The hedge fund that controls the Pioneer Press has apparently decided on one of the time-honored strategies to make money in a declining business.
It’s called simply “harvest.”
It’s a business term that probably doesn’t need much further explanation. Selling off assets like real estate and cutting staff across the board are signs that the harvest is underway. At the Pioneer Press one indicator of what’s happening is that there are just 74 union jobs in the newsroom after the latest cutback, according to the Newspaper Guild, down from more than 200 in late 2006.
There’s no reason to gloat from across the river about what’s happening to the Pioneer Press. This outcome isn’t good for our region and it’s not even good for the Star Tribune, which prints the Pioneer Press and distributes it in some areas.
The fund manager in charge is Alden Global Capital, which controls Pioneer Press parent company Digital First Media and its more than 60 newspapers across the country.
Hedge funds aren’t in the practice of discussing their private investments, but the goal in any harvesting strategy is to maximize the cash that can be wrung from the business, “dis-investing” with the plan of collecting enough cash quickly that it won’t matter if there’s not much of value left to sell at the end.
While that sounds brutal, harvesting a business often can be the best of the options in a declining industry, as outlined in a classic Harvard Business Review study called “End-Game Strategies for Declining Industries.” But Alden also had a choice, and harvesting was not some sort of last or only choice.
It may seem odd to look to a decades-old research project for insight into decisions that were made here, but the thinking in this Harvard study doesn’t seem to have gone stale. And no matter the strategy adopted, the authors make the point that running a business in decline is very difficult work.
Once managers figure out that the industry really is headed south — and that started for printed newspapers roughly a decade ago — one option the authors discussed is fighting to remain the market leader. This means carefully investing to make sure the company is one of the survivors and can pick up market share as smaller rivals fade.
The problem for the Pioneer Press, however, is that the position of leader in this media market is already occupied by the far bigger Star Tribune. In fairness to the Pioneer Press, that has a lot to do with the fact that the Star Tribune is based in Minneapolis, a city that early on edged past St. Paul in population. That stronger market position helped the Star Tribune emerge from a 2009 bankruptcy and makes it more attractive for local ownership.
Where leadership isn’t a clear option, another path could be quickly selling. But the pool of potential buyers in the newspaper business is currently a shallow one. Digital First reportedly had a deal to sell its assets to the private equity firm Apollo Global Management fall apart roughly a year ago, then pulled the company off the market. A round of cost-cutting followed.
Once cutting costs gets underway in earnest, it can be difficult to know when to stop. Cutting service levels or the quality of the product too much or too quickly can lead the remaining customers to flee. Then the business basically just collapses before much of the remaining asset value can be harvested.
With a regional news publisher, however, one of the interesting things is how subscribers seem to hang on even as the printed product gets thinner and the price keeps going up. That customer loyalty is what creates the opportunity to keep generating cash as the harvest continues.
One nagging question is why another option didn’t get tried here in the Twin Cities, one the authors of the old Harvard endgame strategy study called simply “niche.”
This is similar to the leadership strategy, with a willingness to spend some money on service, marketing and product development, but to serve a far smaller targeted market where the most profitable customers remain.
As an observer and not part of the leadership team at the Pioneer Press, it’s not completely clear what the right niche would have been, although it would make sense to keep the Pioneer Press as a big and vibrant community news provider serving just St. Paul and its closest suburbs.
On the other hand, maybe no plan other than harvesting would have appealed to a hedge fund without any interest in being a media owner, like Alden Global Capital. It’s a well-known and highly regarded (for making money) distressed asset investor in New York.
Investors making their living at the distressed end of the market are an unusual bunch even by the standards of hedge funds. They often buy into sinking companies other investors work hard to avoid, perhaps by buying claims on the assets of a company through deeply discounted bank loans or other debt instruments. Alden jumped into the newspaper industry just as major publishers including the predecessors to Digital First were sliding into bankruptcy several years ago.
As a fund manager, Alden collects its fees mostly from a slice of profits on realized investment gains. To complain that it seems to lack interest in maintaining news organizations as civic institutions is like complaining that a new puppy seems to bark too much.
For a firm like Alden everything is for sale at the right price, of course, but even if local investors now emerge as buyers for Digital First assets a new golden age isn’t likely to start.
It sure didn’t work out for the new owners, led by a former greeting card executive, who took over a big newspaper in the Los Angeles area called the Orange County Register in 2012. Brimming with optimism, they hired new staff, opened up two new newspapers and acquired a third.
Their dreams died quickly. After steep financial losses, staff reductions and shutdowns, the end came with a trip into bankruptcy court.
The assets ended up in the hands of Digital First. A short Wall Street Journal story in April put the news this way: “Newspaper company Digital First Media completed its acquisition of the publisher of California’s Orange County Register and began laying off employees.”
Of course it did.