On Oct. 11, Time Inc. President J. Richard Munro sent a two-page memo to all 20,000 employes. His message was simple: Trim the fat.
Munro wants to eliminate $75 million from the corporation's operating costs by the end of next year -- a deep cut that Time says signals abiding change in the corporation's attitude toward costs.
Wall Street analysts believe that Time's decision to focus on costs is a response to softening magazine and cable TV profits. But they say it also is driven by the fear that, unless aggressive steps are taken to try to keep its stock price up, Time could become the target of a hostile takeover bid.
It is clear that the prospect of a takeover attempt is on the minds of executives at Time. Munro said in an interview last week that if Time became the target of a hostile takeover bid, Rosslyn-based Gannett Co. Inc., publisher of 85 daily newspapers, including USA Today, would be an attractive white knight, or friendly merger partner.
Time and Gannett "both have wonderful franchises, and they are both in businesses the other is not in," Munro said. "There is very little conflict there. They have newspapers and broadcasting. We have magazines and cable.
"If you look at the whole spectrum of companies in America, in this environment of either raid or be raided, or who is going to acquire you or who is going to break you up, and you start thinking about 'how do I protect myself from that,' one way is merging to make yourself bigger and less vulnerable," he said. "Gannett is a helluva company. We have a great deal of respect for Gannett. There are probably a couple of other companies that could also make sense. It is public information that we talked to CBS.
Based on its closing price of 55 7/8 Friday, the company has a market value of about $3.56 billion. But Donaldson, Lufkin & Jenrette analyst Dennis H. Leibowitz, and others, believe the company probably would be worth more than $95 a share, or more than $6 billion, in a takeover. It is this disparity between the current stock price and the potential takeover price that keeps the pressure on Munro and makes Time an intriguing target of takeover speculation.
A similar situation existed earlier this year at CBS Inc., which was forced to defend itself against a hostile takeover bid from Ted Turner.
"I don't think we are any more or less vulnerable to a takeover than a company whose stock is selling at $55 a share and whose breakup value is kind of twice that," Munro said. "Anybody who is in that situation has got to be concerned. I think there is a real danger of getting preoccupied with it."
Munro says his attention these days is focused on cutting expenses. He says his goal is to alter Time's corporate culture by changing the way employes think about spending money. He concedes that changing the culture will not be an easy task in a company that has a reputation as a wonderfully generous place to work.
"I've been here for 20 years, and I've watched the fat build around the belly," Munro said. "It's time we started jogging. You can argue that this company, as well as a lot of companies, should have done this years ago. Deep down in our souls, we at Time Inc. know that costs have never been on the forefront of anybody's minds in this company. We have a reputation for being a little bit of a spendthrift."
Since the company was founded in 1922 to publish Time magazine, Time Inc. has become one of the nation's most powerful corporations, with significant operations in magazine publishing, cable television and book publishing. It is the world's largest magazine publisher, with well-known titles, including Time, Sports Illustrated, People, Fortune and Money. Its magazines capture about 22 percent of the nation's total magazine advertising dollars, more than two and a half times its closest competitor, Hearst Corp., according to Time Vice President Philip G. Howlett.
Time's profitable American Television and Communications subsidiary is the nation's second-largest cable television company, serving about 2.5 million basic cable subscribers in 30 states. The company also owns the largest and third-largest pay-television program services, Home Box Office and Cinemax.
Time is the largest direct marketer of books in the United States. Time-Life Books, based in Alexandria, will sell about 20 million books by mail this year. Time's book publishing also includes Little, Brown and Co., which has more than 2,900 titles in print and which plans to publish about 363 new titles this year. Time's Book-Of-The-Month Club has more than 2 million members who buy books and records through the mail, and the company's Selling Areas-Marketing Inc. [SAMI] is second only to Nielsen in the growing field of marketing research.
Despite the current weakening in magazine advertising revenue, and the slow-growth environment that has reduced expectations in cable dramatically, it is difficult to deny the fundamental strength of Time's balance sheet and of the profitable Time enterprises that produced $3.1 billion in revenue and $216.4 million in net income last year. That, according to Munro, is one of the key reasons why it will be difficult to persuade employes that reductions in staff and cuts in spending are needed.
When asked to comment on Munro's memo, Time Inc. employes in three different businesses said they believe that the memo applies to other subsidiaries, not theirs. "It does apply to everybody, no matter what people think," Munro said.
Time magazine Washington Bureau Chief Strobe Talbott said last week that there is not much fat to cut in his operation.
"The Washington bureau of Time magazine is an extraordinarily busy and productive group of people," Talbott said. "There is, in that sense and in that category, no fat whatsoever. It is all muscle and nerve endings . . . I don't regard [Munro's memo] as a big deal. As somebody responsible for a reasonably expensive operation here in Washington, I don't feel my ox is being gored in any way by this. I think it is going to be relatively easy to meet the guidelines that have been set."
E. Thayer Bigelow, Time's chief financial officer and the man directly responsible for seeing that the cost-cutting occurs, said he will focus his efforts during the next year on two key areas. Besides emphasizing cost-cutting, the company also is aggressively looking at acquisitions. But with media companies ranging from CBS Inc. to Storer Communications Corp. becoming the target of hostile takeover bids this year, Bigelow also must pay considerable attention to the chances that Time, itself, will be acquired.
Bigelow said Time has some of the attributes that investors were excited about in other media companies, including American Broadcastings Cos. Inc., that have become takeover targets this year. He said the two top attributes are strong franchises, which Time has in its magazine and cable operations, and "predictable, reliable cash flows that will grow."
Bigelow declined to comment on Time's merger-related conversations with Gannett earlier this year. But in response to Munro's comments about a possible combination with Gannett, Gannett Chairman Allen H. Neuharth said last week that, if Time were interested in a merger, he would welcome the chance to talk.
"Dick Munro and the people at Time Inc. are our friends and we regard them highly," Neuharth said, when contacted aboard Gannett's corporate jet. "If our friends at Time Inc. were interested in a merger, we would be interested in talking to them."
Bigelow is more comfortable talking about the cost-cutting program, which aims at reducing estimated expenses by 2.5 percent. Unlike nearby media companies, including CBS and ABC, that are focusing on costs after becoming takeover targets, Time is taking these steps without a hostile bidder or friendly suitor at its doorstep. And, compared with CBS, which is striving to cut $20 million by 1987, it is taking them faster and further.
Munro's memo and the new focus on costs at Time are "unprecedented in that what we are really looking for here is not a big one-time hit, but a kind of permanent cost reduction and a little bit of an attitude change," Bigelow said. "We want people to think in terms of spending corporate money as if it were their own."
Bigelow said Time, which has a strong balance sheet and which is ebullient over its $480 million acquisition this year of Southern Progress Corp., publisher of Southern Living magazine, is eager to make additional acquisitions. The company is trying to make a large cable acquisition by buying part of the cable properties worth $2 billion that Westinghouse Electric Corp. is selling. Time recently met with representatives of Ted Turner's Cable News Network to discuss buying a stake in that operation.
But acquisition opportunities like Southern Progress that fit neatly into Time's other businesses are more difficult to identify. Time established a relationship with Southern Progress more than a decade ago when Time first broached the possibility of acquiring the smaller company. That finally paid off this spring when Southern Progress decided to negotiate a private deal with Time, rather than auctioning its magazines to the highest bidder. The acquisition gave Time a strong publication, Southern Living, which appeals to women in the rapidly growing Southern states. Those demographics appeal to Time. With the exception of People, none of Time's publications is slanted toward women, and its publications also are underrepresented in the Southeast, according to Time Vice President Howlett.
Some Wall Street analysts believe one of the reasons Time is eager to make another major acquisition is that the company would be a less attractive takeover target with more debt on its books. But Bigelow said the company will not overpay for an acquisition just to make itself less attractive to corporate raiders.
"I would characterize us as much more prepared to make acquisitions than even a year ago," Bigelow said. "All three of our executive vice presidents have this topic top on their lists. It is something I spend a great of time on, and the president and CEO does [too]. We have a database that is much better than we had, and we spend a lot of time with outside advisers on the subject. But we are not going to do it for an antitakeover reason."
While Time's cable business had a higher operating profit than the magazine business last year ($212 million versus $188 million), and during the first nine months this year ($175 million versus $119.4 million), the company's reputation unquestionably rests with the magazine group. Discover, the science magazine, is its only troubled publication. After having difficulty establishing an identity in the science field, Discover was relaunched in September with a smaller rate base and a new editorial concept, Howlett said.
Howlett said it will be some time before Discover is profitable, adding that Time is comfortable because of its experience with two profitable magazines that also got off to slow starts. Sports Illustrated took 11 years before it earned money, and Money, the nation's fastest-growing major magazine, took more than six years.
Time's magazine development group, which creates new magazines, is not likely to be affected much by Munro's cost-cutting efforts. The group is test-marketing Picture Week, a magazine filled with black and white photos. One recent issue featured photos of battered wives and dead dogs. A decision on whether to launch the magazine nationally is expected in January.
Time's record of success with acquisitions, divestitures and start-ups in recent years is mixed. The company's major successes include Money, People and Home Box Office. Munro and Bigelow also believe spinning off the company's forest products division two years ago was a positive move. Major failures include TV-Cable Week, a magazine aimed at cable viewers, which cost the company $47 million, difficulties in teletext and subscription television that cost nearly $100 million, and the failed effort to keep The Washington Star alive that cost more than $80 million.
Munro makes no attempt to downplay past failures. When he talks about the future, especially the cost-cutting program, he is optimistic and enthusiastic about improving Time's financial performance.
"We have looked at our margins over the years, and the companies that we would like to emulate do a lot better than we do in some of the financial dynamics," Munro said. "We said to ourselves, we can run this place more efficiently, improve our margins, improve the measures by which we are judged by several constituencies that are important to us and not lose that certain magic that Time Inc. has always had.
"We are the best place in the world to work, and we don't want to lose that. We are not going to start running through the halls with machine guns. That is not what this thing is all about."