March 01, 2012
Deciphering the madness of the Murdoch method
In the midst of a scandal that reaches new lows every day, Rupert Murdoch's reactions have ranged from the canny and shrewd to the absurd. Given his tight control over News Corp., don't expect any changes soon.
Rupert Murdoch's decision to demote his own son is a perfect example of why he's endlessly interesting. Sometimes he makes business decisions purely with his head, canny and shrewd, occasionally ruthless. That's what he did this time. But sometimes he makes giant decisions with his heart, appearing misguided or just nuts; for example, he runs the New York Post and the Times of London at deep losses that will apparently continue forever, and he just doesn't care.
Overall, the Murdoch method has worked well for him. For investors in his News Corp. (NWS), it has not worked nearly as well as it should have. Recent events show the problem clearly. Amazingly, amid the U.K. phone hacking scandal that led to James Murdoch's downfall -- a mushrooming story that a member of Parliament yesterday called "the single largest corporate corruption case in this country for more than 250 years" -- the Murdoch method is still working, at least for him.
James was, among other things, chief of News International, the News Corp. division that owns the company's British newspapers. When the phone hacking scandal erupted at one of them, the News of the World, Rupert made one of his famously tough-minded decisions, abruptly closing the 168-year-old paper. News Corp.'s value dropped by billions of dollars as investors feared more revelations would follow.
They have followed. An inquiry still underway yields worse disclosures every day. Witnesses have reported that phone hacking was conducted at "industrial scale," that News International employees bribed the police so widely that Scotland Yard became in effect "a subsidiary of News International," that employees destroyed evidence massively, and that all of this was approved at "the highest levels." The highest levels would seem to include James Murdoch. As this mess gets bigger and uglier, Rupert concluded that James had to go. He's out as News International's boss and will work in New York City on the international TV business and other vaguely defined tasks.
Here's the surprise: The stock isn't going down anymore. As the scandal gets worse, the stock rises higher. It fell to $14 last summer; it was over $20 when James got the shove. Investors figure this historic scandal won't hurt profits much; it won't make people stop watching The Simpsons or refuse to go see the next Avatar.
At the same time, Rupert keeps making heart decisions. When he showed up in London last week with elder son Lachlan in tow, News Corp. kremlinologists sensed that a new heir apparent was displacing James. Rupert's determination to have one of his sons eventually run the company makes no economic sense; it discourages other ambitious managers from working there. He just doesn't care.
But hey, the stock's up – what's the problem? The answer is it's a much bigger problem that afflicts News Corp.'s shareholders, namely the penalty they pay for investing at all in a company with terrible governance. Through dual-class stock -- always a warning sign for investors -- Murdoch's 12% economic interest in News Corp. translates into effective control of the board, because he controls 39% of the voting shares and his business partner Prince Alwaleed bin Talal controls another 7%. Thus the 88% owners know they don't run the show. Murdoch, with his unpredictable head-and-heart method, can do whatever he wants.
The result is that when Wall Street analysts add up the value of News Corp.'s pieces, they get a total that's almost twice as great as the company's actual stock market value. Investors impose a "Murdoch discount" because they know the company isn't being managed for them.
The outlook isn't bright. Yes, the market is telling Murdoch that if he gave up some control -- and with it, the ability to make those heart decisions whenever he wants too -- he could be twice as rich as he is. But when you're worth more than $6 billion, how much do you care?
The bottom line for Murdoch is that he's over $1 billion richer today than he was when the scandal broke last summer. It's hard to see why he would conclude that he should change his ways one bit.
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