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July 23, 2015, 8:53 p.m.
Business Models

Newsonomics: Eight questions (and answers) about Nikkei’s surprise purchase of the FT

The quest for one of the world’s top news brands ended with an unexpected winner today. Here’s why.

Is Nikkei the new Axel Springer of Asia? Is $1.3 billion as ridiculous a price as the $5 billion Rupert Murdoch paid for Dow Jones? How did the turn from Berlin to Tokyo happen in 15 minutes? Will Japanese lessons be the first order of business at One Southwark Bridge beginning next week?

Nikkei’s acquisition of the Financial Times today throws a small thunderbolt into the global news business. As we speculated about FT buyers (my Wednesday column: “Newsonomics: How much is the Financial Times worth, and who might buy it?”), Nikkei’s name wasn’t on anyone’s list. Yet, it did tick one box on owner Pearson’s checklist: a trusted journalism company.

This story unearths so many questions. Let’s do a little off-the-news Q&A on some top ones.

What happened between London, Berlin and Tokyo?

“It’s London calling with bad news.” It’s inconceivable how stunned Axel Springer must be. Germany’s media powerhouse thought it had clinched the deal, after a year of talks, but then a foot came through the line. The FT’s news staff first reported that Springer would be the buyer, and then updated its story to say “two people close to the situation said the German company did not know it had been trumped by Nikkei until 15 minutes before the Japanese company’s deal with Pearson was announced.” We’ll have to wait to get the juicy details of what seems to have been almost a live auction.

What’s clear is that Springer lost one once-in-a-lifetime chance to wholly reposition the company as a global media powerhouse, which CEO Mathias Döpfner has laid out as a goal (“What Are They Thinking? Eight Principles for Mathias Dopfner’s Transformation of Axel Springer”). Springer will now look for new opportunities – and proceed with its merger talks with ProSieben, the largest German private TV network.

Did Springer get the chance to ante up at the end, or is this a question of price discipline on Döpfner’s part?

Why might have Nikkei crossed the line first?

Certainly, money could have been decider, but relationships matter even in these biggest of deals, as I pointed out yesterday. Little noticed at the time, the FT and Nikkei struck a multi-faceted partnership in March 2013. It covered content syndication, licensing, training, events, China business, and more. FT CEO John Ridding has a strong relationship with Nikkei execs. Consider the comfort factor here, as one long-time FTer told me: “It’s about as favourable as it gets for the senior management.”

FT execs already know their new boss, and will probably like Nikkei Group CEO Tsuneo Kita better than Pearson CEO John Fallon, whose centralizing strategies have chafed strongly with FT culture and operations. (Good piece on Nikkei culture at The Guardian.)

If the Nikkei relationship is strong, the backstory of how it came to be is even more intriguing. Until News Corp bought Dow Jones in 2007, Dow Jones and Nikkei had enjoyed a decade-long partnership — which, of course, excluded the FT, a DJ competitor. That 1997 Dow Jones/Nikkei partnership included a joint Tokyo newsroom, with journalists working side-by-side, and business-side arrangements.

After News Corp bought Dow Jones, it terminated the partnership with Nikkei, in favor of working with Yomiuri. Yomiuri is the world’s largest newspaper company, with a circulation of 10 million – but it’s a general news pub, not a business one. That change may be a reflection of Murdoch’s greater bent toward non-business news, which we saw play out as he bolstered New York City coverage in the Journal — going broader rather than business-deeper. For whatever reason, that decision opened up the possibility of an FT/Nikkei partnership — which may have led directly to its cinching the deal.

Is $1.3 billion as ridiculous a price as the $5 billion Rupert Murdoch paid for Dow Jones?

Define ridiculous. At the FT’s current profit level, it would take something like four decades to make back the $1.3 billion. Nikkei paid a multiple of more than 35× 40× (updated, including following paragraph, 7/27) for the FT, as we learned today when Pearson, for the first time, announced the FT Group’s revenues and profits. Those official numbers, which could only be extrapolated in the past, showed that I had greatly overshot both numbers in my reporting. (I had at least gotten the profit margin of about 7 percent right.)

We now know the FT Group generated £334 million ($518 million) of sales and £24 million ($37 million) of adjusted operating income in full year 2014. For the first half of 2015, that group lost about $2 million in profit, because of the sale of its Mergermarket business, but may have gained profit in its core business, according 2015 first-half results released Friday. Given that The Economist (of which FT owns half — see below — but which isn’t going to Nikkei in the deal) contributes some of that profit, as do a couple of other ventures. So if profit were to maintain at the same level for 2015, at $37 million, we can now figure about $30 million in actual FT operating income, that’s a multiple of 35×, or a price of about 10 times what an average U.S. daily, large or small, would sell for today. That multiple puts in the FT in a class by itself — as perhaps it should be. As I’ve emphasized in my tracking of the FT’s digital transition over the past decade, the company stands as the world’s news publishing leader. With more digital revenue than print and more reader revenue than ad, it’s crossed over.

John Ridding told me earlier this year that the FT had tripled its profits in 2014 over 2013, so maybe that crossover will now let Nikkei hit the gas pedal of profit in the years ahead, further justifying the price it paid.

Profit alone can’t justify the price, though. We could have dismissed it as a “trophy” buy for some — and clearly the FT’s brand sheen reflects well on any owner — but something more is at play her. As a rare internationally respected news company, the FT offers a platform to build a bigger business on in the years ahead. That’s more an intangible than a financial, but it’s real.

Was Rupert’s acquisition of Dow Jones for $5 billion in 2007 ridiculous? I think he’s satisfied, even as its business results suffer along with its peers. The Wall Street Journal burnished Murdoch’s own standing, and set up his family in the years ahead in ways different than even 21st Century Fox can offer. Incidentally, Rupert, too, paid a 40× multiple for Dow Jones — though he had to more than halve its value in a writedown within two years.

What else does the 7 percent margin tell us?

The fact that a leading example of newspaper transformation can only generate a 7 percent margin tells us volumes. This is one tough business to move from print riches to double-digit digital profitability.

Will Japanese lessons be the first order of business at One Southwark Bridge, the FT’s home on the Thames, beginning next week?

I hear FT staff rejoiced at the Nikkei news today. That makes a certain sense. If an FT competitor, like Bloomberg or Thomson Reuters or Dow Jones — all of whom apparently found the price too rich — had bought the FT, we would have heard endless talk of “synergy” and “integration.” How to mesh those 600 FT journalists with news staffs three and four times their size? “How many people do we need covering Microsoft?”

Given the Japanese/English language barrier, among other factors, that bow won’t be the case. While the current FT/Nikkei news partnership will undoubtedly become jet-fueled, there’s more upside than downside for FT journalists and staff.

One big hope, as a source close to the action told me: “Nikkei will be principled, hands-off owners, and they have the muscle to invest.” Previous parent Pearson, struggling mightily with the turnaround of its core education businesses, didn’t have the money to expand the FT to its fuller potential. Nikkei does.

Why did Nikkei buy it?

Ambition plainly plays a role, as the company expends 160 billion yen on the deal. In fact, Nikkei could aim to become the Axel Springer of Asia, reaching beyond its newspaper and TV roots.

Given that immediate profit payoff didn’t drive the buy, consider three factors.

One: Nikkei and the FT, together, can more effectively tackle the biggest business growth market in the world, Asia. Asia would likely be FT’s fourth strongest region, after the U.S., the U.K., and Europe. Bolstering that FT presence and product — with all kinds of digital niche products possible — will be one top goal.

Two: While Nikkei may be a leader in print-to-digital thinking in Japan, with 400,000 digital subscribers gained (on the FT paywall model), it has lots to learn from the analytics-centered digital transformation (“The newsonomics of ‘Little Data,’ data scientists, and conversion specialists”) of the FT. Expect a new London-Tokyo shuttle to share knowledge in the next-step transformation of Nikkei.

Three: Some basic synergies offer themselves up, like Nikkei content in English at and FT content in Japanese on the Nikkei site.

Why didn’t Bloomberg, Dow Jones, or Thomson Reuters buy it?

Price certainly played a part, but we’d have to ask deeper questions about strategy. Each of these companies finds itself in the midst of revisionist consumer go-to-market strategies, and each has had to deal with internal organizational frictions as much as marketplace-facing work. That takes a toll, and raises the question of whether any of the three was ready to take on the FT.

If they’ve lost a potential acquisition, they’ve gained a new, better-funded competitor in the business news marketplace, especially in that all-important Asian market.

Does Japanese journalism adhere to the same standards of the Brits and the Yanks?

Some say yes, some say no, as New York Times reporter Hiroko Tabuchi tweeted out this morning: “Worrying. Nikkei is basically a PR machine for Japanese biz; it initially ignored the 2011 Olympus accounting scandal (which FT broke). Nikkei has also hardly covered the Takata airbag defect; almost no investigative work on that issue whatsoever. Nikkei *is* Japan Inc.”

Japan’s press is certainly a free one, with good standards, but it doesn’t operate in the same way the press does in North America or Europe. In May, Shigeaki Koga summed up lots of the concerns, and current pressures, for a New York Times piece, “The Threat to Press Freedom in Japan.” We’d have to believe that Nikkei CEO Tsuneo Kita is smart enough to let the FT be the FT, as Nikkei — with its 54 domestic bureaus and 35 global ones — deals with its own travails.

2013 photo by Financial Timesused under a Creative Commons license.

POSTED     July 23, 2015, 8:53 p.m.
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