Dear Mr. Buffett: About Those Newspapers . . .

By Steven Pearlstein
Friday, May 15, 2009

Mr. Warren E. Buffett

Berkshire Hathaway

Omaha, NE

Dear Mr. Buffett:

I don't make a habit of corresponding with directors of The Washington Post Co. -- it's not normally a great career move. However, your recent comments about the folly of investing in newspapers received much attention and hit close to home. I hope you won't mind my offering a different view.

There's no denying that the newspaper business is in a bad way. Virtually every big city daily has been losing money, advertisers and readers at an alarming rate because of a disruptive new technology -- the Internet -- and the current recession. A number of major papers are already in bankruptcy protection, and many more are available for sale, but there hasn't been much interest. Now that one of the world's shrewdest investors has declared that he wouldn't buy a paper "at any price," the prospects of these papers have become even grimmer.

I have to say I was surprised by your remark, and not simply because of your lifelong love of the newspaper business. As a "value" investor, you surely must acknowledge that this is the opportunity of a lifetime as far as newspaper investing is concerned. For close to nothing, investors can pick up some of the most respected regional brands in the news business, along with their (shrinking) lists of advertisers and subscribers. They can obtain modern printing presses for a fraction of their original cost. And they are able to hire from a deep pool of talented journalists, pressmen, salesmen and circulation experts desperate for jobs.

Your mentor, Benjamin Graham, was always on the lookout for what he called "cigar butts" -- cheap and unloved companies that had been tossed aside but still had a couple of good puffs left in them. If the Los Angeles Times, San Francisco Chronicle, Rocky Mountain News, Chicago Tribune and Boston Globe don't qualify as "cigar butts," I can't imagine what would.

I realize, of course, that, looking at current and projected cash flows, it is easy to conclude that buying a paper would simply be buying the right to "unending losses," as you put it at the Berkshire Hathaway annual meeting. Many of these papers are already caught in a death spiral in which further cuts in the quality and quantity of news content and marketing support will lead only to further declines in readership and advertising.

From an investment standpoint, the better way to look at these properties is to think of buying all of them. In a single stroke, and with a relatively modest amount of money, a strategic buyer could assemble a national syndicate with millions of readers capable of achieving the economies of scale that have, for the most part, eluded our badly fragmented industry. And with the near-death experience of these papers still fresh in the minds of readers and employees, a forceful new owner would have an opportunity to offer a different set of products based on a different and more sustainable business model.

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