McClatchy Newspapers, Inc.

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McClatchy Newspapers, Inc.

2100 Q Street
Sacramento, California 95816
U.S.A.
(916) 321-1846
Fax: (916) 321-1996
Web site: http://www.mcclatchy.com

Public Company
Incorporated: 1930
Employees: 7,590
Sales: $641.9 million (1997)
Stock Exchanges: New York Midwest Pacific
SICs: 2711 Newspapers: Publishing, or Publishing & Printing; 7375 Information Retrieval Services

McClatchy Newspapers, Inc. is America’s eighth largest newspaper group in terms of daily circulation. Headquartered in Sacramento, the company’s roster of newspapers includes ten dailies in California, Washington, Alaska, and the Carolinas, each of which dominates its market. The company’s largest dailies are its founding paper, the Sacramento Bee, and the Minneapolis Star-Tribune, the acquisition of which was completed in the first quarter of 1998. McClatchy has numerous Pulitzer Prizes to its credit. It also owns more than a dozen non-daily papers, notably the Senior Spectrum and Senior World weeklies. Its Nando.net is one of the most widely read newspaper sites on the Internet. Other interests include an online legislation service and the Newspaper Network. Though its stock is publicly traded, McClatchy continued to be controlled by the founding and namesake family through the late 1990s. James McClatchy, great-grandson of the founder, continued to serve as company wide publisher in the late 1990s.

Mid-19th Century Foundations

The group’s first and for many years only paper was the Sacramento Bee, founded in 1857 by James McClatchy. An Irish immigrant, McClatchy had served as a correspondent with Horace Greeley’s New York Tribune during the early 19th century before heading west in 1849 to try his hand at gold mining. It was not long, however, before he reconsidered his first career and took a job with Sacramento’s first newspaper, the Placer Times. In 1857, he was among the founders of the Sacramento Bee and became the paper’s editor within its first year of operation. Over the course of his quarter-century at the helm, McClatchy used the Bee as a forum to support the causes of environmentalism and abolitionism, among other issues.

At his death in 1883, the patriarch willed joint ownership of the paper to his two sons. Charles Kenny (C. K.) became editor, while Valentine Stuart assumed the role of business manager. Throughout his more than 50 years at the helm, C. K. carried on his father’s liberal-leaning causes, including environmentalism (editorials supported urban beautification through tree-planting, for example), steadfast support of First Amendment rights, and trust-busting. C. K. obtained exclusive ownership of the paper in 1923 and began grooming his son, Carlos, as his successor. Having graduated from Columbia University, Carlos established the family firm’s two other “Bees” in the 1920s, founding the Fresno Bee in 1922 and acquiring the Modesto Bee (formerly the Modesto News-Herald) five years later. But when Carlos died in 1933, C. K. turned to his youngest daughter, Eleanor, to assume the mantle of leadership.

Diversification into Radio, TV, Cable in Mid-20th Century

Studying at Columbia University to be a playwright, Eleanor was living in New York in 1936 when her father died leaving her in charge of the three-newspaper group. Over the course of her more than four decades as president and later CEO of the family business, Eleanor shepherded growth and diversification. Following the lead of her brother, Carlos, who had guided the company’s first radio acquisition in 1925, she acquired 11 more radio stations throughout California by the mid-1960s. McClatchy obtained its first television broadcasting license in Fresno in 1953, and added a Sacramento station a decade later. Sensing that cable television would siphon advertising dollars from newspapers, Eleanor bought into that industry in the late 1960s. The company also participated in a cellular telephone network joint venture. Eleanor even made a very early foray into electronic news delivery in 1937, when she launched a year-long experiment into facsimile delivery of news and information. This experiment foreshadowed the company’s Internet ventures by more than half a century.

Divestment of Electronic Media in 1980s

Eleanor McClatchy passed the media company reigns to her nephew, Carlos’s son Charles Kenny (C. K.) McClatchy, two years before her death in 1980. C. K. had made his start in the family business in 1958 as a reporter for the Sacramento Bee. Characterized as a “maverick,” he determined that the electronic properties were distracting management from the profitable and important core newspaper business. Over the course of the decade, the company shed its radio, broadcast television, and cable interests. It sold the television stations in 1980 and 1981, four radio stations in 1983, and its 96,000-subscriber cable system in 1986.

During this same time, McClatchy was investing the proceeds of its electronic media sales in newspapers, thereby expanding its geographic reach within California and throughout the Northwest. Acquired in 1979, the Gilroy (California) Dispatch and the Anchorage (Alaska) Daily News served their markets daily, while the Morgan Hill Times and Clovis Independent, both of California, appeared weekly. Two more California weeklies, the Lincoln News Messenger and the Hollister Freelance, were added in 1980 and 1981. After a five-year hiatus, McClatchy acquired the Tacoma News Tribune, a Washington daily, in 1986. With newsprint prices rising to record levels throughout the late 1980s, McClatchy also entered a venture with three other publishers to create a paper mill in Spokane, Washington, in 1987.

McClatchy Goes Public in 1988

Questions of succession—most significantly the lack of a successor within the McClatchy clan—presaged the 1987 decision to take the company public. C. K. reflected that “I was worried about what could happen 15 to 20 years from now when you can’t anticipate what might develop. If a few members of the family wanted to sell their stock... they would not be in a position to break up the company,” in a 1988 Advertising Age article. The seven heirs to the McClatchy fortune agreed to sell ten percent of the media firm to the public, retaining a 90 percent stake in the form of preferred shares that enjoyed a 99 percent voting majority. C. K. himself retained a 53 percent voting interest.

Their plan for the IPO proved ill-timed, however. The McClatchy’s had hoped to launch their stock in the fall of 1987, but the stock market crash that October shrunk the share price from a hoped-for $20 to $23 down to less than $18 by the time of the IPO in February 1988. The offering raised $32.8 million which was used to retire debt from previous acquisitions. Once noted for its secrecy—especially during Eleanor McClatchy’s reign—the newspaper group threw open its books to reveal a recent history of dramatic growth in sales and net income. Under C. K.’s guidance, McClatchy’s revenues had increased from $192 million in 1983 to $283.8 million in 1986, while net multiplied from $6.9 million to over $45 million.

The period immediately following the IPO was not nearly as successful, however, as rising newsprint costs ate into profits. While revenues increased by 46.7 percent, from $229.9 million in 1986 to $337.4 million in 1991, net income slid 47.5 percent, from $45.1 million to $23.7 million.

The company entered an important growth market with its 1988 acquisition of Senior Spectrum, publisher of ten tabloids distributed throughout California. Founded in 1973 in Sacramento, Senior Spectrum was by the end of 1991 America’s largest chain of senior newspapers with editions in Las Vegas, Denver, Seattle, and Portland, Oregon, as well as California. McClatchy added to this high-potential area with the 1991 acquisition of three editions of Senior World published in Washington state.

C. K. McClatchy’s concerns regarding his successor came to bear much sooner than anyone expected when he died in 1989 while jogging. His shares were distributed among relatives and top executives, thereby maintaining voting control in the family. (Shares sold to non-family members are automatically converted to Class A status.) He was succeeded as president and CEO by Erwin Potts, who had joined the company in 1975 as director of newspaper operations.

Major Acquisitions Mark 1990s

In January 1990, McClatchy acquired six South Carolina newspapers (three dailies and three weeklies) for $74.1 million from the News & Observer Publishing Company, a Raleigh, North Carolina, media group. Five years later, McClatchy purchased the remainder of the group for $373 million in cash, stock, and assumed debt. The purchase included the daily News & Observer, six weeklies, the Nando.net online service, Business North Carolina magazine, and a commercial printer.

Company Perspectives:

The object of this paper is not only independence, but permanence. Relying upon a just, honorable and fearless course of conduct for its support, it expects only to make those men enemies, who are the enemies of the country. Its purpose is, whatever may be the measures which it will advocate in the future, to owe no thanks to any cliques or factions, but based on the broader foundation of right, to survive the wreck of mere party organizations, and still be supported by good and true men.—excerpted from inaugural editorial of the Sacramento Bee February 3, 1857

With an estimated two million hits per week, the one-year-old Nando.net was considered “one of the most successful online newspaper services in the industry.” (Its name was derived from the News & Observer, also known as the “N and O.”) By its third birthday in 1997, it was the third most widely read newspaper site on the World Wide Web, behind USA Today and the Washington Post. However, like many ostensibly successful Internet ventures, it continued to lose millions of dollars per year through 1997.

Potts guided a gradual succession program in the mid-1990s, advancing to chairman in 1995. Former Fresno Bee publisher Gary Pruitt became president of McClatchy at that time and succeeded Potts as CEO the following year. The year 1995 also saw the acquisition of the Peninsula Gateway, another Washington state weekly. McClatchy divested five other West Coast weeklies in the fall of 1996.

Then, in 1997, the company stunned the newspaper industry with the acquisition of Cowles Media and its flagship Star Tribune, Minnesota’s largest daily. The $1.4 billion purchase vaulted McClatchy onto the industry’s top ten circulation list and brought to a close the story of one of America’s last remaining independent newspaper publishers. Known among its readers and peers as the “Strib,” the Minneapolis paper was one of the nation’s top dailies. Its circulation even topped that of the Sacramento Bee, and boosted McClatchy’s total daily unit volume to about 1.4 million. The acquiring company planned to recoup some of its acquisition costs through the divestment of Cowles’ magazine publishing interests. In fact, by the time the acquisition was finalized in March 1998, McClatchy had made arrangements to sell two subsidiaries to Primedia Inc., thereby recovering $200 million of the purchase price.

Some analysts thought the deal was too pricey, and in fact the executives acknowledged that the merger might suppress earnings in the short term. Furthermore, McClatchy agreed to carry on the Cowles family’s philanthropic endeavors at a cost of $3 million per year, and shouldered more than $1.3 billion in debt to finance the purchase. Investors registered their disapproval of the deal by sending McClatchy’s stock down 14 percent on the day after the agreement was made public. But in spite of the stock market reaction, CEO Gary Pruitt commended the purchase as “a rare opportunity for McClatchy to obtain a quality newspaper while adding geographic diversity in a premiere growth market.” Moreover, Jon Fine of the online magazine MediaCentral asserted that “McClatchy acquisition history, going back to the ’70s, has gone like this: They pay a high multiple, observers shake their heads and gasp in disbelief—and then McClatchy makes it work better than anyone had reckoned.”

In fact, McClatchy’s net income had risen substantially throughout this period of pricey acquisitions, increasing from less than $24 million in 1991 to a record $46.6 million by 1994 on sales of $368.1 million. Net declined to $33.6 million in 1995, then rebounded to establish a new benchmark of $68.8 million on sales of $641.9 million in 1997. CEO Pruitt acknowledged that “Our string of record earnings will end in 1998 as a result of the Cowles merger, but we are confident this strategic move will yield shareholder value and strengthen our company in the years ahead.” The acquisition of the Star Tribune was expected to boost annual sales to over $1 billion in 1998.

Principal Newspapers

Daily: The Sacramento Bee (Calif.); The Fresno Bee (Calif.); The Modesto Bee (Calif.); Anchorage Daily News (Alaska); Tri-City Herald (Richland, Wash.); The News Tribune (Tacoma, Wash.); The News & Observer (Raleigh, N.C.); The Herald (Rock Hill, S.C.); The Island Packet (Hilton Head, S.C.); The Beaufort Gazette (S.C.). Non-Daily: Clovis Independent (Calif.); Peninsula Gateway (South Puget Sound, Wash.); Pierce County Herald (Pullyallup, Wash.); Clover Herald (S.C.); Yorkville Enquirer(S.C.)\ Lake Wylie Magazine (S.C.); Chapel Hill News (N.C.); Cary News (N.C.); Zebulon Record (N.C.); Gold Leaf Farmer (N.C.); Mount Olive Tribune (N.C.); Smithfield Herald (N.C.).