One of the golden rules of dealing with the media is to "control the message". Given the increasing furor over the conduct of News Corp (NYSE:NWS) in a phone-hacking scandal in the U.K. and the calls for the company to be prosecuted (or at least investigated) under the Foreign Corrupt Practices Act, News Corp is clearly failing in that regard. While some investors may be attracted to the stock given its declines in the wake of the scandal and the theory that it is too big to fail, caution may be the better part of valor today. (For a couple of strategies to over come this scandal, read Crisis Management Strategies For Business Owners.)

TUTORIAL: Investing 101

An Ugly Action Kills a Paper
Even by the iffy standards of British tabloid journalism, News Corp's News of the World always walked a gray line when it came to scandal and controversy. Going a step way too far, though, several of the paper's employees have been accused of hacking into private citizen's phones and intercepting voice mails, including those of the families of dead soldiers and those who lost family members in the 2005 terrorist bombings.

With the furor over the alleged activities, News Corp has shuttered the News of the World. People can debate whether that was an act of contrition or just a simple economic reality given how quickly major advertisers like Ford (NYSE:F), Virgin Holidays and General Motors (NYSE:GM) pulled their ads and other major companies like Vodafone (NYSE:VOD), France Telecom (NYSE:FTE) and Tesco publicly considered doing so.

BSkyB Slips Away
One of the immediate consequences of the scandal may be the loss of the opportunity to buy BSkyB (Nasdaq:BSYBY.PK). Although this deal once looked likely, the passage of a vote in the House of Commons calling for News Corp to drop the takeover bid doesn't help the odds of success. News Corp's chairman Rupert Murdoch has long coveted full control of this asset (News Corp owns about 39% of it now) and its valuable sports broadcasting rights (including Premier League soccer). In fact, Murdoch has long had a stake in this enterprise, going back to the merger of his Sky Television and British Satellite Broadcasting (which basically created BSkyB). While Murdoch may hope that he can just out-wait the buzz and push on with the deal, it may be the case that he has to cool his heels for a year or more.

Will the U.S. Prosecute?
So far there are no clear links indicating that News Corp's U.S. operations (which include the New York Post, Wall Street Journal, Fox and Fox News) have engaged in similar conduct, but there is a building uproar to investigate all the same. Even if News Corp has not conducted similar hacking in the U.S., the company could still be prosecuted here under the Foreign Corrupt Practices Act - an act that is often wielded against multinationals that engage in bribery, but has broader applicability.

This is not a threat that shareholders should take lightly. While the company could likely handle fines, there would be the risk that the company could lose broadcasting licenses, and that could be a major blow to its U.S. operations. Still, given the political implications of that move (News Corp has long been seen as friendly to the U.S. Republican party), it may be a tough case to pursue. (For more on scandal, see Playing The Sleuth In A Scandal Stock.)

Too Many Bad Smells, Too Much Risk
Murdoch has been a polarizing figure for quite a while, and that's not so rare in media. Liberty Global's (Nasdaq:LBTYA) John Malone, Virgin's Richard Branson, and Sumner Redstone (involved with both CBS Corporation (NYSE:CBS) and Viacom (NYSE:VIA)) have their detractors as well.

In this case, though, investors should really think through whether News Corp is a bargain for them. News Corp has a shareholder-unfriendly dual-class share structure and has faced repeated accusations that he has used News Corp to financially benefit himself and his family over the best interests of shareholders. Moreover, there have just been too many allegations of assorted shenanigans to look the other way indefinitely.

News Corp is no unique opportunity. Other media companies like Discover Communications (Nasdaq:DISCA), Central European Media (Nasdaq:CETV) and Vivendi (Nasdaq:VIVHY.PK) offer valuations that at least merit some due diligence and there are other, larger, media enterprises like Disney (NYSE:DIS) to consider as well.

The Bottom Line
News Corp deserves its day in court, as well as a presumption of innocence, even if it does not give that same fair treatment to some of its interview and reporting targets. While the greater than 10% drop in these shares since the scandal broke may seem like a buying opportunity given the company's likelihood of surviving (and the public's short memory when it comes to taking offense), investors should tread cautiously. Maybe the presence of smoke doesn't prove that there's fire, but when that smoke gets too thick for too long, it gets hard to breathe either way.

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