Strategy: Axel Springer

Unit 3, Professor Juan Alcacer, Strategy: Axel Springer: Reinventing a Legacy through Global Acquisitions (A).

The last piece, Nantucket Nectars, was about the seller — a company is worth the most in the year someone else is missing exactly what you have. This one moves to the other side of the table: a buyer who has just been told, at the airport, that a deal a year in the making has fallen through, who is still holding a billion-dollar budget, and who now has two alternative targets in front of him. It's a story about "what do you buy after you lose," and also the story of how an old German newspaper group sold itself off piece by piece and then bought itself back piece by piece.

Here goes — enjoy:

Case Summary

July 23, 2015, Tegel Airport, Berlin. Mathias Döpfner is sitting at the gate waiting for a phone call. He is the CEO of Axel Springer, about to fly to London to sign the agreement to buy the Financial Times from Pearson — a deal worth more than a billion dollars and the centerpiece of the group's strategy of "entering the English-speaking world." Everyone wants to board. He says no: we wait for final confirmation from Pearson's board.

The call comes. During the board meeting another offer arrived, and the board had to accept it. The Financial Times has been sold to Nikkei. Döpfner later said: "We negotiated for a year. At the last minute Nikkei showed up with 'the same piece of paper' — meaning, let the Germans negotiate for a year, then we take their contract, add 10%, take it or leave it."

Deputy CEO Jan Bayer remembers the two of them talking about it all summer, deeply frustrated. Then they met in Berlin and said: going international was still the right direction. We're going to America.

Rewind seventy years. Axel Springer was founded in Hamburg in 1946 by the journalist of the same name. Hamburger Abendblatt in 1948, Bild in 1952, the purchase of Die Welt in 1953, the Ullstein publishing house in 1959. By the 1960s it was Germany's most important news publisher. It put its headquarters right next to the Berlin Wall at Checkpoint Charlie, and in 1967 laid down five "Essentials" still in use today: freedom and democracy, Israel's right to exist, the transatlantic alliance between the US and Europe, the free market, and opposition to extremism. In the 1960s this made it a target of left-wing protest — and, interestingly, the street leading to the headquarters today is named after the protest leader of that era, Rudi Dutschke.

Bild is the newspaper with the largest readership in Europe, and it was still running photos of topless women as late as 2012. Gerhard Schröder once said all you need to govern Germany is three things: Bild, Bild am Sonntag and television. Welt has a much smaller circulation and is the group's intellectual flagship. In 1985 Axel Springer listed 49% of the company and died the same year, leaving control to his widow, Friede Springer. From then on, day-to-day management passed to professional CEOs and an executive board of three to five people, with Friede sitting behind them as a supervisory board member and major shareholder.

In 2002, Döpfner took over. He was 39, had studied musicology, and had spent 16 years in journalism, the last four as editor-in-chief of Welt. Friede admits everyone doubted him at the time:

"They said he was too young, a music critic with no business experience... I said, I want him. And I have the majority."

His plan was just three phrases: strengthen the core business, digitize, internationalize. He said that the first time he read a news website he understood it would replace newspapers. The company was losing €200 million a year, its governance was unstable, and its culture needed to change. In his words: "The good news was that we were in really bad shape — there was little to lose and a lot to win. That gave me the freedom to think outside the box." He cut 40% of jobs, a restructuring that by German standards was "brutal, radical, fast," and sold or shut down unprofitable assets. Within a year the company went from losing €200 million to making €200 million. Almost everyone was against him: "This young man is destroying our business."

2004 to 2005: the first wall. They tried to acquire ProSiebenSat.1, Germany's largest private TV group — a company bigger than Axel Springer was at the time. The team designed a multi-step deal of "tender for the preferred shares, raise capital, then merge." The structure worked; Germany's antitrust authority blocked it. Bayer says this was the turning point: Döpfner concluded that they had to dramatically accelerate digitization and internationalization, and use the print business to fund it while it was still profitable.

Over the next decade, three lines moved forward at once. Digitizing the news went slowly — Bild only launched its paywall in 2013, offering Bundesliga highlights, sweepstakes and slot-machine games along with the news, and reached 680,000 digital subscribers by 2016. That same year, they sold a group of regional papers and magazines — including the ones the founder himself had started in 1948 — to Funke for €920 million. In 2012 those assets had revenue of €512 million and EBITDA of €95 million, so the price was about 10x EBITDA. Bayer says this was probably "the last possible exit" from the regional print business; Friede "immediately understood the opportunity and agreed decisively — she always looks forward, never back."

The second line was classifieds. Döpfner saw early on that the real estate, job and car ads in newspapers were being replaced by the Craigslists and Zillows of the world. So he went shopping globally: StepStone, Immonet, aufeminin, Seloger, Totaljobs, Immoweb, consolidating them into horizontal groups by jobs, real estate and autos, with disclosed deal values above US$1.4 billion. Analysts called Axel Springer "one of the most aggressive buyers of classifieds in Europe." The third line was the result: by 2014, more than half the group's revenue came from digital businesses.

How they bought companies became a philosophy in itself. Döpfner doesn't do deep integration. He named his approach after the film company Charlie Chaplin and others founded in 1919 to protect creative independence — the "United Artists model": "I respect entrepreneurs. I want Axel Springer to be their home — to give them room to run independently and go their own way, as long as they deliver a plan and results." Bayer's metaphor is a jazz band: improvising within a clear framework, with no preset direction. "We don't believe in top-down synergies. We always tell the companies we acquire: you can treat Axel Springer like a buffet — knowledge, technology, product, legal, M&A — but you don't have to."

The deal structure followed from this: the founders keep a substantial stake and later exit through a put/call — overdeliver and you get 12x EBITDA; miss the targets and it's 8x. Andreas Noth, deputy head of M&A, says: "If a founder wants to sell 100% in one go and walk away, we're generally suspicious — he may not believe in his own company's potential."

America in 2015 was hot. NBCUniversal had invested a combined US$400 million in Buzzfeed and Vox; Buzzfeed was valued at US$1.5 billion, about 13x revenue. Hearst and Disney bought 10% of Vice at a US$2.5 billion valuation, about 5x revenue. By estimates, none of them was profitable. The year before, Forbes had sold to a Hong Kong investor group for US$475 million, about 3x revenue and 22x EBITDA. Axel Springer narrowed it down to two targets.

Business Insider, founded in 2007 by former DoubleClick CEO Kevin Ryan and Henry Blodget — Blodget, as a Wall Street analyst, had been investigated by the SEC, banned from the industry and fined US$4 million, but Ryan still believed in him. Purely digital business and tech news, known for its high output, SEO and social distribution, and also criticized for "clickbait headlines, more ads than content, and slideshows built to farm clicks" — Blodget himself said the criticism stung, and also made them better step by step. About 75% of revenue came from advertising, plus a small B2B subscription research product, BI Intelligence. Venture-backed, with shareholders including Bezos and Andreessen. In 2013 AOL offered around US$100–150 million; the board refused, asking for about US$250 million. In January 2015 Axel Springer led its Series G: US$20 million for 9% and a board seat. Noth calls this "a foot in the door" — put in a small amount first, get to know the management, the founders, the culture. By mid-2015 BI had nearly 90 million monthly unique visitors and revenue close to US$50 million.

The Huffington Post, founded in 2005 by Arianna Huffington, Kenneth Lerer, Jonah Peretti and Andrew Breitbart, a liberal news and opinion site that grew into a general-interest giant on the back of aggregation, original content and thousands of unpaid bloggers. By 2015 it had 13 international editions and had just launched an Arabic one. AOL bought it in 2011 for US$315 million, when its annual revenue was about US$30 million. Its business model relied entirely on advertising, with no paid product. Revenue in 2014 was estimated at US$146 million, still loss-making; 2015 was expected to bring US$168 million in revenue and EBITDA of just over US$10 million. In 2015 Verizon bought AOL for US$4.4 billion, and was rumored to be spinning off HuffPost for about US$1 billion — roughly 6 to 7x revenue.

The case stops here. Döpfner, recovering from the Financial Times setback, has to answer:

1. Buy Business Insider or HuffPost? The former has about US$50 million in revenue, is doubling every year, and at the market multiples of the time would be valued at a little over US$400 million in total; the latter has US$168 million in revenue, is growing 15%, and is asking about US$1 billion.
2. This time, how do you make sure the deal doesn't fall apart at the last minute?

My Thinking

The boldest step in the transformation wasn't buying something new — it was selling the newspapers the founder started himself

Reading this case, what sticks most easily is the buying — a dozen-plus acquisitions, US$1.4 billion of classifieds, a billion-dollar Financial Times. But the transaction that truly holds the whole story up is a sale.

2013, €920 million, a group of regional newspapers, including the Hamburger Abendblatt the founder himself launched in 1948. At 10x EBITDA, that was a very good price for the moment; Bayer called it "the last possible exit" — meaning that a year or two later, that price would have been gone.

What makes this hard? Not the valuation, but emotion and power. These were the founder's newspapers, and the founder's widow was the major shareholder, sitting on the supervisory board. Any professional manager knows the risk of making that proposal. And Friede's reaction was to "immediately understand and agree decisively." A major shareholder who "always looks forward, never back" is the precondition for this company being able to transform — more important than any CEO.

My own take is that the most expensive money in a transformation is often not how much the new business needs, but when the old business gets sold. Sell too early and the cash cow is still giving milk; sell too late and nobody wants it. Axel Springer sold in the year when "someone was still willing to pay 10x." It's the same logic as Nantucket Nectars in the last piece, just seen from the seller's seat: sell something valuable while others still need it, not when you yourself no longer do.

The real money for the transformation wasn't in news — it was in classifieds

The case title is "reinventing a legacy through global acquisitions," so the reader's attention naturally lands on the news brands — FT, Business Insider, HuffPost. But the acquisition list in Exhibit 2 tells a different story: StepStone, Seloger, Immoweb, Totaljobs, Immonet — all classifieds platforms for jobs, real estate and cars, with disclosed amounts alone exceeding US$1.4 billion.

This is the thing Döpfner understood earliest: a newspaper's profits never came only from the news, but from those few pages of small-print ads next to it. What the internet took first wasn't readers, it was those pages. Craigslist and Zillow don't write news, but they hollowed out newspapers' income statements.

So half of Axel Springer's digitization wasn't "moving the newspaper online" at all — it was "buying back, in platform form, the ad pages that used to sit in the newspaper." When digital passed half of revenue in 2014, most of that came from these platforms, not from BildPlus's 680,000 subscribers.

That shapes how you look at the 2015 question. Spending a billion on a news brand — are you paying for returns, or paying for identity? News is this company's mission and its voice — every one of the Essentials is about which side the news should stand on, and none mentions classifieds. But the mission costs money; classifieds make money. An honest CEO has to admit that first, and then decide how much a news brand is worth spending.

Buying a company isn't buying an asset — it's giving an entrepreneur a home, then writing the exit as a formula

The United Artists model is the thing I most want to take away from this case.

On the surface it's a management philosophy — no integration, no faith in top-down synergies, acquired companies can treat the parent as a buffet. That sounds like respect for entrepreneurs, and it is. But underneath is a very hard-nosed deal structure: the founders keep a substantial stake; a few years later they exit through a put/call; overdeliver and it's 12x EBITDA; miss and it's 8x.

This structure does three things. First, it lets founders, after selling their company, still run it as if it were their own — because the value of that slice of equity depends on their results over the next few years. Second, it saves the parent the most expensive things: the management cost of integration and the risk of integration failing. Third, and the easiest to overlook, it's a filter — Noth's line, "we're suspicious of founders who want to sell everything at once and walk away," amounts to saying: if there's no founder willing to bet on the company, we don't buy it.

Run both candidates through this filter. Business Insider has founders: Ryan is chairman, Blodget is CEO, the VC shareholders are willing to exit, and management has equity they can roll over. HuffPost has been a division of AOL since 2011; its founders either left or became executives in someone else's company; Arianna is the face of the brand, but she's an employee, not an owner; and the seller is a telecom company that just spent US$4.4 billion buying AOL and wants to spin this off.

My own take is that this company's M&A philosophy and its M&A targets define each other. United Artists isn't just "how to manage it after you buy it" — before you buy, it has already crossed off half the targets for you.

Being shut out twice actually nailed the direction down

Döpfner says the two biggest setbacks of his tenure were ProSiebenSat.1 and the Financial Times — "and both, looking back, were healthy, because they made our shift more radical and faster."

That sentence is worth unpacking. ProSieben being blocked on antitrust grounds taught that in Germany, the road to growing through traditional media had been sealed off by regulators, so the only ways left were digital and abroad. FT being snatched away by Nikkei taught that spending a year negotiating a contract without exclusivity means doing someone else's due diligence for them — the other side only has to take the same piece of paper and add 10%.

Each setback carried a different message. One was about direction, one about process. Döpfner's approach was to treat them as information, not as losses that needed to be made up for. The difference between these two reactions decides what you buy next.

People who treat setbacks as information ask: what has this just told us? People who treat setbacks as losses ask: so what do we buy instead? The first group arrives at "the direction is right, go to America, but this time move fast, lock in the people first, and leave a buffer for a counterbid"; the second can very easily arrive at — find something about as big and as expensive as FT, and spend that billion.

The airport scene matters because it's the most emotionally charged moment in the whole case. A year of negotiation, a plane waiting to take off, a CEO who won't let everyone board. The next decision is made on top of that emotion.

Three times the revenue, two and a half times the price, a fifth of the growth — HuffPost's three ledgers don't add up

The professor's second question asks us to work out the strategic, financial and cultural ledgers separately. Done separately, the conclusion actually gets clearer.

The strategic ledger. HuffPost's selling points are scale and international reach: US$168 million in revenue, 3.4 times BI's; 13 international editions plus the Arabic one, so the "internationalize" box seems ticked right away. But most of those 13 editions are partnerships with local media — you're managing relationships, not ownership. And its business model is 100% advertising with no paid product, competing with Buzzfeed and Vox for the same pool of programmatic ad budgets. BI is small, but it has a seed of paid revenue — BI Intelligence, subscription research that corporate clients pay a few thousand dollars a year for — which is exactly the logic BildPlus proved in Germany: business readers will pay for content; general-news readers rarely do. And BI is still small enough for Axel Springer to be the platform that takes it to Europe, which is something it would do.

The financial ledger. On revenue multiples the two are close: HuffPost at about 6 to 7x, a controlling deal for BI at roughly 7 to 9x. But on growth, the gap is huge: BI went from US$20 million to over US$40 million in a year, doubling; HuffPost went from US$146 million to US$168 million, 15%. On profit, HuffPost's billion is roughly 100x its expected 2015 EBITDA — paying a growth-stock price for a company whose growth has already slowed. Then look at the budget: FT was a little over a billion; HuffPost would use up exactly that money, and spend it on a pure-advertising asset; BI would take about 40% of it, leaving the rest for classifieds — where the real money is.

The cultural ledger. Axel Springer's Essentials are conservative, pro-Israel and free-market, and Döpfner calls himself a "non-Jewish Zionist"; HuffPost is the emblem of American liberal media. Editorial independence can be written into a contract, but the headline "German conservatives buy American liberal outlet" will write itself — in both newsrooms, every day. BI's territory is business and tech, which doesn't collide with any of the five Essentials; and the third one, the "transatlantic alliance," is itself a reason to go to America. BI brings a different kind of cost: Blodget's SEC history and its clickbait reputation. But Axel Springer owns Bild — it knows better than anyone how to live with a tabloid reputation, and how to turn it into money.

Add up the three ledgers and HuffPost wins on only one thing: being big right now. And "big right now" is exactly what a buyer who has just lost a big deal wants most.

My choice: buy Business Insider, and sign it in weeks, not a year

If I had to pick a side in class, I'd pick Business Insider — buy the remaining roughly 91% at a total valuation of US$400–450 million, about 7 to 9x its US$50 million in revenue. Let the billion-dollar HuffPost go.

The reasons are all written above; boiled down to one sentence: BI is the only target that matches all three verbs and the United Artists filter at the same time. Digitize: it has a seed of paid revenue. Internationalize: it's English-language, American, and still small enough to be taken to Europe. Strengthen the core: business and tech sit right next to Welt's readers, and Bild understands its traffic DNA. The founders are there, equity can roll over, the put/call can be used. And Axel Springer has already been sitting on its board for half a year — the "foot in the door" was prepared for exactly this moment.

As for how to make sure it gets signed, the answer is all in the FT lesson. This time, don't run a year-long process; do a short, bilateral negotiation: first line up Ryan, Blodget and the VC funds — their alternative is another venture round at four or five times revenue, so a strategic exit at seven to nine times with rollover equity is a better deal for them than for anyone. Lock in the founders' retained stake and management terms before the price goes public. Trade speed and certainty — no financing condition, almost no regulatory risk — for an exclusivity period and a break fee. Most important of all: before the first meeting, write down the ceiling, with that 10% "Nikkei buffer" already built into the number, and then don't move it. A wounded buyer is the one most likely to overpay, so the discipline has to be set before you fall for the deal.

I accept the costs, too. US$50 million in revenue is tiny for a €3 billion group; BI has to be a platform, not an endpoint, followed by European and Asian editions. Blodget's history and the "clickbait" criticism will show up in every German news story, and have to be owned head-on. It's still loss-making or barely profitable, dependent on advertising, with Google and Facebook holding its traffic. And there's one cost nobody will put in a model: FT is a trophy; BI isn't. After losing the glamorous one, you still have to be willing to buy the less glamorous one.

Why not wait? Because the print cash flow propping all this up is shrinking, and Bayer already called 2013 the "last window" for the regional papers. The American window is open now; valuations are high but affordable. Two years from now, BI will either be bigger and more expensive, or already someone else's.

Takeaways for Arcus42

Reading this case, what came to mind wasn't newspapers, but the kind of transformation we ourselves are going through — the old business feeding the new one, with only a limited window.

First, the bill for a transformation is often paid by selling something you're emotionally attached to. Axel Springer's digital future was paid for by the newspapers the founder started in 1948, and they were sold in the year when someone would still pay 10x. Every company in transformation has its own "regional newspapers" — businesses with history, with emotional weight, still making money, but with no future. The question isn't "should we sell," but "which year is the last window when someone will still pay a good price."

Second, a cash cow buys you time, but not unlimited time. The print business fed the digital business for a decade, yet Bild didn't put up a paywall until 2013 — too slow. Profits from the old business can trick you into thinking you can take it slowly. Set a year by which "new-business revenue overtakes the old business," then work backward from that year; it's more useful than any strategy slogan.

Third, partnerships and acquisitions buy people, not assets; write the exit as a formula. The core of United Artists is: retained equity, autonomy, and an exit multiple determined by performance. It's both respect for entrepreneurs and a filter — people who want to take the money all at once and leave, no thanks. For any organization that delivers through partners and networks, this is worth copying outright: buffet-style enablement, plus an exit written as a formula.

Fourth, before a big decision, get "a foot in the door" first. US$20 million for 9% and a board seat bought half a year of inside view before betting US$400 million. Information asymmetry is the most expensive part of any partnership; a small partnership with real delivery is the cheapest way to eliminate it — with clients, and with partners alike.

Fifth, after losing a big deal, beware of healing the wound with a more expensive one. HuffPost happened to cost exactly what FT did, and Döpfner happened to be "wounded." The ninety days after losing a big deal are the ninety days when you are most likely to sign the wrong contract. Give yourself a rule: for the next deal after a lost one, run it through your three verbs and your filter first, then talk price.

Sixth, values are a filter, not decoration. The Essentials didn't pick anything for Axel Springer, but they ruled some things out, however tempting the scale. If a company's principles have never made it walk away from a single good deal, they probably aren't principles yet.

Final Thoughts

Before class, the line I agree with most is this one: "People who treat setbacks as information ask: what has this just told us? People who treat setbacks as losses ask: so what do we buy instead?"

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These are pre-class reading notes compiled from Harvard case classroom materials, and do not constitute investment advice on any company or transaction.