Papers Make Sense for Gates Foundation

In the last two days I've seen an awful lot of snarkiness around word that the Bill and Melinda Gates Foundation were in on the purchase of former McClatchy newspapers by MediaNews.

Gates Foundation Saves Newspapers Too! screams the HuffingtonPost.

What does it say about the dinosaur newspaper industry that the world's richest man is investing in it? asks Seattle Weekly.

What it means is that Bill Gates is still smarter than you are, Ms. Post and Mr. Weekly (if those are your real names).

Newspapers are horrible for public companies, but they can still make great private investments. That's because the underlying assets are depreciating in value.

Think of the price as an annuity. You put up, say, $350 million. You squeeze the budget as the asset dries up and earn, say, 20% on that money. If the asset is gone in five years you done good. Where else can you get a virtually guaranteed rate of return like that?

Public investors, on the other hand, need growth and rising asset values. Without these magic ingredients, their investments fall in value. Say the papers stayed public. They're worth $350 million now, the company gets a return of $70 million and next year they're worth $280 million.
In private hands those profits go right to you. In public hands you only get what the company chooses to distribute in dividends.

It's just that simple.

There are many assets that make more sense to own privately than publicly. The news is that newspapers are now in this class. The fact is they are still dieing, and the only question is when we'll pull the shroud.

They're a good buy, for the Gates Foundation, and the banks who participated in the deal. For you, no. This is Economics 101. And the fact these outlets never explained all this to you is called journalistic malpractice.