With AT&T's proposed acquisition of Time Warner, both critics and proponents of the deal agree on one thing ... the media mating season is very much moving into high gear. But before we start making lists of potential couplings, it's worth taking a look at how big M&A deals of this sort have performed in the media space.
"Media conglomerates as a whole have underperformed, especially since the age of the Internet. "Digital" is the enemy of barriers-to-entry that protect businesses and their profits," says Ava Seave, a partner with the consultancy Quantum Media and the co-author of the best book on the subject, Curse Of The Mogul (Penguin /2011).
Seave explains the problem this way: "traditional businesses lose profitability; and although new competitors can enter with these lower barriers, even more companies will enter as the barriers drop."
In Seave's book, she and her co-authors investigated deals including Murdoch, Redstone, and the ill-fated Vivendi debacle.
"We showed that in almost all cases, it doesn't help the scale of a company that combines owning distribution and owning content. If the price is right, in the financial sense, you could get a good deal and bring in a lot more money than something costs -- but in an operational sense, there is not a lot of synergy."
So, if there isn't the always alluring benefit of one plus one equals four, then why would any media company or tech company be on the hunt for M&A targets?
"Costs synergies are the only thing you can depend on -- i.e. firing people," says Seave. But how does that play out with the AT&T/Time Warner transaction? "Since the companies reportedly will be run as completely separate entities, that doesn't seem to be the plan."
Which begs the question, is this a good idea? Here Seave doesn't see a lot of new value creation "adding Time Warner to AT&T doesn't seem to affect the scale of either business. Media is made of so many verticals, each with their own scale requirements. TW and AT&T were already "at scale" in many of the areas they competed in; so by adding these very separate businesses together, it's just addition, not transforming subscale to scale."
And, in the end, that's the question that will be put to shareholders. Does this transaction make AT&T more valuable? Here Seave doesn't mince words. "Although AT&T wants to save itself and diversify, share holders can do that by investing in separate companies and businesses -- they don't need conglomerates to make the choice for them. If companies are becoming commodities, they should run themselves as efficiently as possible and "die with dignity." They shouldn't buy companies in categories that they don't have special muscles to run."
And of course, it all comes down to price. What is Time Warner worth? And who's team is best able to make a bid that is appealing to shareholders and the market, but at the same time reasonable enough that it can set expectations that can be met or exceeded?
"So who is best at deciding what a fair price for a creative property is?" Seave asks. Is it "Rupert Murdoch (content specialist) or Randall Stephenson (pipe guy)? Why didn't Murdoch's people go this high in the bid? It is so interesting that Peter Chernin, former Murdoch guy advised AT&T. He wasn't working with Murdoch when TW did not accept the Murdoch bid."