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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!