Introduction
The environment surrounding the impending deal between Media General’s newspapers and Berkshire Hathaway, a company that is associated with renowned American investor Warren Buffet, presents an intriguing financial scenario. Although Warren Buffet has prior investments in the newspaper industry, the decision to acquire 63 newspapers from Media General in a period when the print media sector has been written off by many investors is surprising. It is important to note that Media General is in the brink of bankruptcy when the acquisition is taking place. Furthermore, Media General’s financial records do not contain any indicators that might act as motivation for Berkshire Hathaway’s bid. Buffet is the brains behind the Media General-Berkshire deal and his brand is often associated with excellent investment decisions. This paper explores the mechanics behind the Media General-Berkshire deal including the company’s highlights and a general analysis of the deal’s environment.
Company Highlights
Media General’s sales revenue has been on a steady decline over the last few years. The company’s total revenue has declined from $896.3 billion in 2007 to $616.3 billion in 2011. This downward trend has been as a result of reduced circulation of newspapers and declining Ad revenue due to higher internet penetration among target customers. The company’s EBIT follow a similar pattern because they have declined from $87.8 million in 2007 to $38.4 million in 2011. This downward trend can be explained by Buffet when he notes that “fixed costs are high in the newspaper business” (Esty, 2015, p. 148). Therefore, the company’s EBIT can be explained by the fact that business has diminished but the overheads remain high.
Nevertheless, Media General’s CAPEX has been on a steady decrease within the last five years. This trend is occasioned by the fact that Media General has been operating in a flimsy economic environment. Consequently, the company has not acquired any significant assets within the last five years and it has also been disposing the ‘expensive’ ones. The CAPEX can easily explain the company’s depreciation as a percentage of sales. The depreciation has mostly been random in accordance with the economic environment. The non-cash NWC adheres to a similar pattern of random decrease mostly because the company has been involved in borrowing and bad loans. The company’s account receivable has remained steady over the last five years because the monthly subscription of newspapers has not changed much since 2007. The inventory as a percentage of sales has also coincided with account receivable. The account payable depends on the circulation of Media General’s newspapers, and it has only declined slightly over the last five years. Furthermore, the company’s rates of account receivable, inventory, and account payable have been stabilized by the other businesses that Media General conducts.
Analysis of Environment
The global economic environment indicates that the newspaper printing industry is on a long-term decline. The circulation of newspapers has been on the decline over the last three decades. The decline in circulation of newspapers in the United States has mostly affected evening papers, which have almost went out of circulation (Esty, 2015). On the other hand, Ad revenues have been on the decline over the last decade. The sharpest decline in Ad revenue has occurred since the year 2005 where revenues in the United States peaked at approximately $4.5 billion. However, recent statistics place the Ad revenue at slightly above $2 billion. Consequently, General Media’s ability to maintain profitability under the current trends depends on the company’s ability to come up with new models of operations. However, it is likely that small-town and local newspapers will maintain circulation even as national newspapers decline.
Media General is a veteran in the newspaper industry and the company has been in the print media business for more than a century. However, Berkshire Hathaway has only been in the newspaper business for the last few decades. Berkshire Hathaway faces a minimal threat of new entrants because most newspaper businesses are in the process of restructuring. However, most of the companies that compete with New Media are also likely to have new owners who may bring fresh aspects of competition against Berkshire. The threat of substitute products is quite high because most advertisers favor television and the internet. Consequently, Berkshire’s customers would have bargaining power that is above average. Berkshire aims to acquire 63 of New Media’s newspapers thereby eliminating aspects of intensity rivalry in its main areas of operation. The social environment favors the business, especially when it comes to online publications. On the other hand, Berkshire can also capitalize on technology by diversifying on related products such as online subscriptions, creating newspaper apps, and venturing into other types of businesses.
Berkshire Hathaway’s main strength lies in the fact that the company has vast capital resources. Therefore, the capital-rich Berkshire has the resources that are necessary to institute the much-needed turn-around in the newspaper business. According to Buffet, the company has the opportunity to capitalize on the strong sense of community that comes with local newspapers. The investor also notes that the newspapers have a ‘decent future’ due to their uniqueness. However, Mr. Buffet has also noted the threat of newspapers’ revenues falling below their expenses. The company’s ability to survive competition depends on the new models of business that it can implement in the near future.
Reference
Esty, B. (2015). Buffett’s Bid for Media General’s Newspapers. HBS Case, 9(1), 143-213.