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When Media Companies Ditch Their Stodgy Parts

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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In July 2015, London-based publisher Pearson Plc informed the world that it was getting out of the news business, announcing a deal to sell the Financial Times to Nikkei Inc. and plans to get rid of its 50 percent stake in the Economist. "Pearson will now be 100% focused on our global education strategy," Chief Executive Officer John Fallon said at the time. "The world of education is changing profoundly and we see huge opportunity to grow our business through increasing access to high quality education globally."

Yes, the world of education is changing profoundly! Just not in the right direction, apparently. As Bloomberg News reported Wednesday:

The crisis engulfing Pearson Plc deepened after the education company cut its profit forecast and predicted years of gloom in the U.S. market, forcing it to slash its dividend and put its stake in the iconic Penguin Random House book business up for sale to raise cash.

Pearson had spun off Penguin in 2012 for a 47 percent stake in Penguin Random House (Bertelsmann SE & Co. KGaA owns the rest) in an earlier step in its transformation from prestige publisher to "world's largest education company." These are tough times for legacy publishers in general, and while Pearson's education business grew out of its legacy-publishing textbook operation, it's pretty wide-ranging now, with big testing, training (especially English-language training) and educational software operations. It seemed to the company's management to offer more opportunities for growth than books or newspapers did.

Anyway, I'm not here to dump on Fallon for this strategic choice. The market's doing that already! But Pearson isn't the only big old media company that has tried in recent years to divest itself of fuddy-duddy parts to focus on what it thinks are its growth businesses. So I was curious. How has that gone for everybody, relatively speaking?

In Pearson's case, FT purchaser Nikkei is privately held, and so is the Economist. So I've enlisted the New York Times Co. and News Corp., owner of the Wall Street Journal, as surrogates. The chart starts on July 22, 2015 -- the day before the FT sale was announced.

Pearson's Big Slump
Total return with dividends reinvested*
 
Source: Bloomberg
*Pearson total return measured in dollars

OK, then. So much for getting out of the fuddy-duddy businesses, Pearson.

My favorite comparison along these lines has long been CBS Corp. versus Viacom Inc. The modern CBS was created when Viacom spun its stodgy broadcast and book-publishing (Simon & Schuster Inc.) businesses off from its exciting, youth-oriented collection of cable networks at the end of 2005 -- and stodge went on to demolish glamour over the next decade-plus.

CBS Beats Viacom
Total return, dividends reinvested
 
Source: Bloomberg

Viacom and CBS still have the same controlling shareholder, the ailing Sumner Redstone, so he hasn't really lost out. But it's still been a fascinating turn of events -- made more fascinating last month when a proposal to reunite the two companies foundered, possibly because longtime CBS CEO Les Moonves, according to Recode, "doesn’t want to finish out his career saddled with a faltering business."

Redstone's fellow aging media mogul Rupert Murdoch engineered a similar separation of his businesses in 2013, spinning out the News Corp. newspaper business where he got his start from the film, broadcast and cable giant Twenty-First Century Fox Inc. Sadly for nostalgists hoping there might be a clear pattern here, Fox has outperformed News Corp. -- although not all that convincingly.

Fox Beats News
Total return, dividends reinvested
 
Source: Bloomberg

Then there's Time Warner Inc., which spun off my former employer, Time Inc., in 2014. In this case, the collection of cable networks plus a production studio has crushed the magazine publisher (both have seen their stock prices rise recently because of takeover bids).

Time Warner Beats Time
Total return, dividends reinvested
 
Source: Bloomberg

Tegna Inc. is the former newspaper giant formerly known as Gannett, which in 2014 spun off all its newspapers (USA Today and a whole lot of local papers) as a new company with the same old name of Gannett Co. Inc. and renamed what was left over (local television stations, Cars.com, CareerBuilder) "TEGNA."  The Tegna-Gannett race is currently just about a tie.

Tegna (Barely) Beats Gannett
Total return, dividends reinvested
 
Source: Bloomberg

By this point I know you must be asking yourself, "What about Tronc?!?" Tronc Inc. is the result of the 2014 spinoff of Tribune Publishing (the Los Angeles Times, Chicago Tribune and other regional newspapers) from Tribune Media Co. (WPIX, KTLA, WGN and other TV stations). Last June, to much derision, Tribune Publishing rechristened itself "Tronc" -- for "Tribune online content." Yes, it's a terrible name! But the company has still outperformed Tribune Media since the split.

Tronc Beats Tribune
Total return, dividends reinvested
 
Source: Bloomberg

Tribune Media remains a much more valuable company, though, with a market capitalization of $2.5 billion to Tronc's $474 million. Stock prices are a measure of expectations as well as performance, and the fact that Tronc has done slightly better than Tribune Media relative to the expectations investors held in July 2014 does not mean it's a better business.

The overall lesson here seems to be that media executives looking to separate unattractive businesses from attractive ones don't always get it right, but they don't always get it wrong, either. It's also clear -- and should surprise no one -- that established media companies haven't been great investments. Of all the companies in the charts above, only CBS and Time Warner outperformed the S&P 500.

  1. We here at Bloomberg News refuse to capitalize the whole word, because that looks silly, plus the letters do not appear to stand for anything.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net