A media merger in need of a crystal ball
Problems with major deals were not obvious at first
Friday, December 4, 2009
The media landscape of the past decade is littered with mega-mergers that became mega-failures. Why should Thursday's proposed marriage of Comcast and NBC Universal be any different?
If the past is any guide, the answer is often hidden at first, which is why these mergers are such expensive gambles -- there's little way of knowing how they'll turn out.
"I think this is a different time and a different deal than any previous transaction," Comcast chief executive Brian Roberts told investors Thursday, when asked pointedly why this deal is different. "The timing is, I think, very fortuitous, because of where the economy hopefully is going. The size, the deal, really is quite appropriate. It is not really stressing."
The Comcast-NBC tie-up won't be finalized until regulators have had their say. But it fits the mold of several former media mergers: combine content and distribution into one titanic package, designed to cow competitors and give customers a one-stop shop.
Where it differs from its predecessors is the cost. The $14 billion paid by Comcast to get 51 percent of NBCU is far less than some of the blockbuster transactions that preceded it.
The epic failure of media mergers was AOL-Time Warner, valued at $160 billion, thanks to dot-com stock price inflation. It was announced in 2000 and is finally ending next week, with the spinoff of AOL.
The merger was supposed to combine old media content with a new media distribution system, marrying the Internet with Time Inc.'s 150 magazines, Time Warner's cable system, Warner Brothers' movie studios and television assets including CNN, HBO and the WB network.
But the cultures of the two companies never meshed, and, it turned out, not enough people had access to high-speed Internet at the time, making it difficult for consumers to watch video online. That was a hidden truth of the merger.
At the same time, a stodgy French water and sewage treatment company was trying to turn itself into a media giant, chasing the rapidly growing entertainment dollar. France's Vivendi bought Universal's entertainment assets in 2000 in a $30 billion deal, creating Vivendi Universal, putting Universal movie studios, theme parks, the world's largest music company, and lucrative cable channels, such as USA Network, under one roof.
But all the buying nearly bankrupt Vivendi Universal. The surprise in that merger was billions in debt. The company was forced to unload most of its Universal assets to NBC in 2004, owned by General Electric. GE now plans to send them to Comcast.
"I think what you're seeing is the pure-play companies winning out," said AOL veteran Ted Leonsis, an expert on mega-media mergers. "The days of the conglomerate having a little media here, a little bit of iron over there and some computer somewhere else, that strategy did not hold because you need pure focus and expertise" in your businesses, he said.
The big -- and nearly lone -- success story of mega-media mergers in recent history is Walt Disney's 1996 $19 billion purchase of Capital Cities/ABC, a merger that did not try to do too much and that now looks like a bargain. Disney already had theme parks and a movie studio. With ABC, Disney got a broadcast network and a chain of radio stations.
It also got a come-along, which proved to be the surprise of the deal -- sports cable network ESPN.
In 1996, ESPN was firmly established but was nowhere near the revenue- and profit-generator it is now. In Disney's fiscal 2009, just ended, the cable networks (largely, ESPN) provided 30 percent of Disney's revenue and a whopping 64 percent of the company's operating income.
That's the kind of surprise that Comcast's Roberts -- and his shareholders -- are hoping to find in NBCU.