Wednesday, June 15, 2005

Love and Marriage: Viacom's Divorce is a Natural Part of Media Industry Evolution

One of the wonderful things about documentation (whether text, aural or visual) is that it's akin to leaving a trail of breadcrumbs to find your way back to where you started. For those of us in the research and analysis business, it's a method for keeping score: what did you say, when did you say it and how accurate were you? However, most of the time it is too daunting to go back into volumes of records to compare then and now, though digital storage and improved search engines are changing that dynamic.

To get to my point: Richard Siklos, in London's Daily Telegraph, is just one of several who have commented of late on the momentum for divestiture in the media industry. He wrote (see the entire column here):

Media giants have been assembling and disassembling themselves for years. Remember when John Malone split his cable and programming assets from the old Tele-Communications, forming Liberty Media, then sold the cable business altogether? Or the whole Seagram-Universal-Vivendi debacle? Time Warner has only just unwound Time Warner Entertainment, a strange construct it created years ago to house some of its best assets in partnership with outside investors.

Adam Thierer has been chronicling the slew of announcements here and here (and more).

This is preface to a bit of personal gratification I found in yesterday's announcement that Viacom's Board voted to deconsolidate itself into two pieces, as the most recent development in this series of announcements of media company divestitures. I've held for many years that many media mergers were bad news. Not because they were a sign of any sort of economic or thought-control monopoly, nor as speculation that they endangered journalism or civic discourse. I thought they were bad news because they were simply (but expensively) bad business decisions. As such they drain resources from the content they could create or the distribution they could provide. In my strategic view many did not make sense. CEOs talked about synergies that I just did not see as being realistic. The technologies did not mesh nor did the business models. The Time Warner-AOL merger was the high water mark of ill-advised combinations.

Fortunately I documented my (in hindsight) right-on analysis. In the 3rd edition of my book, Who Owns the Media? (on page 566) I wrote that vertical combinations in particular were ill-advised. The perpetrators would need to "undo them years later." And so they are. I continued:

In the real world of business, sometimes what looks like monopoly power from the outside can drag down profits, development and growth when looked at from the inside. Eventually, savvy managers divest as well as acquire.

And so it is coming to pass. And for just the reasoning I suggested. (Hear my horn tooting?) Following is a five year chart of the stock performance of Viacom, News Corp., Disney and Time Warner, the four largest publicly owned media conglomerates, compared with the Dow Jones Industrial Average. (A two year chart would look much the same). Viacom performed the poorest. But every one is trading well below what they were worth in 2000, while the Dow ended on Tuesday roughly where it started.

What this says is that investors-- mostly institutions and similar aggregators of yours and my 501k and pension funds-- have come to the conclusion that big is not always better. Having more and more Web pages indexed in Google's data servers is better -- and profitable. A merger between Google and eBay, for example, would be neither.

Given the dramatic changes in the information industry over the past few decades and into the foreseeable future, it would be ludicrous for incumbent players not to be looking for new opportunities, including mergers and acquisitions. A newspaper company today that restricted its investment to new presses or adding journalists would be signaling its own downward spiral to death or selling out. The recent acquisition by The New York Times Co. of makes sense strategically -- though I might question if the $410 million cash price paid was too dear.

When Viacom's chairman, Sumner Redstone, announced the acquisition of CBS in 1999 he said, "This partnership seems almost dictated by destiny." Like many marriages, the match made in heaven may end with divorce when the incompatibilities that could have been spotted initially were papered over by infatuation. Corporate mergers seem to be no different -- they are created by men and (less often) women who are prone to mistaking the excitement of the deal for the rationale underlying business logic. The Viacom separation is just the latest and most dramatic of the natural ebb and flow of the media industry's dynamism.

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