Wednesday, August 14, 2013

Washington Post Sold To Jeff Bezos

The Washington Post Company (WPO) recently announced they are selling their flagship newspaper to Jeff Bezos in a transaction that should close later this year. It's an apparent case of realizing it was time to sell an asset that -- considering its history and the Graham family's strong ties for decades -- in a perfect world they'd rather not ever have to sell.

I mean, it's not like that newspaper is just any asset for the Graham family.

If it weren't for responsibility to the other public owners, and probably if a more obvious solution to the paper's current problems were apparent, this surely wouldn't have occurred.

I'd offer that it's not hard to imagine executives and board members at some other companies behaving very differently -- while creatively justifying their actions -- under the same circumstances.
(Explanations and justifications that might attempt to cleverly shroud the real reasons for action -- or, depending on the circumstances, inaction -- more or less at the expense of shareholders.)

With that in mind what has been done here appears rather impressive.

Actually doing what's in the best interest of shareholders.

Unfortunately, all too often, that's just not what happens.

They've sold the paper to someone with a very different set of capabilities and constraints. The unique talents and characteristics of Jeff Bezos naturally played a role.

Washington Post Company chairman and chief executive Donald Graham and publisher Katherine Weymouth made that clear.

Also, Warren Buffett apparently called Jeff Bezos "the ablest CEO in America."

Quite an endorsement. It really isn't easy to think of a better CEO in terms of proven ability to disrupt in smart ways, and a willingness to build something for the long-term (though there are no doubt quite a few very good CEOs that can compete for that characterization). Still, Bezos deserved respect and admiration has been well-earned over the years.

Amazon's (AMZN) stock is another story...*

In prior posts I've highlighted the impressive abilities of Mr. Bezos while, at the same time, saying I didn't at all care for the stock on a risk-adjusted basis relative to alternatives.

It's not that I don't think the stock might be intrinsically worth quite a lot some day; it's that achieving very attractive returns bought near its recent (or even much lower) market valuation depends on continued very good -- even transformative -- things continuing to happen.
(Things that Bezos, considering the track record, will probably even pull off.)

It's also that the company is difficult to intrinsically value (what its true earnings power is and how it will likely change within a reasonable range isn't at all obvious -- at least compared to some others) and, as a result, figure out what the appropriate discount should be. At least it is for me. If you can't figure out the likely value within a reasonable range, it's obviously not possible to figure out what the right discount to pay for that value should be. Someone else, of course, may be able to judge these things well and, as a result, might find Amazon to be an appropriate investment for them.**

To me, when it comes to Amazon, it's just not obvious that the return will be sufficient considering the risks and compared to alternatives. Consideration of opportunity costs is always an all-important part of the investment process.***

Investments occasionally come along that are priced such that nothing extraordinary has to happen to get a great result. That's more my kind of investment.

Margin of safety.

Still, that point of view on a stock -- right or wrong on my part -- shouldn't get in the way of admiring someone's skills as a CEO.

Sometimes, the "halo effect" can cause one to make that kind of misjudgment.

It's just best to be aware and wary of that potential effect.

Corporations more than occasionally end up with a CEO who behaves in a way that isn't near optimal for those who actually own the company. A CEOs mind is no less prone than the rest of us to things like, for example, "self-serving bias" and the many other behavioral biases that lead to less than optimal judgments on behalf of investors.

"On a subconscious level, your brain plays tricks on you and...it's very hard to deal with since it's not conscious malevolence that's causing the bad cognition -- it's the subconscious reality of the human mind." - Charlie Munger at Harvard-Westlake School

So the bad outcomes aren't always going to be conscious and intentional.

The sale price for the Washington Post's soon-to-be former newspaper seems a very fair one considering the circumstances though, for very different reasons than Amazon, figuring out what it's actually worth is also difficult at best. Still, the deal might be a better one for Bezos than it first appears. Check out this The Atlantic article for more details on the reasons why.

The article points out that it mostly comes down to pension obligations. The terms of this deal have been structured so the pension costs associated with the newspaper essentially remain obligations of the to-be-renamed Washington Post Company and not Jeff Bezos.

The good news for continuing Washington Post Company shareholders is that the company's pension plan is, as this Barron's article points out, very much overfunded.

There's no shortage of companies that can't come close to claiming such a thing.

In any case, only with the benefit of hindsight will the merits of this deal, and challenges for the paper itself, become more understandable.

Adam

Small long position in WPO; no position in AMZN

Related posts:
Amazon, Apple, and Intrinsic Value - Part II
Amazon, Apple, and Intrinsic Value
Negative Working-Capital Cycle
Amazon, Apple, and Margin of Safety
Amazing Amazon
Barron's on Bezos: Time to Reign in Amazon's CEO?
Amazon's Jeff Bezos On Inventing & Disrupting
Amazon Sells Kindle Fire Below Cost
Technology Stocks

* I realize there are some strong views about Jeff Bezos and Amazon's stock. I happen to admire what Bezos has accomplished as a business leader overall. I won't be surprised if Amazon ends up being intrinsically worth a whole lot. This might seem at odds with my lack of interest in the stock as an investment, but it simply gets back to knowing what you know and, if you can't pin down the valuation within a reasonable range (as is the case for me when it comes to Amazon), there's no way to figure out what price represents an appropriate margin of safety. That's the primary reason I haven't owned it. For me, shares would need to sell at a plain discount to a more straightforward to estimate value in order for it to be of interest. The shares would also have to look attractive against well understood alternatives. Those who are more comfortable estimating Amazon's intrinsic value are naturally better candidates for long-term ownership. (I've never had -- and will never have -- views on trading price action on ANY stock even if it happens to be over a longer time horizon.) Still, much can be learned from Bezos and Amazon whether or not one is comfortable with owning the stock.
** As always, I have zero opinion on what any individual stock price might or might not do in the next month, year, or even 5 years for that matter. Price action -- no matter how exciting -- is of little interest to me. I'll leave it to others to try and play that game. I'm sure many do that sort of thing well and, well, best of luck to them. It's just a different game altogether. My interest lies in judging what something I happen to understand is intrinsically worth, how that value is likely to change within a reasonable range over time, then paying a clear and substantial discount. That's difficult enough to do consistently and effectively. Judge price versus value well and the rest, at least over the long run, usually takes care of itself. The price eventually roughly tracks per share intrinsic business value even if a disconnect between price and value occasionally persists -- sometimes even for many years. If price persistently doesn't reflect full per share business value that disconnect should be of little concern for the long-term investor. (In fact, such a situation can prove a net benefit for continuing owners if it allows more stock to be bought or bought back cheap.) Now, if price persistently far exceeds per share intrinsic business value that's a whole different ballgame.
*** Charlie Munger at Harvard-Westlake"About the 20th page of [Greg] Mankiw's famous book...the guy says smart people make their decisions based on opportunity costs. Well, that was the last time opportunity cost was discussed in 1,000 pages. I want to tell you that compared to the other drivel that was discussed, opportunity cost deserves more than one sentence."
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