Vaunted marriages show more fizzle than sizzle
There are no bad mergers, just bad deals. Well, maybe.
In buying Time Warner, AOL chairman Steve Case pulled off perhaps the best media deal of all time. It also may go down in showbiz history as the worst of all time.
It’s not that AOL and Time Warner are a bad match-up: The problem for TW is that the majority of stock went to AOL, the company with only 20% of the cash flow. Good merger, bad deal.
Of course, there have also been good deals and bad mergers.
One example in Warner Bros.’ buy of Atari, only to discover it had no idea how to manage the company or what to do with it. Same is true for Matsushita’s purchase of Universal.
For all the megadeals that have transpired in showbiz over the last few decades, few jump out as big successes — especially under the current revisionist thinking that bigger is better.
Still, don’t be surprised if there is at least one more big merger in store among the media congloms. Those who ignore history . . .
Etched into the annals of showbiz dealmaking are a few seminal events: Sony’s audacious buy of Columbia, Steve Ross’ crusade to acquire Time Inc., Viacom’s amalgamation of Paramount, Blockbuster and CBS over a five-year campaign of conglomeration and Rupert Murdoch’s bold roll-up of U.S. TV stations.
In most of these mega-mergers, sellers typically do better than buyers. Certainly Coca-Cola did well selling Columbia to Sony in the 80’s.
Mergers & acquisitions are the lifeblood of the modern-day imperial CEO. And showbiz is largely defined by its dealmaking prowess. But the corporate world, with more than its fair share of Napoleonic CEOs, may suffer from having more shrewd dealmakers than expert managers to pull them off.
When Disney bought CapCities/ABC for $4 billion in 1995, Michael Eisner trumpeted that mergers are about making 1+1=4. Since then, many have challenged the theory. But if that’s not true, what are they about?
In a nutshell, they’re about ego, ambition and paranoia.
And why do most not work? Ego, ambition and paranoia.
Variety polled some industry vets of these mergers, asking about the best and worst deals.
Of course, “best” and “worst,” it appears, are a matter of perspective.
Viacom’s acquisition of Warner cable nets Nickelodeon and MTV in 1984 goes down in TV annals as one of the best deals ever — for Viacom. For Warner, it was easily one of the worst. (In fact, management didn’t want to make the deal, but were forced into it by a major stockholder, Herbert Siegel.)
In judging these mergers, there are a few criteria: How it affected the stock short-term and long-term; whether it made the company better, rather than just bigger; and whether the deal achieved true vertical integration (i.e., did the various branches of the company feed one another? Can the company extend its product line or widen its market?).
The best way to appraise a deal is to look at it six years later, says media consultant Roger Smith, himself a former honcho at Warners in the 1970s and 80s. The company must say that it’s doing better than if it had simply re-invested the cash in its own stock.
Here are the biggest showbiz mergers of the last few decades, starting with the most recent.
AOL TIME WARNER
Time and Warner merged in 1990, but as the stock languished for five years, most pundits labeled it a mistake. They have since been proven wrong. Now, few deals arouse more heated debate and angst than the M&A disaster du jour: AOL with Time Warner.
Then-chairman Gerald Levin has taken the blame for gambling the ranch (and 100 years worth of valuable media assets) on a 5-year-old dial-up Internet provider.
“The AOL deal never would have happened under Steve Ross,” maintains Manny Gerard, chairman of Gerard Klauer Mattison and former chief operating officer at Warner under Ross. “Something in his soul would have warned him about the lopsided terms of the deal and the unquantified power of the Internet.”
“There’s no going back, share-price wise, but I have a hunch that five years from now, having that Internet distribution may be viewed as a very good thing,” says Gerard.
Ousted Viv U chief Jean-Marie Messier’s unprecedented global acquisition spree has made the conglom a poster child of poor M&A design and execution. Though we may never know how the pieces would have hung together, the French company was pushed to the point of bankruptcy after it amassed a huge amount of debt in the name of “new media.”
“I’ve watched these characters for a long time, and I’m not sure Messier really had a strategy other than the fact the entertainment business was a hell of a lot more interesting than a water company,” says Gerard.
After kicking the tires of John Malone’s TCI cable business, Bell Atlantic ran as far away from cable as possible. However, Michael Armstrong’s aging telco AT&T embraced TCI as its savior. Malone looked like a genius, walking away with the juiciest programming assets and a huge chunk of stock.
In the end, though, both parties suffered. Malone — an apostle of the all-stock, no-tax deal — has lost hundreds of millions of dollars in value off his AT&T stock, while AT&T was forced to bail out of cable and is in the process of off-loading the asset to cable operator Comcast.
Between 1987 and 1992, Japanese adventurers made some 30 investments in Hollywood. The most high-profile were Sony’s buy of Columbia and Matsushita’s purchase of Universal.
In a deal brokered by Herb Allen, Sony overpaid for Columbia — and then it shelled out $600 million to install Jon Peters and Peter Guber to run it. Implausibly, Sony wanted predictability in the movie business: At an early meeting, Sony honchos listened to staffers’ projections of films’ hits-flops ratio for the upcoming years, then famously requested that Columbia “only produce the hits.”
Sony founder and chairman Akio Morita “was an egomaniac, and he was willing to pay whatever it took (to get Columbia and CBS Records),” notes Jerry Hass, professor of finance and business strategy at Cornell U.”The price that (Columbia parent) Coca-Cola extracted from Sony during negotiations in 1989 rose from $3 billion to nearly $5 billion in a matter of weeks.”
The most optimistic bidder is bound to attach too much value to synergies, pay too much and never get a sufficient return on investment, Hass explains.
However, once the Japanese electronics giant wrote off $3.6 billion in 1994, its Columbia deal didn’t smell so bad. “Major studios with libraries are like beachfront properties. In the long run you can’t pay too much for them,” counters Smith.
Matushita’s $6.59 billion MCA buy was a copycat deal with all the same cultural and managerial downsides as Sony.
Frank Biondi — who was a top exec at Paramount, Viacom, Coca-Cola TV and subsequently at Universal 1996-1998 — believes that the most fundamental change that has made these deals hard to pull off for the buyers is the sheer scale of the entertainment biz.
“In the 1970s and 1980s, when a $1 billion company was considered a big entertainment firm, you could be successful with one skill set: picking good product. Today, these are $30 billion media companies with five or six different divisions. I’m not sure we have sufficiently evolved management to pull this off,” he opines.
Trying to achieve true synergy (beyond pure cost-savings) is a challenge, and even the more decentralized congloms like News Corp. often fail to justify the prices they spend on acquisitions.
One pact that gets consistent praise: Sumner Redstone’s $9.5 billion deal that merged Paramount into Viacom and Blockbuster in 1994.
The new entity used the Paramount movie library to drive global expansion of cable networks; at the same time, the companies exploited cross-promotions and enabled cable networks MTV and Nickelodeon to venture into movie production.
Biondi, who witnessed the merger during his 1987-1996 tenure at Viacom, maintains that good management, incremental synergies and good timing have a lot to do with longterm success.
The competition from Barry Diller raised the price and made it an expensive deal, “but Viacom reaped benefits quickly thanks to the cash flows generated by Blockbuster,” says Biondi.
Viacom also got the management right. Unlike at Time Warner, where divisional heads were all-powerful and corporate in-fighting common, Viacom units are run as “managed fiefdoms,” which provides independence while minimizing resistance to working together when necessary.
Chairman Michael Eisner predicted that ABC and Disney would find synergies “under every rock,” and set about making such synergies the bedrock of its strategic plan.
Instead, Disney bought a declining network biz and spent much of subsequent management time trying to fix the problem. Eisner’s error, say colleagues and pundits, is his inability to keep the kind of strong management team that could make the business hang together and grow as intended.
Evidence suggests that when creative companies get into non-creative businesses, the managerial challenge can be insurmountable. CBS fumbled its technological experiment in the 1950s when it took over TV set manufacuter Hystron. Two decades later, Steve Ross at Warner took a $25 million risk on gamemaker Atari in 1976, enjoyed one bonanza year in 1981, then watched helplessly as the Japanese stole the videogame thunder.