Reviewing the guru’s deal to buy the company in the late 1970s
Although the business is nowhere near as big as Berkshire, and it has never been as acquisition-driven as Warren Buffett (Trades, Portfolio)’s investment vehicle, Munger has still been able to use the enterprise and its cash flow to acquire a basket of undervalued securities, borrowing the same model Buffett has used at Berkshire for years.
A legal business
In some respects, the Daily Journal was made for Munger. The paper has always focused on the legal market, a specialist industry, which may have put off other potential acquirers.
However, with his legal background and contacts at Munger, Tolles, & Olson LLP, the legal firm he founded, Munger had the knowledge required to make it work.
According to Janet Lowe’s book, “Damn Right! Behind the Scenes With Berkshire Hathaway Billionaire Charlie Munger (Trades, Portfolio),” the investor acquired the newspaper in the late 1970s through the New America Fund, a fund he’d acquired as a deep-value investment with the help of Rick Guerin.
The fund paid $2.5 million for the paper. Not only did Munger have a legal background, but he was also close with Stan Lipsey, who ran the Buffalo News, which was acquired itself by Berkshire in 1977. In 1986, the New America Fund was liquidated and its interest in the Daily Journal was distributed to investors. Munger became one of its largest shareholders and the chairman of the business.
In the late 1980s, Munger pushed the business through an acquisition spree. One of his business partners described the investor as an “aspiring media mogul” in Lowe’s book. By 1997, the group owned 18 newspapers with a daily circulation of 35,000. The flagship publication was the Los Angeles Daily Journal, which had a circulation of 15,000.
This extract from the book provides some insight into the content of the papers:
“Compared to the mainstream Los Angeles Times or the entertainment oriented alternative newspapers in its circulation areas, the Daily Journal and its sister newspapers do on many days seem bland. The news stories are wrapped around pages and pages of court dockets and other information upon which attorneys rely. Yet among legal newspapers in California, the Daily Journal is the one against which most legal publications measure themselves. Other legals have tried to imitate the Daily Journal’s court calendars, descriptions of court rules, and its daily appellate reports.”
This specialist legal publication was never going to take over the world. And according to the book, Munger didn’t spend as much time running the business as he could have done.
However, he was very active in the company’s legal troubles. The Daily Journal was reportedly “always getting sued” as other legal publications tried to remove its market dominance and lawyers took offense at some reporting.
Munger took a leading role in defending the business, and from that perspective, he was instrumental in helping it succeed through challenging times.
The investor’s capital allocation skills also helped the newspaper group. By acquiring different papers and diversifying into technology and investing cash resources into securities in 2008, Munger has been able to grow the overall value of the business substantially. Today, the group has a market capitalization of $470 million. Based on the $2.5 million purchase price, that suggests the business has increased its value at a compound annual growth rate of 13.3%.
That’s not bad for a newspaper company facing the structural headwinds of decline in the newspaper industry.
The Journal is often sidelined compared to its larger peer, Berkshire, but the backstory of how the business got to where it is today is just as interesting.
Disclosure: The author does not own any stocks mentioned.
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About the author:
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.
Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.
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