Murdoch Puts His Money Where His Mouth Is –-He’s Setting Aside Another $1 Billion To Buy Internet Sites, and He’s Close to Gobbling Up a Search Engine.

Philip Stone August 15, 2005

Rupert Murdoch, chairman and CEO of News International, described the problem to a meeting of American editors in the spring, “The threat of losing print advertising dollars to online media is very real. In fact, it’s already happening, particularly in classifieds. No one in this room is oblivious to it.” This week he presented his solution – he is setting aside another $1 billion plus to purchase Internet sites.
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News International is already earning about  $100 million revenue ($10 million profit) from its various Fox entertainment Internet operations but that is just petty cash within the company’s $2.1 billion net income for the past year. Now Murdoch intends to go big-time.

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He told analysts and journalists in a telephone conference call announcing the company’s fourth-quarter results that News International has set aside $1 billion for Internet purchases, and the Internet was now the company’s prime investment priority.

Analysts have been saying that the more than $2.5 billion spent by major US publishing firms for Internet sites this year – all in cash – is way over their true value, but companies like the New York Times and the Wall Street Journal have already reported that the sites they bought early in the year are contributing already very nicely to the bottom line.

News International has already spent more than $700 million on Internet purchases this year. Just last month it acquired Intermix, parent of the web’s leading social networking site for the 18-24-year-olds, Myspace.com, for $580 million, also all in cash, and it is paying $60 million for Scout Media that runs 200 sports web sites and 47 magazines.

There had been reports the company has been seriously looking at Skype, the voice over Internet site, but the reported $3 billion price tag was too high. And in another sign that Internet sites are playing hard to get an online real estate advertising company in Australia has recommended shareholders reject a hostile bid worth about $92 million from a News International unit, saying the real estate company’s current share price was some 14% higher than the offer, which might well indicate the market expects a higher bid!

Nevertheless, Murdoch is quite clear on where he sees the future. “Make no mistake, our commitment to this space (Internet) will constitute a major part of this company’s growth and asset building over the next several years.”

And unusually signaling a future purchase strategy before the deal was actually done, he said the company was in advanced talks to buy a “wonderful” search engine for a price that he said most people would find “insignificant”.

According to MarketWatch.com, there are at least four such search engines that might fit the bill — Miva with a market value of about  $175 million; GuruNet (100 million), LookSmart ($74 million) and Mamma.com ($35 million). 

Search advertising on Google and Yahoo, the world’s two main search engines, already accounts for some 28% of all Internet advertising revenue income and no doubt News International sees gaining a substantial piece of that search revenue pie to be a major goal. But not only that, for all of its various Internet businesses News International needs to build a portal to exploit its various assets.

The company recently grouped its more than 200 local web sites, plus the new additions, into its Fox Interactive unit.

The company had an outstanding fourth quarter, with revenue growing 67%, led by its cable units, from the $429 million a year ago. For the full year growth was up 44%. The company has about $6 billion in cash, $3 billion of which will go to share buybacks and the rest for acquisitions including the Internet purchases. Murdoch and his family trusts own 29.9% of the shares.

And in a sign of confidence Murdoch basically said he had “moved on” from what had been seen previously as a problem – that his friend John Malone via his Liberty Media had bought some 18% of News International shares. Talks had been ongoing through the year for asset transfers so News International could retrieve those shares but now that no longer seems a Murdoch priority and he said he was awaiting proposals from Liberty. But just to make sure Malone has no further designs, the News International board has extended a poison pill defense for another two years that prohibits holders of more than 15% of the company’s shares from buying more shares. 

Malone may be content, however, with the increased value of his News International shares and the increased dividend although he has made mumblings about wishing News International would do more to increase shareholder value than to build dynasties.

But while emphasizing an Internet ambition, that doesn’t mean that Murdoch is shying away from investments elsewhere. News International is holding negotiations in Russia for a 35% stake in Ren-TV, the only remaining television station of any importance offering independent newscasts that not under government control. No global media entity has a serious foothold in the Russian television market although News International does own Nashe Radio and a street advertising business.

Murdoch had warned those newspaper editors meeting in Washington last spring that a revolution was underway and media companies needed to change their ways, both corporately and editorially.

“In the face of this revolution, however, we’ve been slow to react. We’ve sat by and watched while our newspapers have gradually lost circulation. Where four out of every five Americans in 1964 read a paper every day, today, only half do. Among just younger readers, the numbers are even worse. One writer, Philip Meyer, has even suggested in his book The Vanishing Newspaper that looking at today’s declining newspaper readership – and continuing that line, the last reader recycles the last paper in 2040 – April, 2040, to be exact.

“There are a number of reasons for our inertness in the face of this advance. First, for centuries, newspapers as a medium enjoyed a virtual information monopoly – roughly from the birth of the printing press to the rise of radio. We never had a reason to second-guess what we were doing. Second, even after the advent of television, a slow but steady decline in readership was masked by population growth that kept circulations reasonably intact. Third, even after absolute circulations started to decline in the 1990s, profitability did not.

“But those days are gone. The trends are against us.

“So unless we awaken to these changes, and adapt quickly, we will, as an industry, be relegated to the status of also-rans or, worse, many of us will disappear altogether. “

Earlier this year Murdoch called a meeting of his top 50 executives to discuss the company’s Internet strategy. They decided to ask McKinsey & Co. to make recommendations. There has been no public statement on what McKinsey may have recommended, but in reality we may be seeing those results, and Murdoch putting into practice what he preached to those editors in Washington.

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Shareholders Sue Claiming MySpace Sale Valued Too Low; Russian TV Deal Fails - September 7, 2005

Not all smooth sailing for News Corporation’s ambitious growth plans.

Its purchase of Intermix Media is now the subject of a shareholders class action suit that claims the sale price was at around half of the company’s true valuation. Intermix shareholders were to vote on the sale September 28. Intermix says the lawsuit has no merit.

And in the CIS, the attempt to buy a 35% share of Ren-TV has failed. Surgutneftegas, an oil group with close ties to the Russian government, won the stake based solely on offering more money, according to the seller, Severstal (a big steel group). When the deal is completed, Severstal will still hold a 35% share, Surgutneftegas will also hold 35% and Luxembourg-based RTL Group will hold the remaining 30%.