Can’t Get Any Worse?

Newspaper companies’ wildly inflated balance sheets

Newspapers are quick to tell us bad news about the war, the economy, and the local politician. Newspaper companies aren’t so quick to tell us bad news about themselves.

That’s what Jonathan Weil says last week in a convincing Bloomberg column arguing that the newspaper industry has several companies with wildly inflated balance sheets.

In June 2005, Lee Enterprises Inc. paid $1.46 billion in cash to buy Pulitzer Inc., the newspaper chain founded by journalism legend Joseph Pulitzer. For Lee shareholders, it’s been one of the worst deals in the industry’s history.

Lee’s stock market value today is a mere $515 million, after a 63 percent decline during the past year in the Davenport, Iowa-based publisher’s shares. Yet judging by its latest balance sheet, you would think the value of the papers Lee bought had been holding up just fine.

The publisher of the St. Louis Post-Dispatch and 54 other daily papers showed a book value, or assets minus liabilities, of $1.09 billion as of Sept. 30. That’s about twice the company’s current market value and included $2.44 billion of so- called goodwill and other intangibles, which represented 75 percent of the company’s total assets.

The market’s message: Big writedowns are needed. And Lee has lots of company.

The problem is “goodwill,” an accounting term for intangible assets such as brand awareness or talented employees. It’s often created in mergers or acquisitions where the buyer pays more than the target’s market value. The difference is considered goodwill.

Since it’s so nebulous, goodwill is a famously easy vehicle for inflating a company’s value. And if a merger or acquisition goes south, goodwill should be one of the first assets written down. The unremittingly bad news for the industry means these assets are worth much less than they were even a year ago.

But newspaper companies like Lee are valuing assets at ludicrous prices. In one eye-popping item from Weil’s column, Lee says its customer lists are worth nearly $850 million, about $340 million above what the market values the entire company. Even we math-challenged types can tell something’s amiss there.

As Weil says:

At least those would fetch something in a sale. Lee’s biggest asset at Sept. 30 was $1.51 billion of goodwill, mostly from the Pulitzer purchase. Unlike customer lists, goodwill can’t be sold by itself. It’s merely the ledger entry that companies record to reflect the difference between a premium acquisition price and the fair value of the acquired company’s net assets. You would have an easier time selling old Post-Dispatches on EBay.

Look, we know the rapidness of the demise in the industry’s fortunes has caught most everybody by surprise. Just when you think it can’t get worse, another shoe drops.

To be clear, we’ll defend to the death newspaper companies’ right to account as creatively as any other company (ahem, within generally accepted accounting principles, of course!), and we understand that the market isn’t the last word on the value of newspaper assets. We believe firmly (OK, hope strenuously) that newspapers will be very valuable once someone figures out how to better monetize their work in the Internet age.

Still, newspapers have enough credibility issues without creating another unnecessarily, and their watchdog mission means they should be pristine corporate governors. That’s too often not the case, especially in recent years.

Recall the circulation scandals of recent years at the Dallas Morning News, the Chicago Sun-Times, Newsday and Hoy, where newspaper companies ripped off their advertisers. While you’re at it, don’t forget Conrad “Lord” Black’s pillaging of Hollinger International.

Let’s face it, the value of something is what someone else is willing to pay for it. The markets have put a price on what they think the damage to asset values and on future cash flow has been. That should be taken into account.

Newspapers, cleanse thy books.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.