A group of Hong Kong investors have purchased Forbes for US$475 million (HK$3.68 billion), roughly 25x 2012 earnings in a challenging industry, so value oriented private equity investor and Peking University professor Jeffrey Towson, author of What Would Ben Graham Do Now?: A New Value Investing Playbook for a Global Age, has some urgent advice for them: call Charlie Munger.
Munger’s Daily Journal Corp follows the Berkshire Hathaway model
“One of America’s leading capitalist publications is now a Hong Kong company,” Towson writes in the South China Morning Post. “But before the new owners go chasing any growth plans, they should call Warren Buffett’s partner Charlie Munger. Because he is doing something quite surprising in American publishing right now. He is making lots of money.”
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Munger’s Daily Journal Corporation (NASDAQ:DJCO) has a tiny staff (the CEO is also CFO and principal accounting officer), a very specific niche targeting lawyers in the southwest, and about $45 million per year in revenues. But it also has margins over 20%, no debt, and $140 million in equities on its balance sheet.
As Towson reminds us, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) was a struggling textile company when Buffett took the helm. He kept expenses on the textile business as low as possible and then expanded into insurance, banking, and other more profitable sectors. To no one’s surprise, Munger is following the same game plan with Daily Journal Corporation, keeping costs low and using a steady stream of cash to invest outside the publishing sector.
And as Towson explains, Forbes could have done the same thing fifteen years ago when the writing was on the wall, cutting costs and diverting money from publishing to some other industry.
Towson recommends pursuing profitability over growth
Towson counsels Forbes’ new owners to focus on profitability instead of growth, not to re-invest profits into a fading business like publishing, and to take a cue from Daily Journal Corp’s profitable dominance of a niche market instead of trying to conquer the world, but the terms of the deal suggest that his advice will fall on deaf ears.
Forbes has an international reputation, not the kind of platform you would normally use to tackle a niche market; it has roughly three times the revenue of Daily Journal Corp with much smaller margins, showing where the new owners’ priorities lie; and the premium paid for those two things imply that Forbes’ new owners have bold plans.