The Cost of Valassis' Suit vs. News America Is Eating Its Profit

(MoneyWatch)  You can spend years in the ad business without hearing the name Valassis Comunications mentioned, even though the company controls roughly half the direct mail in the U.S. and pulls in revenue of $500 million per quarter. Two years ago, Valassis came up with a bright idea: sue its main rival, News America Marketing Group, which controls the other half of the direct mail business, for trying to gain a monopoly through predatory pricing and coercive long term contracts with packaged goods companies and supermarkets. The $1.5 billion suit contained the juicy tidbit that News America used a video of the baseball bat beating scene from The Untouchables as an illustration of its corporate strategy.

Two years later, with the case set to go to trial in early 2009 and the ad economy in tatters, that suit is looking like a much bigger gamble than the company thought it would be. In its Q3 earnings, costs for the suit were $1.8 million. In Q2 the costs were $4.5 million. This is for a company that made a loss last quarter of $5 million, and whose revenue declined 7.2 percent to $563 million.

In other words, the costs of litigation are making a real difference on this company's profit level. This comes at a time when the economic environment is militating against the company: For every dollar Valassis spends in operating costs it gets back just $1.03 in revenues, down from $1.09 the year before. That's even lower than the major agency holding companies.

The suit has also been disruptive for Valassis. Check the scale of the litigation, since 2007:

Plaintiff has produced 107,479 documents and defendants have produced 374,404. The parties expect the total number of pages of documents produced between them to be in the millions.

In sum, the stakes are high for Valassis, especially if it loses the case and a judge awards costs to News America. The irony here, for those of you with long memories, is it was Valassis that, in 2004, was caught by the FTC attempting to persuade News America to join it in a price-fixing scheme.