News Limited restructures, buys online news group – but will it work?

News Limited has announced a dramatic internal restructuring, cutting the number of divisions in the business from 19 to five, consolidating resources across its editorial and commercial operations and foreshadowing an unknown number of job cuts.

The cost-cutting drive comes just days after Fairfax announced its own brutal restructure that will see 1,900 positions disappear over the next three years as the company focuses on its digital operations.

But at least News Corp had a few pieces of good news.

This morning, it lobbed a $1.97 billion takeover bid to buy the rest of pay TV provider Consolidated Media Holdings, a move that will have profound effects on the empires of Rupert Murdoch and James Packer.

And just hours ago, it confirmed that it has bought Australian Independent Business Media (the publishers of Business Spectator and Eureka Report) in a $30 million deal.

AIBM’s leading commentators, including Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz, have signed long-term contracts with News Limited. Kohler’s $8 million payout ties him to the sites for four years.

In a letter to “partners” distributed today and obtained by LeadingCompany, Kohler pitched the deal as a big opportunity for AIBM.

“Our business is going to grow under their ownership in a way that we could never have managed on our own. It was this, in the end, that sealed it for me: this transaction will provide all of us personally with fantastic new opportunities for advancement and growth in a global organisation that is, itself, changing and modernising to focus on digital publishing.”

The purchase also gives News Limited control of one of Australia’s most profitable paywalls. Eureka Report, an investment website, made $1.91 million in profit last year with only 16,000 subscribers, most of whom pay $385 for a yearly subscription.

The deal is one of a number of similar acquisitions News Limited has made in recent years – small, entrepreneurial media companies in the digital space that provide a way to diversify and gain access to the committed audiences who often read such niche publications. For example, in May 2011 it acquired parenting website Kidspot, and in February it bought BestRecipes.com.au for an undisclosed amount.

Media companies like News Limited aren’t alone in making bolt-on acquisitions. But it is a strategy that comes with some risks.

As the smaller company is integrated into the larger business, the entrepreneurial and independent spirit that makes many small businesses successful can disappear. This can mean the acquiring company often losses the very thing that attracted it to the acquisition in the first place

Kwanghui Lim, an associate professor of strategic management at the Melbourne Business School, and Rahul Kapoor, at INSEAD business school, have studied this in large technology companies, who regularly use acquisitions of small firms to grow and gain market share.

Lim and Kapoor say that one of the key attractions when buying a smaller business is the staff at the acquired company. But over time, these key people don’t stay so nimble and productive. They converge to the productivity of the acquiring firm, and stop inventing.

This happens because of the incentives facing staff when they are bought into the larger company. Big businesses offer a level of comfort, and once the owners of a small business hit pay day by being bought out, they can lose their drive.

Lim, who spoke to LeadingCompany recently, did offer some solutions.

For one, key staff can have their future pay structured to reward future – as well as past – successes.

And secondly, companies should avoid quickly assimilating the small business.

“If you buy a firm and leave it independent, it has a better chance of doing well than if you bring it in, break it apart and assimilate it into the larger company,” Lim said.

For the employees of the small business being bought out, a takeover by a larger company can also spell the end of what attracted them to the small business in the first place, says Brian Gardner, the general manager at HR firm The Donington Group.

“What’s valued in a small company isn’t what’s valued by a large company,” he says.

“A smaller company is usually more flexible, a lot flatter, everyone chips in, and people are often attracted to smaller companies because of that culture.”

“A lot of company culture is based on the relationships which develop in a small company. In a large company those often disappear – you don’t see others every day any more. There’s also less excitement about a big company. You’re not an upstart anymore – you become a number in a system.”

The acquiring business should be aware this may lead to reduced morale in those formerly employed by the small business. But there are things the small business owners can do to smooth the transition.

“Relationships are going to be impacted,” Gardner says. But you can consciously and maturely manage that as the transition happens. You could have small team meetings, catch-ups for a time, but it can’t stay as it was. It will change.”

Gardner says as a result of this, some people may choose to leave the company. But he says this isn’t necessarily a bad thing, as some people aren’t likely to flourish in the new situation.

Kohler and the AIBM team appear to have anticipated this and will pay bonuses to staff out of the proceeds from the sale amounting to $200,000.