Short-Sellers Take Lumps on Dow Jones Deal
Newspaper and broadcast stocks are entering a period of uncertainty following News Corp.'s unsolicited $60-a-share bid yesterday for Dow Jones.
The New York Times, the Washington Post, Gannett, and all the other newsprint empires rallied as investors assumed that more such deals may come down the pike. But yesterday's excitement over newspaper issues — stocks, that is — brings into sharp focus the risks in today's markets for short sellers.
Dow Jones's stock quickly rose $22 per share, or nearly 60%, leaving behind some bruised and battered investors who were short some 7 million shares. One veteran money manager, Lulu Wang of Tupelo Capital Management, cites takeover activity, especially among private equity firms, as a reason some investors are starting to shy away from long-short hedge funds.
"The short side is very crowded, and very dangerous as a result. Many funds are trying to go short by using ETFs, where they are at the mercy of the market and the sector, and are consequently adding less value," Ms. Wang says.
The reasoning is that private equity buyers, who have amassed giant war chests, are looking typically for undervalued companies with business prospects that might be improved with an infusion of results-oriented management. Unemotional pruning of operations, targeted capital investments in technology, or outsourcing to improve efficiency are all on the private equity plate.
Strategic buyers like News Corp. often follow a similar line of reasoning. Consequently, buyers are frequently zeroing in on companies that have not been doing well in the market and that have picked up a hefty short interest.
Dow Jones is a good case in point. The stock closed Monday at $36, about flat for the past 52 weeks, while the S&P 500 is ahead 13.6%. Moreover, Dow Jones's stock has traded consistently below its high of $68 reached in 2000, in response to the industry-wide shrinkage in circulation and concerns about the long-term impact of digital news delivery.
In other words, the stock was a great short candidate and indeed, as of a few days ago, traders held a short position of 7.4 million shares, or 27% of the float (tradeable shares). Those who shorted the stock were doubtless comfortable that the Bancroft family's 22% ownership share and past resistance to a takeover bid would forestall an offer.
They did not count on the perseverance of the News Corp. chief, Rupert Murdoch, however, who had made an earlier unsolicited bid of $73 a share for the company in 1996. They also did not take into account the enthusiasm for leading newspaper properties, which may seem to fly in the face of value investing.
The deal by Sam Zell to take the Tribune Company private earlier this year for $8 billion and the acquisition of Knight Ridder by McClatchy Company in 2005 are two of the more visible deals that have rocked the newspaper world. Investors are also pushing the New York Times to attack their business problems more aggressively.
It may seem counterintuitive that an industry that appears to be shrinking is attracting all this attention. As reported yesterday in The New York Sun, circulation for American daily newspapers was off 2.1% in the past six-month period. While vanity investing may be a factor, there is also the view that the leading newspaper companies "own" a great deal of content — the product of reporters, writers, and editors — which is of value no matter what the delivery mechanism. Whether people read the Wall Street Journal in print or online, they will continue to support the product.
In any case, investors should perhaps be wary of strategies that rely too heavily on the art of selling short. If Ms. Wang is correct, the continued growth of private equity activity could reduce opportunities in the sector and could constrain long-short hedge fund results going forward.
