Why I'm so focused on Gannett's falling stock

Remember Knight Ridder? Its shares fell dangerously low, infuriating a key stockholder, Private Capital Management (PCM), which demanded Knight's board of directors sell the company. Knight had no choice -- PCM owned 19% of all the shares -- and the rest is history.

Led by then-CEO Tony Ridder (left), Knight was sold to McClatchy, which immediately broke it up. (And McClatchy is now suffering major buyer's remorse; its shares are down more than 60% since that June 2006 deal.)

I write this today, when Gannett shares traded below $40 for the second consecutive day, before closing just above that key milestone.

Knight's travails illustrate a simple, if little-understood truth: So-called institutional investors -- mutual funds, pension funds, private-equity firms like PCM -- are almost always the biggest owners of stock in publicly traded companies like Gannett. They have no emotional or ethical attachments to their investments. (Defending the First Amendment? That's a pricey obstacle to boosting profits!)

They do, however, get emotional when the value of their investments fall -- and that's what's happened to Gannett, along with most other newspaper stocks. Indeed, Gannett's market value -- its so-called market capitalization -- has fallen below $10 billion in recent months, and is now in danger of falling below $9 billion.

Market cap is basically the total number of shares in a company multiplied by its current stock price. For comparison, look at Google, the online search engine company that's sucking advertising away from newspapers. Founded just nine years ago, Google now has a market value of $232 billion! That shows how quickly our competition is growing.

As GCI's value shrinks, several ominous scenarios emerge:

• It could become vulnerable to a forced sale. That was the speculation in August, quickly dismissed by CEO Craig Dubow, when GCI filed some new documents with the Securities and Exchange Commission hinting a deal might be in the works.


• Its debt might get downgraded by the big credit-rating agencies, Standard & Poor's and Moody's. Lower debt ratings typically raise borrowing costs by millions of dollars for a company the size of GCI.

To be sure, even at a $9 billion market value, Gannett would be an awfully big company to buy when several factors make big deals less likely.

For one thing, private-equity firms and other such investors have been burned after agreeing to buy newspaper companies. (An example: the investor group that bought the Philadelphia Inquirer when McClatchy dumped 12 of the former Knight papers.)

Also, private investors typically borrow most of the money they need for these sort of deals; they put in very little of their own. Yet, beginning in August, lenders started growing wary of making big loans because of uncertainty over sub-prime mortgages.

One thing is certain. GCI's board of directors has one legal obligation above all, and it is not what should be our core mission: defending the First Amendment. Instead, the board's obligation is to protect and enhance the price of the company's stock. The board can't let the stock keep falling; it will need to do something to bring stability to GCI shares.

The question: What will the board do -- and when?

[Photo: McClatchy Co.]