Berkshire recently entered into an agreement to sell its newspaper business to Lee enterprises for $140 million. It was the right move, and not just for financial reasons. Taking one big public hit now is far better for Berkshire’s reputation over the long run.
“Berkshire was in the unenviable position of possessing not one or two textile-like businesses, but over a hundred.”
Warren Buffett has seen this movie before. In the mid 1980s Berkshire’s original textile business textiles faced economic oblivion. Buffett found a compromise position by allowing the operation to continue at subpar rates of return. And that was during at a time when Berkshire had more things to do with it’s capital.
He codified his thinking in a principal that said Berkshire wouldn’t sell a business just because of poor profitability. But there was an exception if unending losses were in sight. He ultimately made the decision to shutter the textile operation in 1985.
Newspapers face the same fate. What once we’re monopolistic franchises that churned out fantastic returns on capital became capital intensive operations with declining revenues and high costs. Lee Enterprises may salvage something of the papers by digitizing some of the best assets. But many will ultimately close down.
With its large array of newspapers Berkshire was in the unenviable position of possessing not one or two textile-like businesses, but over a hundred. What would have happened if he allowed them to go on under Berkshires umbrella? As each paper faced closure it would have looked to it’s rich corporate parent for support. Each bout of necessary layoffs would have come with much negative press (probably from the papers themselves).
Now imagine this happening over and over and over again.
Buffett has rightly said that Berkshires reputation must be guarded ferociously. Sometimes protecting that reputation has meant holding onto a company that others might have sold for a quick profit. Now that protection must come in the form of parting with a beloved collection of newspapers. The decision surely wasn’t easy, but it was absolutely necessary.
As a postscript, it is sad to see the papers go. The Buffalo News played such an important part in Berkshire’s early history, as did others such as The Omaha World Herald.
Photo by Jeremy Bishop on Unsplash