You have to wonder if AT&T CEO Randall Stephenson read “The Curse of the Mogul.”
The book, co-written by Jonathan Knee, Bruce Greenwald, and Ana Seave, is a data-filled take down of mergers like AT&T’s $85.4 billion bid for Time Warner Inc., which owns everything from HBO to CNN.
Almost none of these deals pay off for customers or shareholders.
“The single most consistent reason for underperformance in media companies is bad acquisitions,” the authors of the 2009 book write. “Mergers and acquisitions do not create value.”
The AT&T-Time Warner deal announcement touts “a combination unlike any other,” “a perfect match of two companies with complementary strengths,” and a billion dollars a year worth of “synergies,” which is how business people talk about cost-cutting.
But a review of past deals suggests Stephenson has his work cut out for himself, and there could be parallels to the disastrous failed AOL acquisition of Time Warner at the turn of the century.
Perhaps more than any other industry, media companies have long been run by “moguls,” executives whose personality and fame was often larger than the size of the companies they run. They were the faces of movie studios for much of the 20th century. And today, CEOs like Leslie Moonves of CBS are celebrities in their own right, making cameos on shows like The Late Show.
For the same reasons regular people feel emotional connections to certain movies, songs, and television shows, moguls have a track record of becoming enamored with “content,” even when that leads them to make bad financial decisions.
According to the book, in 2004, Douglas Shapiro, then an analyst at Bank of America Securities, took a look at how media companies would have fared if they hadn’t merged or acquired others. In some cases, like with Time Warner’s merger with AOL, he estimates Time Warner’s stock would have been about 2.5 times higher. In others, like Disney’s acquisition of Capital Cities (then the parent of ABC), the stock would have remained about the same, implying the deal didn’t add much of anything to the bottom line.
Shapiro, it should be noted, ended up with senior positions at Turner, which is a part of Time Warner.
What’s the advantage?
AT&T has about 130 million Americans using its cellphone network, and about 20 million customers paying for its DIRECTV satellite television. For now, it doesn’t create music, produce television shows, or make movies, but it does control a lot of ways this content gets to Americans.
And AT&T has a lot of advantages in the businesses it does control.
It’s expensive to own and maintain cell phone towers, and thousands of miles of wire. It’s expensive to own satellites. That’s why it doesn’t have many competitors.
And it’s not the easiest thing for customers to switch to the competitors it does have. Sure, at least now you can take a phone number with you from provider to provider but cellphone contracts and other hurdles mean that switching cellphone service or television provider takes more thought than, say, changing channels.
Media companies like Time Warner are in a tougher business. Many of the “competitive advantages” listed by many media moguls are “shams,” the authors say.
These include :
Deep pockets: “Businesses that provide deep pockets as the source of their competitive advantage have a predictable tendency to empty those pockets over time,” they write. A case in point is Sony’s purchase of Columbia Pictures after Coca-Cola’s brief ownership (yes, really – Coca-Cola once owned Columbia Pictures!).
Brands: Many big names in media have suffered “sudden deaths,” as the authors put it. Remember the Saturday Evening Post? Newsweek isn’t what it was. Plus, many consumers aren’t particularly loyal to media brands. They care more about individual shows and movies.
Talent: Having big, famous names signed to a media company can provide benefits (Howard Stern is pretty much keeping SiriusXM alive). But like Howard Stern, successful personalities also get really expensive really fast.
Plus, that emotional connection leads some leaders to make bad business decisions. Ted Turner almost destroyed Turner Broadcasting by paying $1.5 billion for the movie studio, MGM in 1986. He sold a lot of it back to businessman Kirk Kerkorian a few months later for a fraction what Turner paid. Reportedly, Turner really wanted to own “Gone with the Wind.” (He did once again a few years later.)
Content is not king
Moguls say media companies should be measured by other metrics because they’re managing creative people producing artistic content. But, the authors write, media companies as a group consistently underperform the market on average.
And this is a big reason why: The tools to produce successful shows and movies are more or less available to anyone with the cash to fund it. So while a network may have a successful run, or a movie franchise, over time, there’s little to stop a competitor from swooping in (think Fox News disrupting CNN). And successful content is often produced by talented individuals. As it succeeds, those people can demand larger and larger shares of the profits for themselves (think news anchors making millions, or film stars earning huge paydays). Netflix and Amazon have spent billions of dollars producing high quality television, giving Time Warner’s HBO a run for its money.
Reading the book 16 years since AOL’s botched purchase of Time Warner should offer some warning signs for AT&T. At the time, AOL surprised Time Warner officials with an estimate of the expected synergies, the savings and benefits that a combined company that would supposedly be impossible apart. Their estimate was $1 billion in savings, which is odd considering AOL and Time Warner had almost no overlapping businesses.
(There’s an immediate parallel to the latest deal: AT&T and Time Warner also have nearly no overlap, something the companies have actually pointed out when addressing concerns about regulators blocking the deal.)
AOL and Time Warner famously parted ways a few years later, effectively admitting the deal was a big mistake.
So, now we have AT&T, a company that’s primarily a wireless phone provider and the owner of DIRECTV satellite television, hoping to buy Time Warner, primarily a content creator.
Here are some questions customers, investors, and the public should be asking:
- Does the deal in any way make content cheaper to produce? Almost definitely not. AT&T isn’t currently in the creative business. Will AT&T be able to prevent competitors from accessing Time Warner’s content? No. It’s unlikely because of regulations, existing contracts with other cable companies, and it wouldn’t make good business sense to limit the networks’ audiences. What’s the point of owning both content and distribution? AT&T could always strike a distribution deal – even an exclusive one – with a company like Time Warner without outright owning it. And don’t forget Time Warner spun off its cable provider, which was later sold to Charter. There just wasn’t an advantage to owning the cable pipes and the networks like CNN. (Comcast, which now owns NBC, may be learning this, too.) What are the barriers to competitors encroaching on its turf? Anyone with money to burn can start creating content, no matter who owns the pipes that get it to customers. Netflix and Amazon spent billions to create their own content empires. AT&T would want its customers to have that content just as much as anything Time Warner produces. In media deals, the selling company (Time Warner, in this case) typically reaps most of the benefits of a deal, even when the acquirer doesn’t pay as big a premium as AT&T is. So, with AT&T offering $107.5 per share for Time Warner, which is currently trading far below that at $87 a share, and with AT&T’s debt load soaring to about $170 billion if the deal goes through, the challenges for the combined companies appear immense.
If there’s one takeaway from this book, it’s that most media mergers are bad ideas. The few that do succeed tend to work because the two companies are able to consolidate physical infrastructure like wires, and save money in the process. But even then, acquirers are often so eager to make a deal that they overpay.
Even if regulators approve the combo, which is an open question, AT&T will have to bet that owning creative content is better than just providing the pipes and towers that get it to customers. It’s hoping that when everyone watches video on portable devices, the economic advantage of owning networks and a movie studio will be different than it has been for previous owners. Or it could be a wake up call to AT&T’s Randall Stephenson that being a mogul isn’t as fun as it looks.