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In the Tribune-Times Mirror merger, one small piece promises a big Internet return.

It may not erase the sting of that infamous banner that proclaimed Thomas Dewey winner of the 1948 Presidential election, but “Tribune Buys Times Mirror” certainly sounds better to Chicago’s newspaper publishing giant.

In one fell swoop, Tribune Co. secured a national footprint by adding the Los Angeles Times, New York Newsday, and the Baltimore Sun– powerful voices in the other three of the nation’s four largest metropolitan areas. And Tribune already has a strong presence in Florida, through the Orlando Sentinel and Fort Lauderdale’s Sun- Sentinel. Include Tribune’s big-market television stations, and the new No. 3 newspaper company becomes one of the country’s largest media conglomerates.

The combination creates a sturdy vehicle for national advertising, the most lucrative form for TV, radio, and print. And from here, Tribune can launch further consolidation rounds with less apprehension about falling prey itself.

All this great news, however, lacks a crucial component: real growth prospects. Snaring a few points of newspaper or local-TV market share creates no excitement in this world of new media. Exploding revenues nationwide, or at least expectations of an explosion–now that’s the growth to be coveted in the Internet Age.

Indeed, investors have seen the $8 billion Tribune­Times Mirror Co. combination chiefly as an enlarging of Tribune’s stable of mature assets. And in that context, the tab sounds out of line: a market price nearly twice Times Mirror’s selling price before the announcement. Times Mirror shareholders came out well, to be sure, with the Los Angeles­based company’s shares leaping nearly 80 percent on news of the deal with its controlling Chandler family, which owns 60 percent of voting shares.

But Tribune got knocked more than it expected, based on a dilution of existing shares by 16 percent, and the addition of nearly $6 billion in goodwill to the balance sheet. Investors thought the combination a lurch backward into the tired old paper-and-ink economy, not a leap forward into the compelling new-media era.

In terms of cash flow return on investment [CFROI], an inflation- adjusted measure of economic performance, the deal looks especially overpriced. The $95- a-share price is what Tribune should pay for a business earning a CFROI of about 22 percent with 5 percent asset growth, according to HOLT Value Associates, not the 10 percent CFROI Times Mirror currently earns.

The acquisition news sucked 18 percent from the company’s market value in a day, as the stock price plunged to a low of $31, before recovering most of the loss in the next week.

A Hip Investor
Yet, forward is exactly where the company is heading, says Donald C. Grenesko, Tribune’s CFO. Tribune’s Internet linkages will give it “national reach”–built around its major-market newspaper Web sites–and “better leverage in creating a national E-commerce type of business,” he says. These operating efficiencies will increase revenue by between $10 million and $20 million the first year, while also resulting in cost savings of $10 million to $20 million. That’s not quite enough to make the operation profitable. But that equation would change in five years, when the Web-based revenue gain from the combination hits $90 million.

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