It is hard to look at the hard fought (and hard won) battle for Dow Jones with through the lens of any emotion other than shock and awe. It is both a measure of how occupied I have been with all thing "work" lately and my psyche's need to process the news that the Bancrofts have finally been brought to bended knee in the face of News Corp's onslaught. Most financial journalists I paid any attention to looked at the story as an "end of an era," piece, and focused on the storied history of the Bancroft family. Few, I fear, looked deeper and beyond what passes for "human interest" pieces in financial journalism (dynastic worship) into the strategic messages for dealmakers.
I think any analysis of the long battle requires the tacit admission that the close of the transaction signaled the utter failure of dual class structuring in the traditional media business, one of few corporate finance environments where the arguments for rigid dual class structures in publicly held firms are even remotely valid.
If there ever was a nightmare that Dow Jones' elaborate dual class structure was designed to avert, it was certainly Murdoch's News Corp. Many things can be said about Murdoch's reputation, except, perhaps, that he is well known in any large measure as a purveyor of high quality journalism.
Murdoch is exactly the sort of threat that elaborate control provisions were designed to frustrate. A scale driven media strategy can only, of necessity, deliver content with a low news:entertainment ratio as it aims farther and farther to the left on the bell curve in search of consumers. By extension, a scale driven media baron must seek to dumb down content, or, perhaps as will be the case with the Wall Street Journal, distill from the quality content of the Wall Street Journal highly filtered streams of "more accessible" content for wider distribution. Unfortunately, the Wall Street Journal will have to endure the indignity of attribution when this content filters down through the weeds and moss before settling into the swamp of what has become "financial journalism."
Still, one cannot help but look askance at the Bancrofts and marvel that they somehow managed, despite their indomitable apathy as managers, to preserve a jewel of some luster over these many years. The fact that the journalists of the Journal are among the lowest paid and still bear the weight of some of the highest expectations in the industry tends to color the discussion, however. This highlights what I think is the first lesson in dual class structures: They almost certainly promote managerial apathy to one degree or another. One cannot decouple the pressures of financial accountability from the management oversight process (the very explicit and stated purposes of most media dual class structures, including that of Dow Jones) and expect no long-term governance effect. To wit: on the eve of deadlines, Crawford Hill, one of the Bancroft cousins and an evolutionary biologist by education, penned a letter to the disparate clan which mused in part:
I spent a good amount of time at The Oaks during college summers and thereafter and Suzie and I spent 3 lovely spring breaks with her down in Sarasota before she passed away. Aunt Jane graciously invited us down the following three spring breaks and we had wonderful times with Gay's sister then. Furthermore, it was I who jumped into the back seat of the limo that we grabbed to rush Gay to Lenox Hill Hospital after her renowned collapse at the family dinner at "21" [Manhattan's 21 Club] in April of 1982. In that back seat, next to Uncle Bill, I attempted CPR on her, but sadly, it was too late and she had taken her last breath.
Nearly half of the 3900 word letter could fairly be characterized as of this general tenor. Step back for a moment and consider this in the context of a governance dialog among controlling shareholders. What is even more remarkable, perhaps, is the fact that Crawford himself recognizes the deficiency even as he drones on about the last family reunion. Specifically, where he continues:
There is nothing new about having to be responsible, active and engaged owners. We, despite the attempts of a few, have not until very, very recently acted as successful owners do. We are actually now paying the price for our passivity over the past 25 years. This is not something that happened overnight and in the context of history and circumstances it is very understandable if sad that the company that we own is now in the position that it is in. We have, as Buffett himself pointed out, not acted like we owned the company. Well, we had no legacy as to what in fact that meant. And in the absence of that legacy it certainly did not evolve independently by those in a position to make that happen.
Of course, Dow Jones, and by extension the Wall Street Journal (or is it the reverse?) is a huge "vanity capital" buy for Murdoch. As close students of vanity capital, well versed Going Private readers will naturally be interested to see what lessons the Chicago Cubs have to teach us about the sorts of premiums that one can expect for vanity capital investments. It would be interesting to examine the price elasticity of vanity brands in relation to capital markets performance in the several quarters before a purchase. Is it possible that what I will now coin as the "vanity spread" (the spread between intrinsic value + reasonable control premium and actual purchase price) widens after extensive bull markets?
Though Murdoch paid a 67% control premium, it is still interesting to speculate that a good measure of his success was a consequence of the intense and extensive fragmentation of the Bancroft family. From this perspective, it actually wasn't much of a fight. Murdoch saved himself a lot of time, expense and headache by merely jumping to a borderline absurd premium and allowing the complete lack of cohesiveness of the Bancroft clan, its branches and cousins pull the resistance apart with the brute centrifugal force of its chaos.
While dual class structures have reliably preserved the artificial power of families in the media business for generations, each generation along with the many skip-generation trusts, bequeaths and distributions causes the wide proliferation of the economic and governance interests in the underlying asset to a population experiencing non-linear growth. Doubtless, the rule against perpetuities, among other nuances of tax and estate planning law, contributes to the power dilution. Before too long the population of even the super-voting class begins to look like a public market. It would be interesting to speculate what a control premium in similar economic circumstances but .5 of a Bancroft generation half-life later would look like.
Take note of generational effects in closely held acquisitions, dear LBO demand generation folk. They matter.
I have seen the effect even in closely held acquisitions by Sub Rosa. Patriarch builds the business up over 30 years, keeping 85% of the shares in the family but his two sons, for whom he has been saving the shares, are far more interested in becoming, respectively, a world class poker player and a jazz musician than taking over the family business. The control premium for such an acquisition is held in orbit by the centripetal force of shareholder entropy.
I suppose this leaves us with:
"On a long enough timeline the survival rate for everyone drops to zero."
- Chuck Palahniuk, "Fight Club," 1996.
"On a long enough timeline all science becomes falsehood."
- Robert Falnear, c. 2003.
"On a long enough timeline the effectiveness of any dynastic control mechanism drops to zero."
- Equity Private's Law of Dynastic Deterioration