The collapse of nearly all major media companies over the past couple of years, following a long decline of local newspapers and radio stations, raises big questions about what to do with the companies.
Those are questions companies like Beasley Broadcasting in the radio industry and Media General in the TV business also have struggled with, and it’s important to understand the reasons behind the unraveling.
Under U.S. tax laws and international trends, owners of media companies, especially in the media sector, have faced harsh financial constraints over the past few decades.
Until around 1980, media companies were held to different regulations. In the U.S., companies generally traded in an open market, not in a hostile takeover market.
If a company controlled 20 percent of a media company’s stock, it could be bought and held for a time and influence policies and executives. Often, such companies were controlled by unions. This process was called “bump trading” in the media industry, because it happened often enough for the transactions to be seen as bumping.
In the 1980s and 1990s, many companies switched to publicly traded companies where stock could be bought and sold, and labor unions and other stockholders no longer could exert control over the companies.
Then, some companies switched again to a hostile takeover market. At the same time, U.S. tax rules changed, making it more difficult for companies to receive high-income tax deductions for their shareholder distributions.
To meet the more complex new requirements of the tax laws, some companies tried to shrink their income distribution. The problem was that media companies are typically very large, with many owners holding stock, and tax-exempt dividends don’t need to be distributed equally among all owners.
Often, owners have different financial interests, and they may hold interests in different businesses.
For instance, owners of television stations tend to own broadcasting companies, while owners of newspapers tend to own printing companies. Owners of some newspapers have other businesses, and some magazines publish their articles, and each owner can have different connections to the media companies.
The IRS made clear in rulings a few years ago that a company holding a single business could not distribute an income distribution to all shareholders, to the extent that each owner had different ties to the media company and the distributions were deemed unequal.
Even before the IRS issued its rulings, media companies shifted away from equal distributions to shareholders.
For example, if a media company was having a good year with revenues, all owners would be happy, even if some of the owners were doing worse. That produced the bad tax results, with the beneficial owners seeing big capital gains that they could not then pay taxes on.
The market is what ultimately speaks volumes, even if we’re talking about competitor strength. If for instance one more PayPal casino came online, that would be an indication that the online casino industry is experiencing a steady growth. The same applies in the media industry, albeit the nuances are naturally a little different.