By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute

For 10 months, 2005 was shaping up as another slow year for change in the landscape of who owned America ’s newspapers. All that was reversed in the first week of November when Private Capital Management, owner of 19% of Knight Ridder shares, demanded that the company be put up for sale. Two other large institutional shareholders supported exploring the possibility of a sale, and thus the company was thrust into play as an acquisition target.

Knight Ridder capitulated, at least to an extent. It hired Goldman Sachs and Morgan Stanley as advisers and agreed to accept bids. In January 2006, the company met with prospective bidders including McClatchy, MediaNews and a half-dozen private capital groups. Ultimately only McClatchy and one private equity group were confirmed bidders in mid-March as this report went to press.

What price Knight Ridder can fetch will be read as a barometer of investor opinion of the entire industry. At the end of the year its shares were up 20% and trading in the mid-$60s on the basis of the takeover possibility. A likely final price in the mid $80s would be a modest premium compared to transactions of the last 15 years. Knight Ridder also indicated that if the bids came in too low, it might choose not to sell.1 [1]

Even without a final chapter, putting Knight Ridder in play was a huge event for the industry. It amounted to an exclamation point on a dismal 18 months, in which newspaper stocks fell so sharply that the properties were in the bargain/clearance bin. It raised the possibility that purely financial players would take over a once-proud company, cut and slash much more deeply than current management and have little regard for journalism and public service. Or something else might happen.

Even people who disliked Knight Ridder management were unsure how to feel. “Overnight, Tony Ridder seemed to go from Darth Ridder to Anthony Skywalker,” an editor at the San Jose Mercury News told the Project in a private conversation.

Knight Ridder was especially vulnerable to a takeover because it lacks the structure of dual classes of voting stock, which ensures family control over public companies like the New York Times, Washington Post and others. Gannett has no family control, but is protected by its size and tradition of strong financial results. Tribune, while broadly traded, doesn’t have institutional owners with the clout of Private Capital Management. Its three largest institutional holders control barely 10% of the shares. About 25% of the total is owned by the McCormick Tribune Foundation and the Chandler family. The foundation’s board is essentially top company management, and the Chandler family would have influence on any sale or restructuring plan.2 [2]

By contrast, at Knight Ridder, Private Capital Management, and the longtime institutional shareholders Harris Associates and Southeastern Asset Management, control about 37% of the shares. Knight Ridder management was thus in no position to shrug off the pressure to explore a sale.3 [3]

The bill of particulars PCM held against Knight Ridder management was somewhat murky. In a letter that doubled as a Securities and Exchange Commission filing, Bruce Sherman, CEO of Private Capital, wrote that the company had “unexceptional operating margins.” He also said it had not adequately addressed the migration of traditional newspaper advertising to other media and lacked a national newspaper that could capture online national advertising.

Sherman said he was particularly disappointed that after Knight Ridder’s board met with him in July and took action, including raising the dividend, buying back 5 million shares of stock, making staff reductions and disposing of the Detroit Free Press and the Tallahassee Democrat, the share price fell rather than increased.4 [4]

Whether or not that is the heart of the matter, this much is clear: After more than a decade at the head of the company, Tony Ridder and his team appear to have lost favor in Wall Street circles. It is significant that Harris and Southeastern, patient investors through that entire period, now also see a sale as a potential exit strategy.

Their bet is that some set of financial and/or industry players will see potential in paying a premium for the stock, then restructuring the company or running it differently. All it takes is one buyer.

On the other hand, Knight Ridder stock, even at its Nov. 1 low, did no worse in 2005 than Gannett, Tribune or the New York Times. If stock price is the measure of corporate competence, the argument that Knight Ridder is poorly managed is not so airtight.