There’s no doubt about it. Newspaper outfit The Washington Post Co. (WPO) has already won the “Strangest Acquisition of 2013” award.
Last week, Washington Post Co. announced it would be buying Forney Corporation — a subsidiary of United Technologies (UTX) that makes (and this isn’t a misprint) combustion monitors for industrial equipment used by utility companies.
Don’t bother looking for a synergistic connection; you won’t find it. It’s just a company WaPo CEO Donald Graham liked, saying, “Our acquisition of Forney Corporation is part of the Post Company’s ongoing strategy of investing in companies with demonstrated earnings potential and strong management teams attracted to our long-term investment horizon.”
But there might be more to it than just the diversified investment The Washington Post’s Graham is describing.
Crunch the Numbers
First and foremost, whether the idea you’re about to hear is on target or not is a little irrelevant. The Washington Post Company has a potential challenge on its hands. Bringing in Forney might solve it, though to the extent that it does, the acquisition also might create other challenges.
The problem? In February, WaPo offered early retirement to some of its newspaper employees. No big deal; companies bite that bullet from time to time. But, for The Washington Post Company, it was a relatively big bullet. When all was said and done, the company booked or will book $24.3 million in expenses between Q1 and Q2 to fund the voluntary early retirement program.
The good news is, the cash burden of the voluntary retirement incentive program isn’t going to be a drag on the income statement and cash flow report any longer. The bad news is, that $24 million was taken out of the company’s pension plan to do it. For perspective, the company’s quarterly pension plan and executive retirement plan expenses are normally in the $5 million range. The total deferred compensation plan’s long-term liabilities are right around $63 million right now.
For the record, early retirement expenses should be taken out of the pension pool, so that in itself isn’t unusual or problematic. On the other hand, after a couple of decades of failed and mismanaged pension plans, there’s just something uncomfortable about a company that dips into the cookie jar to slough off some employees, then dips into another cookie jar to buy a completely unrelated organization. And with $24 million less in the pot, one has to wonder whether there’s a pinch waiting around the corner.
That’s not to say the corporation’s pension is underfunded, nor is it to say it’s adequately funded, either. It’s just a question worth asking.
And therein lies the problem — there’s not a lot of transparency or clarity here regarding the pension fund’s health, before or after the early retirement program went into effect. But, the least number of dots to connect en route to a rational explanation, and the timing of the buyout suggests the purchase of Forney Corporation in particular somehow shores up one fiscal problem or another.
If the Washington Post was truly just looking for “companies with demonstrated earnings potential and strong management teams,” there are far more liquid and synergistic options available … even if it just means assembling a corporate-owned portfolio of publicly traded stocks.
What’s in It for WaPo?
So what exactly is The Washington Post Company going to get for its undisclosed sum? That’s another great question — nobody has any clue (yet) what the acquisition is going to cost. And, neither United Technologies nor the Washington Post have detailed what Forney’s actually worth. There’s still a handful of data nuggets about the company that are worth a closer look, however.
Though it’s not broken down to the subsidiary level, we do know the UTC Climate Controls and Safety division of United Technologies where Forney operates generated $3.82 billion revenue last quarter. About $520 million of that became operating profit, translating into net margins of around 13.6%. It was a quarter that could be considered the norm.
As was noted, there’s no way of breaking out how much of that is attributable to Forney. However, it’s likely that Forney’s piece of the pie is commensurate. It’s also safe to assume Donald Graham knows the Forney details, and feels it’s worth the price.
Graham’s opinion isn’t the $64,000 question for shareholders though. The average stockholder is wondering one key thing at this point: While it might be worth it to WaPo for whatever the final cost is, why would a newspaper publisher want an industrial business that an industrial conglomerate didn’t even want?
A close runner-up question: Why no details?
It’s possible things are as simple as they seem on the surface. It would just be unusual if that were the case, especially given the Washington Post’s recent pension plan activity.
A news release that raises more questions than it answers isn’t exactly the kind of thing that gives investors a warm, fuzzy feeling. The irony is that some details of the deal would actually be very reassuring to an investor base that senses a lot of fog surrounding the company’s future, and perhaps its pension in particular.
Until the veil is lifted, the market’s going to have a tough time supporting the acquisition.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.