Post and Sun merger a doubtful pursuit of size and synergy: Don Pittis

A lot of us in the business side of the media have been expecting bad news from the National Post chain for years. Can attaching itself to the Sun chain alter that?

I, for one, never wished for the newspaper group's demise. One of my best friends works there. The media business is becoming a hit-motivated internet world, with news descending to the lowest common denominator equivalent of cat videos. But the Post chain has real reporters, digging for real original news.

Somehow, time after time, the wily Postmedia president Paul Godfrey has pulled the paper and then the chain away from death's door. Just a year ago, as the Globe and Mail reported, the rating agency Moody's was warning about Postmedia's debt. But somehow the papers struggle on.

• From 2009: National Post to close if court nixes transfer
• Canwest sells newspapers to creditor group for $1.1B

A lot of it may be Godfrey's personal force of will. Running Toronto's metropolitan government in the '70s, he certainly learned the skill of herding cats.

But the other signature of Godfrey's deals has been their complexity, including the financing. 

Somehow, by casting off some assets and adding assets from somewhere else, building a legal structure here and borrowing money there, the National Post and its fellows survive to print another day. Each time it happens there is a new financing deal. Each time, Godfrey has a new set of reasons why, this time, it will work.

This weeks' purchase of Quebecor's 175 English-language newspapers for $316 million in cash is no different. The expanded company announced $140 million in new debt to pay for the deal and expects to raise $186 million by selling new shares.  

• Quebecor sells 175 Sun Media newspapers and websites to Postmedia

As the CBC's Pete Evans reported, Godfrey offered the expected list of reasons why this time it will be different.

As usual in mergers, "synergy" is one of the purported advantages. It means that the sum of the parts makes a greater whole. But saying the word doesn't make it so. The other advantage cited by those who support mergers is  that bigger is better. Godfrey used both those arguments today.

"To survive and compete against the largest foreign-based digital businesses, we must be strong enough to fight and win," he said. "We will be able to offer advertisers the opportunity to reach the full scale and scope of their target audiences."

Risky business

Mergers and acquisitions, M&As as they are called in the business world, carry with them an initial aura of optimism. With so much money on the table, executives on both sides usually get generous payouts. The feeling of creating something new seems to open the door to endless possibilities.

In the first year, sales and profits for a buyer add to happy feelings. Sales, profits, payroll — all normally indicators of a company's growth and progress — are always up just after a merger. 

But that is just because the company is now bigger, not necessarily better. At the same time the fresh financing for the new, bigger company gives its managers some breathing room. Those initial signs of good fortune may be a temporary illusion.

"Most research indicates that M&A activity has an overall success rate of about 50 per cent — basically a coin toss," says Robert Sher, author of the book The Feel of the Deal, in a Forbes blog. 

Paul Godfrey's rationale

By most people's understanding, the most important measure of a corporation's success is profit. But according to company theory, there is something more important: survival. Godfrey and his papers are certainly survivors. 

"I have a strong attachment to the Sun," Godfrey told Danielle Bochove on CBC's The Exchange with Amanda Lang. "But I did this for business reasons.

"I know what the business is all about, and if it wouldn't have made sense from a business point of view, I wouldn't have done this deal," Godfrey said.

This merger may or may not fulfil Godfrey's dreams as the great success that will finally put the National Post and its media empire on the road to riches. Perhaps this time the chain will be big enough and synergistic enough to make good quality web newspapers profitable. 

But merging two weak companies does not magically create a strong and successful one. Sometime it just makes one big weak company.