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Not all mergers made in heaven

Jun 24, 2002  •  Post A Comment

Some of the media mergers that have commanded the most flashy investor premiums and press coverage in recent years may not have been such good ideas after all.
While that may seem obvious now, with media company valuations scraping the bottom in a volatile market, the players engaged in the next round of deregulation-driven deals are bound to make some of the same merger-related mistakes.
The fact is media mergers have for the most part failed to live up to most of their expectations and lofty goals. In a roller-coaster economy, consolidation has mostly rendered mounting debt, shrinking cash flows and plunging values that in the first quarter alone shaved more than $100 billion of net worth off of the Standard & Poor’s 500, many of which are media concerns.
No synergy necessary
In an effort to re-examine and learn from a decade of media mergers, veteran analyst Tom Wolzien of Sanford Bernstein has published a comprehensive report that is quick to remind that some of the best reasons given for a big deal before shareholders vote often came back to haunt struggling merged entities.
For instance, Mr. Wolzien wastes no time taking on “synergy,” a well-intentioned goal of many headline deals that has been difficult for most merged entities to achieve while integrating two giant corporate structures. Mergers done for the sake of realizing synergies “are more likely to work if individual business units remain on track,” Mr. Wolzien said in his report. But of course these days, almost nothing stays on track for long. Just consider the rapid declines of AOL and ABC.
“Deals pitched to The Street on synergies, such as Disney/ABC and AOL/Time Warner, may have realized some or all of the synergies promised, but gaining synergies has failed to mitigate overriding declines in core businesses,” Mr. Wolzien said. Most often, those declines are the result of external factors, such as economic and industry cycles, or management’s failure to execute a merger vision.
AOL Time Warner’s new CEO Richard Parsons conceded during a recent speech that he is a corporate caretaker in search of a new strategy. The deterioration of the merger vision that appeared so plausible only 18 months ago when AOL Time Warner was created, and the swift exit of his predecessor, Gerald Levin, should have the amiable Mr. Parsons instead crying, “My kingdom for a horse!”
Although AOL Time Warner has managed some clever and effective initial synergies among its diverse media units, including cross-platform marketing, it has barely skimmed the surface of its merger plan, Mr. Wolzien noted in his report, “Media Past as Prologue.”
It’s an example of how media mergers that are fashioned for the sake of scale, unless they are initiated at a low enough premium to mitigate the risk, are in for a short-term struggle, Mr. Wolzien said. The mergers most likely to succeed are based on “realistic expectations, solid leadership and reasonable pricing,” he said.
Viacom a winner
In a marketplace where mergers have failed more times than not, Mr. Wolzien identifies only one winner: Viacom. Why? Viacom’s is “the only management, individually or as a team, that has consistently produced value for shareholders throughout multiple mergers,” Mr. Wolzien said.
Preserving that track record has been the most potent impetus for Viacom Chairman Sumner Redstone and President Mel Karmazin-both major shareholders-to put aside their publicly displayed differences and get along.
Shareholders of CBS and King World Productions have seen their resulting stock outperform the S&P 500 by 50 percent since the companies’ 1999 merger. That stands in stark contrast to Ted Turner and other Turner Broadcasting shareholders who took Time Warner stock in those companies’ merger and have since seen it plummet 54 percent below the market since the AOL deal.
Though like other media stocks, Viacom remains off its one-year highs, it is trading about 75 percent beyond its post-Sept. 11 lows, boosting its capitalization to about $87 billion, or about where AOL Time Warner was when it merged.
“Because of Viacom, there are no clear indictments of vertical integration, as some have suggested,” Mr. Wolzien said.
Deal-by-deal analysis
Mr. Wolzien’s deal-by-deal analysis, in which he highlights what went wrong and what went right with prominent mergers since the late 1990s, is particularly enlightening. In the case of Disney’s acquisition of Capital Cities/ABC, investors assumed Disney’s stellar studio and consumer goods returns would continue unabated and never imagined the company would be plagued by continuous, high-level management problems. On the other hand, AT&T shareholders were so blinded by their plummeting telephone fortunes, they didn’t even see what was then the negative cash flow and costly system upgrades of acquired cable companies such as TCI.
Even with all the problems and complexities, media companies that already are big by normal corporate standards are about to become bigger. The primary catalyst for more mergers over the next five years will be more sweeping deregulation that is sure to include the easing or outright elimination of cross-ownership of cable and broadcast television and radio, cable and newspapers. The elimination of cross-ownership rules restricting the merger of studios and networks in the 1990s is what set vertical integration in motion, even though media companies have yet to cash in big time on the strategy. It rendered some of the most reasonable corporate marriages: Viacom’s acquisition of CBS and of Infinity, and Disney’s acquisition of Capital Cities/ABC.
This time around, one of the big sleeper plays will be allowing the joint ownership of cable systems and television stations in the same markets and of newspaper and television stations in the same markets. The possibilities, as Mr. Wolzien speculated, are mind blowing. General Electric Co., which owns NBC, would be free to acquire AOL Time Warner, which at the latter’s current record-low trading levels doesn’t seem like such an unthinkable stretch. Imagine for instance, Time Warner’s cable system in New York working with WNBC-TV. Such a media conglomerate could even reach out and snatch up The New York Times Co. or a Tribune Co.
Another potentially lucrative union would be Viacom and Comcast. It would allow for ownership of cable and TV stations in markets such as Philadelphia and the more direct integration of big-name content with distribution.
However, Mr. Wolzien places little emphasis on the major management shifts due at nearly all of the top media companies-whether they be from generational turnover or internal unrest-that will have a significant impact on past and future mergers.
But he does remind us that with each new merger possibility comes potential pitfalls, such as assuming that the buyer’s management can “fix” the company being acquired. For instance, unless AOL Time Warner can constructively resolve its existing financial and management issues, not even GE’s cunning management approach can save it. Big doesn’t have to mean better-it can just mean plain old bad news, he said.
Merger rationale
The rationale for doing deals will continue to vary as widely as the players-and in some cases have disastrous results. One of the most powerful and unjustifiable reasons companies will continue to merge is pure ego, as in “the one who dies with the most toys wins.”
Companies also will continue to join forces to expand their packaging, content production and distribution platforms (such as AOL Time Warner); to be self-sufficient supplier-distributors (as with Viacom and CBS); to strategically change or reposition themselves (as when Westinghouse bought CBS and Vivendi bought Universal); or for a company’s cash resources (as when Viacom bought Blockbuster).
And then there are those merger rationales to be staunchly avoided. Take for instance AT&T Corp.’s notion that it could save its dying long-distance business by buying its way into brand-new industries saddled with their own problems, which turned out to be the defunct TCI, MediaOne and ot
her debt-heavy cable operators.“ Buying into the unknown of a new industry delivers uncharted stock market results, as happened with the online unit of AOL Time Warner,” Mr. Wolzien said.
Clearly what works for one merger does not necessarily work for another. The careful and balanced exchange rate between Viacom and CBS has resulted in a 28 percent growth for both sets of shareholders. Compare that with the 50 percent exchange premium Time Warner shareholders enjoyed when they sold out to AOL, only to see their combined company’s valuation and stock price fall far below where Time Warner traded before the transaction. And what about the Capital Cities shareholders: Those who chose Disney stock have seen those shares underperform the market by 54 percent. The Capital Cities shareholders who chose cash would have reaped the best rewards if they indexed their cash to the S&P 500, Mr. Wolzien said.
In the end, Mr. Wolzien gave the pending Comcast-AT&T Broadband merger high marks for being well positioned for prosperity. “Having seen its early post-merger announcement drop, Comcast is expected to outperform the market as investors gain comfort with the company’s ability to grow [AT&T Broadband’s dismal margins].” Comcast management appears to have covered all the bases, he said. But then, if we’ve learned anything, it’s that hindsight is a powerful force that isn’t always heeded.