The Biz View from Peking U
by

Forbes’ new Hong Kong owners should call Charlie Munger ASAP

PUBLISHED : Monday, 04 August, 2014, 9:26am
UPDATED : Monday, 04 August, 2014, 9:35am

A Hong Kong investment group, including Tak Cheung Yam of Integrated Asset Management and Wayne Hsieh of Asustek Computer, has reportedly purchased Forbes for US$475 million (HK$3.68 billion). One of America’s leading capitalist publications is now a Hong Kong company. But before the new owners go chasing any growth plans, they should call Warren Buffett’s partner Charlie Munger. Because he is doing something quite surprising in American publishing right now. He is making lots of money.

The high price paid for the company, on the order of 25x 2012 earnings, means big growth is envisioned. And, indeed, the initial announcement by Forbes Media has mentioned new projects in online media – as well as potential new ventures in real estate, education, financial services and technology.

But the new owners would be well advised to take a moment and do a quick comparison of Forbes Media with Charlie Munger’s publishing company, the Daily Journal Corporation. It is pretty sobering.

Founded in 1917, Forbes Media is steeped in American history and capitalism. They’ve got a big name. They have a website and a print magazine. They can claim hundreds of thousands of subscribers and millions of online readers. And the company does have some brand power today, especially in international markets.

However, the financial decline of the company over the past fifteen years has been fairly spectacular. According to the pitch book obtained by Ken Doctor, a media analyst for Outsell Inc., Forbes Media has had revenues in the US$120-140M range for the past several years. And EBITDA has been in the US$10-15M range.

To a financial buyer, Forbes is likely worth US$150-200M. And, unfortunately, the majority of Forbes’ revenue is from advertising (about US$100M). Advertising-based publishing is a very difficult business, and getting more so.

In contrast, the Daily Journal Corporation is a virtually unknown Los Angeles company. It publishes newspapers, websites and magazines in California and Arizona. And their primary readers are lawyers, to whom they provide the various legal updates needed to keep on top of local court rules and happenings. Their publications also serve as a place for public notice advertising. They have recently expanded their business of providing information and software to courts. They are also a surprisingly small company. Management seems to consist mostly of one man, who serves as CEO, CFO and principal accounting officer.

Financially, the company has stable revenue of around $45M per year, approximately one third of Forbes. But their annual operating earnings are in the US$5-10M range, a >20% margin. So the Daily Journal is a small, non-sexy, non-growing, non-famous, non-big online traffic gathering but profitable publishing house that mostly sells to lawyers in small niche markets. In terms of publishers, it is literally the exact opposite of Forbes.

But here is why we are talking about them. Because while Forbes has been hunting for a foreign strategic buyer and dreaming expansions into unrelated businesses, the Daily Journal has been making money and rocketing upwards financially. As I am writing this, their market capitalization is US$250M. Yes US$250M, quadruple what it was worth in 2008 and likely worth more than what Forbes is worth today.

The Daily Journal has been focused on running a lean and profitable company in unsexy publishing niches. And their investment committee has been focused investing these profits into long-term investments.

It gets better. In the last 4-5 years, the company grew $45M in stock purchases into US$138M. The balance sheet of this small publishing company now has close to US$140M in equities and virtually no debt. And, no big surprise, Charlie Munger runs the investment committee and much of the company’s holdings are in Wells Fargo and Bank of America, similar to Berkshire Hathaway.

There are three big lessons for Forbes’s new owners in this story.

Be wary of chasing growth.

The Daily Journal has no grand plans for international expansion or Manila skyscrapers. They don’t appear to be interested in growth unless it is clearly accretive to shares. They are proof that a small profitable and stable business is better than big or growing profitless one.

Don’t put cash into difficult or declining businesses, like publishing.

If you are in a business with bad and/or declining economics, pull out every dollar you can. Just run the company lean and then put your cash into proven businesses with attractive economics. Don’t reinvest in publishing businesses. Don’t launch new initiatives. If a machine breaks in the office, don’t replace it. Just pull out the money, put it into proven great business and let it grow.

The Daily Journal has mostly followed the strategy Warren Buffett used when he bought textile company Berkshire Hathaway. He kept it lean and mean and pulled whatever cash he could. Then he invested that into proven great companies and let them run.

And you don’t have to be Charlie Munger or Warren Buffett to do this. What would have happened if 15 years ago Forbes started taking out as much cash as possible and just bought whatever Berkshire Hathaway was buying? Or maybe just started buying real estate in Manhattan? Would Forbes really be selling their business today if they had hundreds of millions on their balance sheet and no debt?

In publishing, target small niche markets where you can eliminate the competition.
The Daily Journal goes small. It isn’t sexy. But they hunt for valuable niches where you can actually build barriers to entry, eliminate the competition and extract profits, relative to capital deployed. Even though their publishing business is small, they have net margins of over 20 per cent and their return on equity is impressive.

The new Forbes owners would be wise to call up Charlie Munger and talk about how you actually build wealth in American publishing today, especially before jumping into any new big growth plans.

A final tip of the hat to Elevation Partners. Pop star Bono’s private equity firm appears to be selling their entire 45-per-cent stake in Forbes in this transaction. And at a great price. You can tell a lot about an investor when things go wrong. Most tend to quietly slip away. But Roger McNamee and his team at Elevation Partners worked through some really difficult times in their Forbes investment. It’s impressive work and it’s the kind of thing that makes all of us in private equity proud. Congratulations.

The views are the author's own