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Rupert Murdoch's tough call: Split up News Corp. to survive

Rupert Murdoch has reportedly been against splitting up his News Corp. media empire.
Rupert Murdoch has reportedly been against splitting up his News Corp. media empire.Oli Scarff / Getty Images

Rupert Murdoch’s driving ambition may have finally met its match.

On Tuesday, his News Corp. media empire confirmed reports that it is thinking of restructuring into two separate, distinct, publicly traded companies -- a move that would effectively bring to an end Murdoch’s decades-long drive to pull together the disparate strands of his empire into one coherent company.

Harder still for Murdoch would be the fact that a division of the media giant would almost certainly mean cordoning off the newspaper business that once was the core of Murdoch’s company, which he has grown from a single Australian newspaper he inherited in the 1950s.

“This is a sign of the times,” Barton Crockett, an analyst with Lazard Capital Management, told CNBC.

“A lot of us were surprised that they're actually taking this step, because Rupert’s ties to newspapers are so strong and so historical, I was doubtful they’d go there as long as he was calling the shots. But they are, and I think that’s showing he’s evolving with the times, and the company is,” he added.

The restructuring of News Corp. would, according to a report in The New York Times, likely would divide the more profitable entertainment unit -- driven by News Corp.’s movie studio and powerful television networks -- from the smaller, less profitable, publishing business that comprises The Wall Street Journal, The Times of London, The New York Post and the HarperCollins book business.

Rob Enderle, an analyst with Enderle Group, said the main motivation for dividing News Corp. in two is likely the protection of the Fox movie studio and television networks that are now the most profitable parts of the media empire.

Murdoch is likely to want to insulate this part of the business from the fallout from the phone hacking scandal that has led to the closure of the News of the World tabloid in the U.K., halted Murdoch’s BSkyB takeover bid and prompted the arrest of several key figures, he said.

“There has been a lot of concern about how broad the company’s holdings have become, and that if something were to happen to any one part of it, it could bring down the whole of it,” said Enderle.

The split is also likely driven by shareholder unrest over the direction of the company.

Less concerned about journalistic ethics and more worried about the company’s bottom line, News Corp. shareholders have become more vocal since the hacking scandal broke, and they are more likely to want the company to focus on its more productive entertainment assets, which generated $23.48 billion in revenue in the year ended June 2011, nearly three times the $8.83 billion in revenue generated by the publishing business.

There were also concerns that the size of the company could raise antitrust concerns if it wanted to engage in corporate acquisitions, Enderle added. A split would realign the company and enable it to focus it on each core operation, he said.

“This split is clearly along functional lines,” Enderle said. “The resulting companies should be easier to manage and focus, because it really did look as if News Corp. was losing track of each unit’s focus.”

News of the potential plan to split the media empire in two has certainly won the approval of the market, with shares of News Corp. rising more than 8 percent in trading Tuesday.

Media conglomerate Viacom took a similar path in 2005 when it split into two companies, leaving the television company CBS as a standalone company. Both companies have thrived since the move.

Murdoch has reportedly been against splitting up News Corp., but may have been swayed by the views of his second in command, Chase Carey, who is said to regard the publishing industry as mature and unlikely to yield substantial profits. Earlier this year, Carey made it clear that the company’s management team has considered a split.

“For Murdoch it has been all about empire building, about maximizing power and control, but the only thing that leaves you with is something unmanageable,” Enderle said, adding that it’s rare to see someone like Murdoch, who is clearly oriented toward status and power, step in and break up a company.

“The board is subordinate to Murdoch, so it probably really took a real and present threat to the overall entity for him to step back and realize there’s a need to restructure,” he added.

The outlook for Murdoch’s beloved newspaper business remains gloomy, Enderle added.

“By providing more focus for the unit they might be able to turn it into something more profitable, or find a buyer that will do something else with it, but the trend right now is away from publishing,” he said.

Crockett noted that the phone hacking scandal presented an opportunity for News Corp. to rethink its operations and improve the situation for shareholders. A division of the business will lead to a stronger company, he said.

“We’ve gone from lemons to lemonade,” said Crockett. “I think it’s something that will make News Corp. a stronger business and a better stock.”