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Dow Jones Shares Should Stand Tall

Nat Worden

Investors who bounded into Dow Jones' (DJ Quote) stock after they learned of Rupert Murdoch's masterful offer to buy the company on Tuesday now find themselves wondering if the Bancroft family has more backbone than they thought.

After Wednesday's board meeting at the venerable New York publisher, Dow Jones said that shares representing 52% of the company's overall voting power are opposed to the $5 billion buyout offer from Murdoch's media empire, News Corp. (NWS Quote), and its directors will take no immediate action on the bid.

Suddenly, the $5 billion offer that couldn't be refused is starting to look like an offer that has been refused -- at least for the time being. Still, it's clear that Murdoch isn't going anywhere anytime soon.

Meanwhile, there may be downside in shares of Dow Jones as the jockeying begins, but the stock is likely headed for a net gain, thanks to Murdoch's dark-horse gamble.

To be sure, the godfather of the global media business has always been lurking. Murdoch has made no secret of his lust for The Wall Street Journal, Dow Jones' flagship property, and he has offered to buy it before at even higher prices than his latest $60-a-share bid, which represented an incredible 67% premium to where the stock closed on Monday. Even if the 76-year-old media maven should be laid to rest tomorrow, the richness of his offer is itself a testament to the strength and longevity of his own family business.

"There aren't many CEOs that can convince their board of directors to pay that kind of premium for an asset that's in a declining industry," says Jeff Matthews of Ram Partners. "News Corp. will pay a huge multiple for Dow Jones because it's a unique property that it has always wanted, and it will continue to want it until it gets it."

Shares of Dow Jones have edged backward since the stock throttled up more than 60% to a high of $58.47 on Tuesday, when Murdoch's offer was made public by CNBC. But even though the Bancroft family has signaled its opposition, the stock still stands around $55.25, a 52% premium to Monday's close and a clear sign that Wall Street is salivating for a deal.

Now that the board is on the record as taking no action, signs are emerging that the Bancrofts' opposition might hold. The family owns 82% of the Class B shares, which control 64.2% of the voting rights. If only 52% of the voting rights oppose the deal, that signals there could be dissension in the ranks in what the The Journal reports are the younger members of the family.

But The Journal also reported, citing unnamed sources, that the Ottaway family, which acquired a 6.2% stake in the company's class B shares when it sold its chain of community newspapers to Dow Jones in 1970, is firmly opposed to selling to Murdoch. That raises the level of opposition to at least 58% of the voting power.

So if the opposition stays firm, where are shares of Dow Jones headed? Down, but probably not all the way down.

While newspaper publishers have been shunned recently on Wall Street, shares of Dow Jones have largely held their ground, while its peers have collapsed. The stock is down 20% from its highs in early 2004, but New York Times (NYT Quote) lost half its value over that span while Gannett (GCI Quote) shed 30% of its value and McClatchy (MNI Quote) lost 56%.

Investors see no growth potential in newspapers, but The Journal remains the most influential financial news source in the world. Its content is valuable enough to its audience that it has been able to charge a subscription fee for access to its Web site, and its parent company has been a leader among newspaper publishers in positioning itself for a digital future.

Dow Jones lends instant credibility to its owner -- credibility that Murdoch craves to use alongside the tabloid sensationalism of his New York Post and the right-wing-tilted cable news juggernaut, Fox News. The Journal is the five-star restaurant of the news business while News Corp. is the fast-food king, and that's precisely why the opposition in the Bancroft family exists.

"News Corp. is not held in the same journalistic esteem as Dow Jones," says Ken Marlin, managing partner with Marlin & Associates, an investment bank focusing on media and technology. "[The Bancrofts] view themselves not as owners but as caretakers of a tradition and a trust that benefits society and democracy. They are the guardians keeping the barbarians from the gate. That's precisely why they set up this two-tiered ownership structure."

While the Bancroft family can block this deal for now, in a decade from now, the opposition's majority likely will be gone if the current trends prevail.

"It's very difficult for family-maintained businesses to maintain control from generation to generation," says Marlin. "They will have to find a way to instill the idea in the younger members of their family that they're the caretakers of this sacred trust. Otherwise, it becomes a question of at what price does the money become worth more than that."

If that's the case, then News Corp. will still be there -- probably with deeper pockets than it has now.

If the Bancrofts want to keep The Journal away from barbarians in the long run, they may have to find a more palatable buyer, and it's unlikely that they'll be able to find one that is willing to bid head-to-head with Murdoch and his big bucks.

"Google (GOOG Quote) won't buy Dow Jones because they don't want to get into the content game," says Matthews. " Washington Post (WPO Quote) wouldn't pay that kind of premium."

While the Bancrofts' opposition holds out, the company's directors, facing fierce opposition from Wall Street, may feel compelled to accept the deal in the name of their fiduciary duties or else resign their post. Even if they tried to accept Murdoch's bid, the votes from the controlling shareholders will have the final say. And if any public shareholders are tempted to launch a lawsuit, all the lawyers in the world will have a hard time convincing a judge that they're not beholden to the lopsided corporate structure that they chose to buy into.