Wednesday, May 02, 2007

Murdoch vs Bancroft The Law of Unintented Consequences

Rupert Murdoch’s News Corp (NYSE:NWS) made an unsolicited offer for Dow Jones (NYSE:DJ) at an incredibly high premium to pre take over share valuations. The Bancrofts have stated that they will not be voting in favour. The union is naturally opposed citing concerns that News Corp will dumb things down. Also the union is correct in fearing any restructuring scheme.

Everyone else believes that the Bancrofts should let it go as they are not viewed as adequate stewards to the Dow Jones fortune. The one person on this planet who needs Dow Jones the most and is probably prepared to pay the most is on the playing field. It would not be surprising to see the News Corp offer price increased. Would other players even want to out bid News Corp? Would they even try if the Bancrofts only know how to say no?

The market is viewing the struggle in financial terms and seems perplexed on how you can force the Bancroft hand. The Bancrofts are probably expecting Rupert Murdoch to eventually withdraw. If as and when the News Corp offer expires and other offers are not forthcoming the share price cannot be expected to stay at current levels. Tens of millions and perhaps in some cases hundreds of millions will be lost by third party investors.

Investors particularly institutions will not sit idly and watch the valuation erode as they have to explain to their investors and stakeholders why they are losing money. In short the lawsuits will start. The Bancrofts face untold liability as aggrieved investors large and small argue that the Bancrofts have acted in a reckless fashion by failing to make a takeover deal work.

Methinks that somewhere a legal team in the employ of News Corp has conjured up a war game strategy where the takeover is based on litigation tactics and traditional financial analysis is just a supporting document. In the meantime News Corp will carry on with the motions of a takeover. Rupert Murdoch did not make this offer just to be publicly humiliated and then sent home with his tail between his legs.

GE (NYSE:GE) may consider a take over bid. But if they view the Bancrofts as non co-operative what is the point. Also GE may balk at the huge premiums required to trump News Corp. GE’s subsidiary investment in CNBC does rely on Dow Jones rather extensively. Human Resources will tell you that to replace the Dow Jones personalities it would not cost $5 billion. Other feeds and technical resources are available. Besides some of the on air personalities and key behind camera talent may be coming loose soon as they decide they do not want to work for Murdoch and News Corp.

The cost of a Bancroft NO may prove to be surprisingly prohibitive
. The Bancrofts may yet realize that when they get a flat tire, which they refuse to fix properly, the passengers may high jack the car and drive off. Frustrated with the entrapment investors will litigate and the courts decisions will invoke laws of unintended consequences.

I’m with the union about the dumbing down thing. Rupert Murdochs traditional approach conflicts with the historical cache of Dow Jones, WSJ and Barrons. His victory may be a triumph of money over brains and insight.