McClatchy's Purchase of Knight-Ridder is a Win for Private Capital Management (KRI, MNI, LEE, NYT)

Of all institutional money managers, Private Capital Management (PCM) had the most riding on McClatchy's (MNI) announcement that it will acquire Knight-Ridder (KRI). A few comments on the outcome:

1. Private Capital Management is an interesting money management firm with a great track record. Their bad last 12-18 months suggests that now would most likely be the time to hire, rather than fire them.

2. PCM's Bruce Sherman (pictured) is putting a positive spin on this, but it's not working. Sherman is claiming an average cost of $60 per KRI share. SEC filings suggest it is more like 65. A certain number of PCM clients have an average cost significantly higher than that.

3. PCM has a philosophy of "investing in what they know". For example, they don't do energy, because it is driven almost entirely by energy prices, and they don't claim any specific edge in being able to forecast them. This is refreshingly honest. They do know newspapers.

4. PCM has made a compelling case for the newspaper industry not being "dead yet" that I recently sat through. While companies like Knight-Ridder flounder, others like McClatchy and Lee Enterprises (LEE) are very successfully incorporating a new industry model of selling in high growth areas, and incorporating local advertising into their local websites.

5. They also have a case for the larger newspaper companies that I don't buy. They consider the New York Times's (NYT) subscription-only site a success. I think it is a flop. Yes, the NYT has signed up 200K subscribers, but I think that is just the initial target group that was expected to subscribe. The market for a small coterie of liberal op-ed writers is small. It will get smaller. Whereas Paul Krugman and Frank Rich were once widely read columnists, now that they are behind the paid site nobody pays any attention to them any more.

6. PCM thinks that there is huge value in the NYT archives. I don't think so. Information is widely available at low cost, and is getting to be more so. The days of the NYT as the "paper of record" are fading fast.

7. The Knight-Ridder deal shows one of the great perils of value investing. Sherman saw great value in Knight-Ridder using the high cash flow of the older big city newspapers to expand in the high growth regional areas, as McClatchy and Lee have done. Knight-Ridder wanted no part in it. Value investing is tough when management doesn't see the value.