I never cease to be startled by the optimism of businesspeople. Why would anybody buy a newspaper company these days? Yet, Crain's reports "Sun Times Sale Appears Near." It's believed the buyers are a group of independent investors, no media experience, led by Mesirow Financial Group.
Ever heard the term "smart money?" This is definitely not "smart money." Just like Cerberus was none to clever to spend billions buying Chrysler a couple of years ago. Shortly before it went bankrupt. Too often, those with lots of money to invest become full of hubris. They believe their experience allows them to "fix" any business. This almost always involves cost cutting – such as letting go any sort of R&D, product development, advertising, marketing and often sales. Assets are sold to raise cash and incur one-time write-offs (with tax deductions) and get rid of depreciation charges. These financiers believe they can "fix" any business if they are "tough" enough to cut enough costs, and get the remaining employees "focused" on specific segments with specific products.
Only we're finding out that just doesn't work. This sort of "company flipping" was prevalent in the early 2000s. But it added no value, and it wasn't long before market investors quit playing. The value of these cost-stripped businesses, with no growth potential, dropped like a stone. Without growth, the business just keeps on shrinking.
Tribune Corporation, parent of newspaper Chicago Tribune, has already filed bankruptcy. But it is expected to wipe out bondholders (lots of it the employee pension plan), and come out of bankruptcy. To a market which in which fewer and fewer people read newspapers, and fewer and fewer advertisers are buying ads. There is too much competition today for too few subscribers, and too few advertisers, in newspapers. Sun Times Media has no major on-line presence, nor television stations. So how will these investors make a return on their acquisition investment?
They won't.
It's hard to give up in business. It's hard to believe that there just isn't demand for buggy whips any more. It's hard to believe that the last remaining buggy whip manufacturers are so competitive, unwilling to give up, that they don't make much profit. We are romanced into believing that "if you really want to be a blacksmith, there's a way to make money at it." We want to believe that somehow if we work hard enough, if we're smart enough, we can "fix" any business. But when the market has shifted, and demand drops, the smart leaders know to say "no." They take their investing to where customers and demand are growing so they can make a much better rate of return.
Invest in the Rapids. Not the Swamp. Companies in the Swamp almost always end up in the Whirlpool. It's hard to think Sun Times Media isn't already there – what with their negative cash flow and very small cash hoard. Unless you know exactly how you're going to add growth to a troubled business, it's best to simply walk away.
