Investor Provokes Newspaper Debate
Bruce Sherman got his first taste of investing in the 1960s after his father gave him 10 shares of Polaroid Corp. as a bar mitzvah present.
The stock was at $20 a share, and the gift carried a proviso that prevented Sherman from selling the shares until he turned 21. By then, Polaroid had climbed to about $180 and Sherman, figuring the stock was overvalued, promptly sold it.
“I don’t think it ever saw that price again,” he later told Peter Tanous, who featured Sherman in his 1997 book “Investment Gurus.”
That so-called value strategy -- finding what appear to be under-appreciated stocks in hopes of reaping big gains down the road -- has served Sherman well in a career marked by high returns and a low profile. The 57-year-old grandfather, who sometimes relaxes by reading annual reports in a Jacuzzi, has seen assets under management at his investment firm, Private Capital Management, grow to $30 billion, thanks largely to his stock-picking prowess.
But Sherman’s picks in recent years have included shares of several newspaper chains -- including Knight Ridder Inc. -- that have been sinking since 2003 as the chains grapple with slumping circulation and stagnant ad sales in the face of competition from the Internet.
With the declines tarnishing Sherman’s stellar track record, Sherman last month demanded that San Jose-based Knight Ridder put itself up for sale.
In doing so, Sherman added himself to a growing list of institutional investors that are publicly pressing for the sale or dismemberment of companies to boost the value of their stocks. The money manager also has sparked a debate about whether he has become the catalyst for a major restructuring of the entire newspaper business.
“It’s like a lion chasing a herd of wildebeests, where it might appear it’s chasing only one but where you also get the whole herd to run,” said Stuart Gillan, a visiting business professor at Arizona State University who studies shareholder activism. “It could be a mechanism for putting pressure on other companies in which you’re invested.”
Sherman, who operates out of Naples, Fla., rarely grants interviews and declined to comment for this story. He also avoids glad-handing with clients and potential customers, said Tanous, who is also president of Lynx Investment Advisory, a financial consulting firm in Washington.
Sherman stays under the radar even among his Wall Street peers. Several money managers and deal makers drew a blank when asked recently about Sherman and his firm, saying they had not heard of either.
But he does put emphasis on meeting the executives and touring the facilities of companies in which he invests, Tanous said. That and other spadework has helped Private Capital post an annualized return of 20.8% over the last decade, one of the best among value-stock funds, according to Nelson Information, part of Thomson Financial.
“His record is hard to beat or even duplicate,” Tanous said. “And this is not investing in soybeans or other wildly risky stuff. This is pure stock picking.”
Sherman grew up in a middle-class family in the New York City area and got a degree in accounting from the University of Rhode Island and an MBA from Bernard Baruch College. He worked for the accounting firm Arthur Young & Co., now part of Ernst & Young, from 1969 to 1979 before taking a job as a money manager for the wealthy Collier family of Florida. His work included helping sell their Naples Daily News, to the media company E.W. Scripps Co.
In 1985, Sherman co-founded Private Capital, an investment fund for wealthy clients that now has a minimum investment of $2.5 million. His value-oriented strategy is in line with the philosophy of billionaire investor Warren Buffett, who has helped boost Sherman’s record.
Between 1998 and 2002, Buffett’s holding company, Berkshire Hathaway Inc., bought four companies in which Private Capital had amassed major positions, giving Sherman and his team hefty gains. The companies included ice cream seller International Dairy Queen Inc. and clothing maker Garan Inc.
Qualcomm Inc. was another score for Sherman. Private Capital made a big bet on the San Diego-based telecom firm and then reaped huge gains when the stock soared 26-fold in 1999.
Sherman and Private Capital’s other owners sold the firm in 2001 to Legg Mason for $682 million in cash, and Legg Mason agreed to pay an additional $700 million in two installments over the next five years if Private Capital met certain growth targets. The first installment of $400 million was paid, and the remaining $300 million could arrive next year.
The sale helped Sherman amass a personal fortune estimated at several hundred million dollars.
Private Capital tends to cluster its holdings in specific industries, which lately have been the gaming, banking and technology sectors, according to its most recent quarterly regulatory filing.
But it’s the newspaper stocks that have helped mar Sherman’s winning streak. In the 12 months ended Sept. 30, Private Capital’s net total return -- after subtracting trading costs and other fees -- was 10.9%, which trailed the 12.3% gain of the benchmark Standard & Poor’s 500 index, according to Private Capital’s website. That included “a modest loss” in this year’s first quarter, it said in a newsletter to clients.
Private Capital’s newspaper holdings are valued at more than $4 billion. Besides owning 19% of Knight Ridder, the firm owns major chunks of eight other chains, including Gannett Co. and Tribune Co., which publishes the Los Angeles Times. It’s also the largest stockholder of New York Times Co., with a 14.9% stake.
Frustrated with a steep slide in Knight Ridder’s share price, Sherman on Nov. 1 publicly urged that the company be sold and warned that, if it wasn’t, Private Management “would strongly consider supporting more aggressive” moves, such as seeking new management.
Two weeks later, Knight Ridder succumbed to the pressure and agreed to seek potential buyers -- sparking widespread debate about who, if anyone, might acquire the chain, whether a sale would lead to more newspaper consolidation and whether the industry’s woes would get better or worse.
Last week, reports surfaced that a trio of private-equity firms was mulling a bid for Knight Ridder, although no formal offer had been made as of late Friday.
Some observers, including Sherman’s allies in the effort to get Knight Ridder sold, said the industry’s troubles were exaggerated and that chains such as Knight Ridder still held promise. But it will take new owners or breaking the company apart to unlock that value, they said.
“Newspapers are still the single biggest source of news and advertising in their local markets,” and the companies “throw off lots of cash,” said Henry Berghoef, research director at Harris Associates, another major Knight Ridder stockholder that joined Sherman in pressing for the chain’s sale.
Others counter that the newspaper industry’s slowing growth in advertising and circulation doesn’t warrant such optimism. Some Wall Street analysts also said they didn’t see many likely buyers for Knight Ridder, indicating that newspaper chains weren’t worth what Sherman and others suggest.
But Sherman is unmoved, according to Tanous, who said he met with the money manager last month: “He sees value in them. He knows there are people saying, ‘Who needs to read newspapers any more?’ But he doesn’t believe that.”
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(BEGIN TEXT OF INFOBOX)
Paper chase
Private Capital Management, the investment firm headed by Bruce Sherman, holds stakes in several newspaper chains.
Company: Belo*
Shares held by PCM (in millions): 24.6
Value of stake (in millions): $561
Percentage of outstanding shares: 21.7%
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Company: Knight Ridder
Shares held by PCM (in millions): 12.9
Value of stake (in millions): $757
Percentage of outstanding shares: 19.0%
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Company: Lee Enterprises
Shares held by PCM (in millions): 8.6
Value of stake (in millions): $366
Percentage of outstanding shares: 18.9%
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Company: Media General*
Shares held by PCM (in millions): 4.3
Value of stake (in millions): $247
Percentage of outstanding shares: 17.9%
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Company: McClatchy*
Shares held by PCM (in millions): 7.7
Value of stake (in millions): $503
Percentage of outstanding shares: 16.4%
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Company: New York Times*
Shares held by PCM (in millions): 21.7
Value of stake (in millions): $647
Percentage of outstanding shares: 14.9%
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Company: Journal Register
Shares held by PCM (in millions): 4.9
Value of stake (in millions): $79
Percentage of outstanding shares: 11.7%
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Company: Gannett
Shares held by PCM (in millions): 16.6
Value of stake (in millions): $1,200
Percentage of outstanding shares: 7.0%
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Company: Tribune
Shares held by PCM (in millions): 2.5
Value of stake (in millions): $85
Percentage of outstanding shares: 0.8%
*Class A shares
Number and value of shares are as of Nov. 10 for Knight Ridder and Sept. 30 for all others.
Sources: Securities and Exchange Commission filings, Times research
