, the de-merger may signal two things. First, the damage to the UK newspapers may be so bad that no buyer is likely to be found, leaving de-merger as the only alternative. Or, News Corporation expects the scandal to widen to its US newspapers and it is divesting them before the scandal grows. Either of these conclusions is bad news for the Australian part of the company that will be tied to these overseas newspapers.
In my opinion, however, the most likely reason for the de-merger is much simpler. News, entertainment, publishing, movies, and pay-TV are all going through a technological revolution. Nobody is quite sure which way to jump or what the industry will look like in 10 or 15 years. Corporate leaders are making their bets. After the disastrous bet on MySpace (bought for $580m and sold for $35m five years later) the de-merger is simply News Corporation’s latest attempt to try and work out how to survive.
It may or may not work, but the break-up is probably driven by fear and uncertainty. It has tied News Limited, which is betting on integration, into the exact opposite strategy at a global level. Murdoch has made a gamble one way. Williams has taken the opposite bet. Only time will tell if either is correct.