MAR 2007

CAN BANKING SACRAMENTO’S BEST business insight for the SAVE HEALTHCARE? SHANGRI-LAS BATHROOMS capital region

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32 mar07 Any number of things make a business trans- action a “big deal.” For one, size does matter, MCCLATCHY as does a touch of controversy and the poten- MOVES tial to dramatically alter an industry. In 2006, 1 the Sacramento region’s biggest deal — the McClatchy Co.’s $6.5 billion March purchase UP of the Knight Ridder newspaper chain — had all of that and more, most notably the rapidly THE growing star power of the industry’s golden boy du jour, McClatchy CEO Gary Pruitt. PAPER The 32-paper Knight Ridder chain was un- doubtedly one of the industry’s heavyweights, CHAIN led by crown jewels like the Philadelphia In- quirer, the Miami Herald and the San Jose BY Mercury News. But while Knight Ridder pa- pers earned kudos and Pulitzer prizes by the RICH EHISEN score, the company itself wasn’t winning any awards from shareholders. For much of the last decade, Knight Ridder’s profi t margins hovered between 15 and 20 percent — great for some industries, but not really close to many of its newspaper brethren, including McClatchy, which regularly topped the 20 percent mark. Faced with growing shareholder pressure to either grow the margins or sell the company, Knight Ridder CEO Anthony Ridder fi nally put the chain on the market last year. And although Pruitt has consistently called the Knight Ridder purchase a deal “we didn’t feel was essential to do,” he nev- ertheless pounced on the opportunity. “We felt we could have been a good company staying the size we were, but when Knight Ridder became available, we felt that if we could get it at an attractive price and we could sell the papers we didn’t want, that this could be a deal we could make work,” Pruitt says. “We weren’t going to stretch too far or put ourselves at risk, because we didn’t need it. But if we could get it, it would defi nitely make the company stronger.” Just over $4.5 billion in cash and stock later, plus another $2 billion in assumed Knight Ridder debt, McClatchy was not only stronger, it was also fi rmly established in the land of the giants. Even after selling off a dozen of the Knight Ridder papers that it didn’t want, McClatchy still raised total circulation for its remaining 32 daily papers to more than 3 million. That moved the 150-year-old company from its respectable but unspec- tacular position as the nation’s ninth largest newspaper chain to second place overall, trailing only the Gannet Co. at the top of the daily newspaper world. The sale of the 12 “orphans” — papers like the Inquirer and Mercury News that Pruitt says did not fi t the McClatchy model of being dominant entities in high-growth markets — also returned a cool $1.6 billion to help pay down the more than $3 billion the company borrowed to fi nance the Knight Ridder deal. But Pruitt’s wheeling and dealing didn’t end there. Just days before Christmas, Pruitt sold another high-profi le McClatchy asset, the Minneapo-

33 mar07 lis Star Tribune, for $690 million in cash paper that offered a tax advantage to with rising competition from the Inter- to Avista Capital Partners, a New York- the structure such that it would en- net and 24-hour cable news channels, based private equity fi rm. hance the purchase price signifi cantly. has been in decline for years, particu- That is signifi cantly less than the So while it was a diffi cult decision, it larly among younger readers. With $1.2 billion McClatchy paid for it in was also a clear decision.” smaller circulation has come stagnant 1998, but as with seemingly all things Not everyone has Pruitt’s clar- ad revenue, a knife to the jugular given Pruitt touches these days, the sale ity about his recent moves. From the that most papers derive as much as had a pronounced silver lining: the big moment the original Knight Ridder pur- 80 percent of their revenue from ads. fi nancial hit on the Tribune sale will ulti- chase came to light, observers within That stagnation has also placed virtu- mately allow McClatchy to offset about ally all publicly held newspapers under $160 million of the approximately $500 the shareholder microscope, including million in capital gains taxes it incurred such luminaries as the Tribune Co., from selling the Knight Ridder papers “McClatchy has which shareholders forced onto the it didn’t want in the fi rst place. The market almost before the ink was dry only negative, per se, was that the sale abandoned its on the Knight Ridder sale. dropped McClatchy to third in size be- Others have also questioned hind the Tribune Co., which owns such employees and whether McClatchy’s newfound debt industry luminaries as the Los Angeles would lead to staff layoffs and re- Times and the Chicago Tribune. readers, for profi t, duced newsroom budgets, in essence While everyone knew well before- not principle.” watering down the company’s journal- hand that Knight Ridder was in play, istic credibility in deference to its own few saw the Star Tribune deal coming. — Nick Coleman, columnist, shareholders’ demands to pump up the But Pruitt says the circumstances were Minneapolis Star Tribune bottom line. a perfect storm of opportunity: the pa- In that regard, few failed to notice per’s advertising sales and circulation that virtually all of the dozen Knight had fallen dramatically, and the tax ben- Ridder papers that Pruitt moved were efi ts of moving it now were too good to the industry and on Wall Street won- heavily unionized, as was the Star Tri- pass up. dered aloud why Pruitt was willing to so bune. And everyone certainly took note “We applied the same kind of clear- boldly risk both his reputation and the when the Sacramento Bee closed its eyed strategic tests to the Star Tribune company’s fi nancial well-being during a Los Angeles and San Francisco bureaus that we applied to the Knight Ridder time when many of those same observ- and, in spite of Pruitt’s assurances that papers,” he says. “We felt by selling it ers consider the industry to be on the the company “has no plans for across- we could reduce debt, improve perfor- wane. the-board layoffs or buyout programs,” mance and increase our operational It is a question with some merit. steered around 3 percent of its editorial fl exibility. And, of course, it was the only The daily newspaper business, faced staff toward buyouts.

ROOTS: Born in Alexandria, Va., on July 3, 1957.

JOB: Chairman, president and CEO of the McClatchy Co.

FAMILY: Pruitt and his wife, Abby, live in Sacramento with their two daughters, Katherine, 17, and Allison, 15.

EDUCATION: BA from the University of Florida; MA in public policy and law degree from the University of California, Berkeley.

HOBBIES: Tennis, swimming, body surfi ng, hiking and reading.

WORK ETHIC: “Think about the values of the company and try to personify them. I have high expectations of myself and my company and the people who work for me, but I also respect other people and what they’re doing professionally. There’s no reason to be nasty or mean.”

LIFE PHILOSPHY: “I think it’s important to lead a balanced life and not let work become the be-all and end-all of your existence.”

Gary Pruitt

34 mar07 The reaction after the Star Tribune on just the journalism, no matter what. to quote rock ’n’ roll lyrics to begin and sale was particularly harsh, at least from He is pragmatic in that he stands for close board meetings. those affected most. In a piece printed sound journalism, but he also recog- But while Pruitt does count surfi ng just days after the sale was announced, nizes the economic pressures of the among his many hobbies, he is quick Star Tribune columnist Nick Coleman industry.” to point out that he is a newspaper guy claimed McClatchy had “abandoned its Facing doubt is nothing new to through and through. He is also unde- employees and readers, for profi t, not Pruitt, who has heard most of it since terred by those who might question his principle.” Coleman also accused Pruitt his ascendancy to McClatchy CEO in bona fi des, either as a media guy or as of providing “lip service to the cause of 1996 at the ripe old age of 36. A lawyer a savvy businessman. The reason for quality journalism” and said that “in the by training and trade, he had been with that, he says, is simple: He has done end McClatchy folded like a cheap lawn the company for only a dozen years, his homework, particularly in regard to chair under a steady gale of Wall Street starting as a fairly nondescript in-house where he believes the industry is going. demands.” Still more howling followed attorney working on First Amendment And while he acknowledges that the in- after Pruitt’s annual salary was bumped issues and, he says, “making sure we dustry is changing, Pruitt scoffs at the to just over $1 million in December, a didn’t get sued for libel, squashing sub- idea that newspapers have become a fi gure that could double if the company poenas, opening courtrooms, public relic doomed to extinction. hits certain benchmarks this year. records — all that stuff.” “The newspaper form is about 400 Pruitt’s colleagues, however, have But he also had a keen eye for busi- years old, but the predictions for our de- been quick to his defense. “Gary Pruitt’s ness transactions, something that mise are about 399 years old,” he says. job almost tripled in complexity at mid- caught the attention of his bosses. A “People have predicted the end of news- year, and I don’t think he got a raise papers forever. And most of those people then,” says David Zeek, president of the are dead and newspapers carry on. American Society of Newspaper Editors “We still regard the newspaper as and executive editor of the News Tri- critically important and as having the bune, a 128,000-daily-circulation paper “Gary is pragmatic ability to grow,” he says. “Maybe not in Tacoma, Wash. (The News Tribune in circulation, but I think revenues and is also a McClatchy-owned paper) “If I in an industry that profi tability can grow over time because went from being the editor of the Taco- in each of our markets there is only one ma News-Tribune to being the editor of would like daily newspaper, and every year there’s the Los Angeles Times, I guess I would more idealism.” more of everything else — more TV sta- expect a pay increase.” tions, more cable channels, more radio Zeek also defends Pruitt’s choices on — Karen Dunlap, president, the Poynter stations, more magazines, more web- the 12 Knight Ridder papers McClatchy Institute for professional journalists sites. So our competition actually faces sold off, saying, “I think the issue is not even more fragmentation of their audi- unionization, I think it is about fl exibil- ence because they have a proliferation ity to react quickly as the competition of outlets within their medium.” changes or the market changes. The rapidly expanding list of responsibilities That said, Pruitt does acknowledge newspaper business has historically followed, including a stint as the pub- “that the newspaper is not suffi cient had a correlation between heavily lisher of the Fresno Bee, before Pruitt anymore. It’s not enough. We have to unionized businesses and the inability eventually rose to company president do more than that.” Along those lines, to be fl exible and to move rapidly and in 1995 and CEO a year later, earning Pruitt notes that “our strategy for more to adapt.” the golden-boy tag that has followed than a decade has been to be the lead- Karen Dunlap, president of the him ever since. ing local Internet site in each of our Poynter Institute, a Florida school for That moniker has been used deri- newspaper markets, and we are that. In professional journalists and journalism sively more than once by those who Sacramento it is Sacbee.com, Sacticket. teachers that is funded by the Times believe his interests in corporate suc- com and Sacramento.com, all of which Publishing Co., the corporate parent cess outweigh his interest in good are the local leader. In fact, when you to the St. Petersburg Times and Con- journalism. But if any of the recent look at the unduplicated reach of the gressional Quarterly, understands the turmoil bothers him, you would never Sacramento Bee and our websites, our negative reaction from some circles of know it from Pruitt’s demeanor. audience is actually growing.” the industry, but says Pruitt is in a par- Tall, trim and blessed with youth- And that growth is ever more exem- ticularly diffi cult situation because he ful good looks that easily belie his 49 plifi ed by the rise in ad dollars generated is trying to balance the needs of both years, Pruitt appears a lot more like a by online newspaper advertising. Online corporate and news interests. Southern California surfer than a seven- ads currently account for only about “Gary is pragmatic in an industry fi gure corporate CEO. That persona is 6 percent of total newspaper ad sales, that would like more idealism,” Dunlap amplifi ed by his somewhat laid-back, but that still equates to serious money says. “Journalists want more emphasis cheerful manner, as well as a tendency when considering that, according to the

35 mar07 Newspaper Association of America, on- sets will not only “help our newspapers business side so we can maintain the line newspaper ad sales totaled over $2 and help our newspaper websites, but journalistic side.” billion in 2005. Sales for 2006 were on they’re also a long-term play in terms It is undoubtedly a tall order, in part, target to climb another $500 million, of valuation. If CareerBuilder.com goes says Poynter’s Dunlap, because the end with signifi cant jumps in revenue com- public one day, we’ll get a return on results matter to more than just Pruitt ing in each of the fi rst three quarters. that as well, independent from our web- or the McClatchy shareholders. “He is in With the Bee, for instance, 2006 third- sites, because CareerBuilder’s market an unusually diffi cult position,” Dunlap quarter online sales jumped a nifty 7.3 capitalization could be enormous.” says of Pruitt. “In addition to migrating percent over that same quarter in 2005, In the same breath, however, Pruitt audiences and shareholder concerns, while print ads fell 2.8 percent. adds that it isn’t good enough “just hav- he faces a third challenge that nobody Most industry experts expect the ing the leading Internet sites. We need else in the industry has in that, in a upward trend for online newspaper ad to also be a 24-7 media company by de- sense, he holds the hopes of journalists sales to continue in 2007, particularly everywhere because of buying Knight as Internet search engines like Google Ridder. The industry is now watching and Yahoo continue with their own for- him in hopes that those papers still with ays into the arena. The infusion of new “We think good McClatchy will continue to be strong.” Internet blood could help prop up de- The Tacoma News Tribune’s Zeek clining print ads. Google, for instance, journalism is says Pruitt is the perfect man to pull it began a pilot program last November off, saying his “mixture of stability and that allows advertisers, mostly small good business. innovation” is a “kind of magical thing.” companies who often fi nd traditional We make no Dunlap concurs, saying of Pruitt, “There newspaper ads too expensive for their are many fi ne leaders out there, but I budgets, to access a single site to bid apologies for being don’t know who could better handle the on and buy unsold print-ad space at challenges he is facing.” the last minute from a group of more profi table.” One challenge Pruitt won’t be deal- than 60 papers across the country. ing with for now is taking the company But while both Google and the —Gary Pruitt private, rumors of which have swirled participating papers hope the simple around the company since before the one-stop shopping process will pump Knight Ridder deal. Although Pruitt says up those lagging print sales, Pruitt livering information to people’s PDAs, going private could be an option some- and his newspaper brethren are also BlackBerries and their cell phones; day, he contends it isn’t an option at all clearly not holding their breath for it news alerts, scores, everything ... try- right now. “We don’t currently have any to happen. ing to deliver what information people plans to go private, and given our debt In January, McClatchy reportedly want, when they want it.” and number of shares outstanding, we entered into negotiations for creating Pruitt rejects the idea that good would be paying down debt and buying a three-way deal with the two players journalism by its nature has to mean back shares for a while before we could above them in the newspaper food ignoring profi ts. “We think good jour- even contemplate it,” he says. chain — the Gannet Co. and the Tribune nalism is good business,” he says. “The Pruitt says that while he fully expects Co. — to create their own joint Internet metaphor we like to use at McClatchy to see more industry turmoil and more advertising service. If completed, the is to be athletic, to be trim and fi t but newspapers being sold, particularly to deal would allow the three titans to of- also muscular in those places that private equity investors, he is done with fer similar one-stop shopping for large count. Sometimes newspapers and his own mergers and acquisitions for a national retailers to place display ads newsrooms roll their eyes and think, while. For now, he says he just wants on their respective Web sites. Yahoo ‘Oh, we’re too profi table.’ Well, we to concentrate on the continuing inte- has a similar deal with several other make no apologies for being profi table gration of the Knight Ridder group and media entities. and successful because ultimately we making McClatchy an industry leader by With the Knight Ridder deal, Mc- understand that the greatest insurance fi nding the tricky balance between prof- Clatchy also gained a large interest for our independence is business suc- its and quality. in such profi table ventures as Career- cess. If we’re successful as a business, “We’re not going to be a deal-driven Builder.com, which recently eclipsed our independence and our strength on company,” he says. “We just did a major Monster.com as the No. 1 online job- the journalistic side is much less vul- acquisition, but we don’t live for deals. hunting site, as well as other popular nerable to challenge. We live for the operating side and to go sites like Apartments.com, Cars.com “I know it sounds hokey, but the forward there. McClatchy’s not going to and Homescape.com. Pruitt later sold a newspaper is the one that supplies be the ‘go, go, go’ company that’s trying signifi cant chunk of CareerBuilder.com most of the original reporting in a to become the biggest newspaper com- off to partners Gannet and Tribune. community, and a community is hurt pany. That doesn’t mean anything to us. Ever the forward thinker, Pruitt without that,” he adds. “It is very im- Trying to be the best means something cheerily notes that these collective as- portant to us to get it right on the to us.”

36 mar07