Global Policy Forum

Big Media Mergers Raise Big Doubts


By Frank Ahrens

Washington Post
May 14, 2002

When the cable channel CNNSI was launched in 1996, it was lauded as a new-world media marriage. Time Warner's Sports Illustrated would join with corporate cousin CNN and a new creature would be born, one combining the editorial heft of print with the instantaneous global reach of television.

Four years later, the sprawling Time Warner was bought by another media titan, America Online, in the largest acquisition in history. The new AOL Time Warner Inc. promised even broader reach for its channels such as CNNSI, by cross-promoting them on the AOL Internet service.

Instead, in 2000, CNNSI staff members were laid off. Last September, the channel lost its coveted 11 p.m. sports broadcast on CNN. AOL Time Warner in January finally decided to pull the plug on CNNSI, a victim of flat ratings -- it never garnered as many viewers as chief rival ESPNews. Even the might of the world's largest media company could not save it. CNNSI goes dark at midnight tonight.

The saga of CNNSI is just one example of how synergy, the seductive prize that drove a series of media mega-mergers over the past few years, has proved so elusive that some in the industry are asking whether it can be achieved, or even whether it should be attempted.

The results so far have not been encouraging:

AOL Time Warner last month announced the biggest quarterly loss in corporate history, pushing its share price to a new low, a close of less than $17 on Friday.

France's Vivendi Universal -- the world's No. 2 media company, which owns the Universal movie, music and theme-park companies, as well as a telecom subsidiary and a water utility -- finished 2001 with a $12 billion loss, the largest in French history. It now finds its long-term debt rating one notch above "junk."

Viacom Inc., parent of the CBS television network, Paramount Pictures Corp. and publisher Simon & Schuster Inc., absorbed a $1.1 billion loss for the first quarter of this year.

Executives of the media giants and some industry analysts insist that there is no systemic problem with large-scale media acquisitions and that it is too early to issue a meaningful report card on synergy. They say last year's advertising climate, the worst since World War II, has conspired with a recession to keep companies from achieving their goals; the jaw-dropping one-time charges on companies' balance sheets are merely the product of a change in accounting rules.

But the write-offs essentially reflect the fact that the companies paid too much for their acquisitions, based on overly optimistic expectations that the whole would be greater than the sum of the parts.

Companies that are more homogenous, such as Viacom, are performing better than rivals that own more disparate properties. It turns out that a fickle Wall Street -- which only a few years ago cheered the mergers as a way for companies to cut costs and boost revenue -- now finds itself spooked by the wildly diverse companies.

Wall Street "doesn't want companies to be portfolio managers," said Bill Battino, a partner with PWC Consulting. "They want to be the portfolio managers. The more heterogenous a company is, the more difficult it is for the Street to evaluate its performance."

This has opened a debate as to whether synergy is a reachable goal. Even some of those who helped engineer the corporate marriages look upon synergy with a wary eye.

"I've never been a believer in synergy, but I mean that in a certain context," said Barry Diller, who last winter merged his USA Networks Inc. television company with Vivendi Universal. Diller is a member of the board of directors of The Washington Post Co., which, in addition to The Post, owns Newsweek magazine, six television stations and a cable company.

"To impose synergistic behavior on separate entities is ill-advised," Diller said. "You're far better off developing businesses on their own -- in their own silos, if you will -- then letting some natural things occur when good management enables it."

For instance, as Diller oversees Vivendi Universal Entertainment, he suggested that last summer's Universal Studios movie hit "The Fast and the Furious" might make an exciting ride at a Universal theme park or an action-packed television show for USA Networks. But Diller said movie executives should not begin the filmmaking process by asking: How could this movie be turned into a theme park and a TV show?

USA executives recently met with Vivendi brass at the company's Orlando theme park to literally get to know each other, even before they can begin strategizing on how the two companies can meld.

There appears to be no easy explanation of why synergy is failing to make headway, other than time. "The cost synergies are what the companies can achieve first," PWC's Battino said. "Realistically, it takes a couple of years to start to drive revenue synergy."

In many cases, however, the gears of synergy are simply not meshing. Vivendi Universal was for years an old-fashioned French utility. Over the past few years, Chairman Jean-Marie Messier has been crafting an extraordinary transfiguration of his company, converting it via a series of high-priced acquisitions into an entertainment conglomerate.

It has been a labored metamorphosis. Vivendi Universal is still something of an enigma to American investors, it carries a great deal of debt and it faces peculiar problems at home: Messier had to face down a mutiny at his French television company by employees who believe the expanding transatlantic reach of his corporation equates to the Americanization of France's cultural treasures.

Even at the Viacom conglomerate, which has had the best stock performance of the major media companies, corporate cousins have squabbled: CBS affiliate television stations complained when UPN stations, also owned by Viacom, aired repeats of "The Amazing Race 2," stealing audience share. In response, CBS pulled the shows from the UPN stations. Viacom has kept itself streamlined, limiting its portfolio to mostly television, radio, movie and book companies. This is one reason that analysts often rate Viacom as a robust media giant, even though its stock is trading at about $10 below its high of the past year.

The company has eschewed purchasing assets that other media giants consider complementary. "As we speak today, we have made a decision that we are not going to be in the cable or satellite distribution business," said Richard J. Bressler, Viacom's chief financial officer. "Those businesses have a lot of technology challenges, they're very capital-intensive and they don't fit our financial profile."

Other media titans have found varied success in coupling their assets.

Thomas O. Staggs, Disney's chief financial officer, called ESPN an "under-exploited, underdeveloped asset" when Disney bought it as part of the Capital Cities-ABC Inc. merger in 1995. Now, with several cable channels, a magazine, a product line, restaurants and viewership in the tens of millions, ESPN is considered more than a television channel -- it has become a brand. "The fact is, we've been able, because of Disney's strength in building brands and franchises, to make ESPN grow," Staggs said. "The people at ESPN deserve credit for executing it, but one thing Disney does pretty well is brand."

Other gains come incrementally, in a fashion that does not garner headlines. A recent "soap" day at Disney's theme parks that featured soap opera stars from ABC's daytime dramas and Disney's SoapNet cable channel "drove incremental attendance" at the parks, Staggs said.

But Staggs cautioned: "If nothing else, what you've seen going on in the market over the last year or so will perhaps serve as a reminder that an acquisition in and of itself is seldom enough to create lasting shareholder value." Which is exactly the problem that giant AOL Time Warner now wrestles with.

Last month the company took a $54 billion write-down in goodwill on the 2001 purchase of Time Warner. Goodwill, the amount a buyer pays a seller in addition to the value of the seller's assets, used to be written off over a period of years to lessen its impact on the buyer's balance sheet. But new accounting rules require that the write-down now be accounted for all at once.

Incoming chief executive Richard D. Parsons argues that most of AOL Time Warner's businesses, aside from the America Online division, are performing well. "We're the No. 1 movie company, the No. 1 online company, the No. 1 premium cable network company, the No. 1 cable network company, No. 2 cable company, No. 2 music company," Parsons said during a panel discussion at last week's annual cable television industry convention in New Orleans, as reported in the New York Times. "What am I missing?"

At the time of the AOL-Time Warner merger, which came at the height of the dot-com boom, the new company set high growth goals based on the rollout of new products and services. There have been some cross-promotional successes. AOL Time Warner said it is gaining about 100,000 new subscribers a month to Time magazine by selling subscriptions on its AOL online service. But the company has struggled to meet its targets for signing up customers to its high-speed Internet service or meet other ambitious advertising and subscriber goals.

"AOL Time Warner is being punished by Wall Street for having such high expectations," said Standard & Poor's analyst Scott Kessler.

Some synergy critics assert that corporate synergies never boost stockholder value, that promised efficiencies are oversold and that meshing corporate cultures is difficult at best. From a strict interpretation of success, shareholder value, media mergers have rarely worked out, some analysts say. "Even before the AOL deal, Time Warner stock was never as high as it was separately before Time and Warner merged" in 1989, said Mark Edmiston, managing director of AdMedia Partners, a New York investment banking firm. "In my personal opinion, synergy doesn't seem to work."

The synergy climate has so changed over the past two years that AOL Time Warner is considering an IPO for its stake in Time Warner Cable, the nation's second-largest system, behind AT&T Corp.'s cable unit, with nearly 13 million subscribers. This would raise money for the parent company but, more symbolically, could implicitly admit that parts of the current model may not be working.

A group of Harvard University business students has another idea. Four of the school's undergraduates recently won a contest sponsored by Goldman Sachs Group Inc. The challenge: How would you fix AOL Time Warner? Teams from Dartmouth College and Yale University proposed maximizing synergies. The winning Harvard team, however, argued that the media Goliath should abandon synergy and operate as a holding company, letting each business under its control prosper in its own fashion.

In late April, AOL Time Warner's Parsons addressed a group of Ivy League business students and referenced the contest when he jokingly asked if anyone else had an idea: "I'm desperately in need of a strategy," the incoming chief quipped.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.