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Dow Jones Plays Hard to Get

Nat Worden

Rupert Murdoch sought to make Dow Jones (DJ Quote) a buyout offer it can't refuse, but he has an uphill battle in his bid to become the godfather of the U.S. media industry.

Dow Jones said late Tuesday that the Bancroft family, the controlling shareholders, has told the publisher's board that members of the family will vote shares constituting slightly more than 50% of the company's voting power against the $5 billion acquisition offer from Murdoch's media empire, News Corp.(NWS Quote).

Dow Jones said its board would factor this information into its evaluation of the offer.

Shares of Dow Jones, the publisher of The Wall Street Journal, soared 55% Tuesday to $56.20 after Murdoch's offer was disclosed. The $60-a-share bid amounts to a whopping premium of 65% over Dow Jones' closing price on Monday.

"This offer is so outrageous that it simply can't be dismissed out of hand by Dow Jones' board of directors," says Ed Atorino, analyst with The Benchmark Company. "This lofty premium above current market prices is simply unprecedented."

Like its newspaper counterpart, New York Times (NYT Quote), Dow Jones is controlled by a family trust. The Bancrofts, whose ancestors built the company into a media empire, maintain control over the company's voting rights through a dual-class share structure, which is designed to shield the editorial independence of its news operations from the animal spirits of Wall Street.

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The living members of the trust may be tempted to keep Dow Jones and its crown jewel, The Journal, out of the hands of a media maven like Murdoch, who makes no pretense of editorial independence at his news divisions, like Fox News and the New York Post.

For this reason, opposition to the deal is strong in the Journal's newsroom.

"Mr. Murdoch has shown a willingness to crush quality and independence, and there is no reason to think he would handle Dow Jones or The Journal any differently," said the Independent Association of Publishers' Employees, a union representing Dow Jones employees. "Despite our differences of opinion with current management, we strongly encourage the Bancrofts to continue to stand up for the institution's independence, and to walk away from this offer."

While the Bancrofts ultimately hold all the power, declining such an eye-popping offer could cause a severe uproar among the other shareholders.

"They could be open to some kind of lawsuits if they try to resist something like this," says Atorino.

Refusing such a rich deal also may scare away any other potential bidders, who already didn't have much room to offer a significantly higher price.

Previous sales of other newspaper publishers, like Tribune (TRB Quote) and Knight-Ridder, revealed that even deep-pocketed acquirers like private-equity firms are loath to pay a big premium for a newspaper company in today's environment.

Because private-equity firms are pure financial buyers, Dow Jones is presumably worth less to them than to Murdoch, who also is interested in wielding the political influence and prestige that comes with owning the Journal, the most influential media asset in the world of business and finance.

Meanwhile, would other publishers or media conglomerates step into the fray? One clear possibility is General Electric (GE Quote). Its cable news network, CNBC, is threatened by Murdoch's bid, because it has enjoyed a content-sharing partnership with the Journal.

If Murdoch were to steal the Journal out from under GE, that could be a boon for News Corp.'s soon-to-be-launched competitor to CNBC, the Fox Business Channel. At the same time, CNBC is a tiny part of GE's portfolio. The massive conglomerate would have a tough time justifying a pricey acquisition of Dow Jones to its shareholders, who are largely impatient with the media industry in general.

Other potential buyers, like the Washington Post (WPO Quote), might have more credibility with the Bancrofts as stewards of the Journal, based on their own journalistic traditions, but would the Washington Post or any other newspaper publisher match Murdoch's offer?

Ken Doctor, analyst with Outsell Inc., says News Corp.'s bid is a "shock and awe" technique on the part of Murdoch to plow through all the potential hurdles that lie before him in his quest to own a top-shelf media property like the Journal.

Doctor also says investors should refrain from extrapolating Murdoch's sky-high valuation for Dow Jones to its peers.

"This shouldn't have an impact on other general newspaper stocks," says Doctor. "Beyond whatever ego is involved here, the Journal is a business niche publication with a very different audience than a general news publication. Dow Jones has reorganized itself in a way that makes sense to grab hold of a digital future, and Murdoch probably thinks he can leverage its assets for both broadcast and digital purposes in News Corp.'s portfolio in a way that makes the company way undervalued here."

Still, newspaper stocks jumped Tuesday. Shares of New York Times added $1.18, or 5%, to $24.58, while Washington Post climbed $21, or 2.8%, to $765. McClatchy (MNI Quote) jumped 93 cents, or 3.2%, to $29.83, and Gannett (GCI Quote) rose $1.27, or 2.2%, to $58.33.

For its part, News Corp. fell 82 cents, or 3.4%, to $23.18. Dow Jones earlier said it was in the process of evaluating the bid.

"There can be no assurance that this evaluation will lead to any transaction," the company said.