Many media companies are still controlled by the families of the founders, which can sometimes lead to corporate decisions that are more beneficial to the family than outside shareholders. No matter how well-managed these firms may be, shareholders as a group simply do not have the voting power that they would with a company whose majority ownership resided with the public.
• Media firms are also known for extensive cross-ownership holdings, which
means that another media firm could potentially have much more say in
your company's decision making than individual shareholders. For exam-
ple, Liberty Media owns chunks of many different companies, as does
News Corp.
• The entertainment industry revolves around glitz, glamour, and cash,
and sometimes industry executives get caught up in the scene. Be "wary of
firms that reward executives with ridiculous compensation packages and
excessive perks. Michael Eisner at Disney comes to mind immediately,
and the old guard at Warner Brothers "was known for this, as well.
• Look for media companies that consistently generate strong free cash
flow. We like to see free cash flow margins around 10 percent.
• Seek out companies that have high market share in their primary mar
kets—monopolies are often great for profits. Licenses, especially in broad
casting, also serve to reduce competition and keep profit margins high.
• Seek out companies with a history of well-executed acquisitions that have
been followed by higher margins.
• A strong balance sheet enables media companies to make selective acqui
sitions without increasing the risk for shareholders or diluting the share
holders' ownership stake.
• Look for candid management teams, a history of sensible acquisitions,
and either conservative reinvestment of shareholders' capital or the return
of capital to shareholders through dividends and stock repurchases.
• Don't chase hits. Buying a stock because there's a lot of buzz about a hit
movie or TV show rarely pays off.
