M&A: Back in the room
For the last few years, M&A has been off the menu; recession tends to dull the corporate appetite, no matter how many dishes the desperate investment bankers offer up.
But business doesn’t stop and many companies have harvested a lot of cash or shed a lot of debt. As economies uptick shareholders start expecting accelerated returns and directors can either hand them the cash in special dividends, or start eyeing up rivals.
Presumably directors do always truly believe the takeover route will generate better returns, but there’s always a suspicion the important thing it generates is activity for its own sake, always egged on by corporate financiers who only make money when deals are done. A cynic might also think managers sometimes characterise acquisitions as game changers when what they mean is goal post movers as they realise they can’t deliver promised performance from their company as it is. They can either get on with the day job of improving their business or go for the excitement of the deal.
Anyway, M&A, whatever the motivation, is certainly back in fashion. In the transmission business, bigger does mean better; there are economies of scale in buying power across technology, marketing, back office, supplies, civil engineering and staff. They are all fairly easy to assess and forecast within a range of a few tens of millions over several years. So, setting prices shouldn’t be too tough on these prosaic parameters.
But then you add in the more difficult stuff to value; branding and the opportunity cost of another rival making the purchase instead of you. That’s when you start getting prices that are huge multiples of current earnings which seem untenable at face value.
Then there’s the really difficult stuff. Because it is highly sensitive – look at the various recent blackouts and stand-offs – no one is quantifying the predicted content buying savings of mega mergers of distribution platforms, be they DirecTV or Time Warner Cable or Kabel Deutschland, or whatever.
Access to popular content in many formats is the key to keeping subscribers on-net – no matter whose net, or how big it is. In the age of social media there is no such thing as a consumer who doesn’t know what is popular and what is available elsewhere. Look at Game of Thrones, look at House of Cards, look at the English Premier League. Unpopular content will have to bow to the increased purchasing power of a mega network. Popular content – and that’s the stuff which costs – will not.
Still, valuing mega network mergers is easy compared to valuing content companies themselves. I was once running a publishing subsidiary of a big UK TV company that went into a sealed bid process for a – at the time – famous Hollywood production company. It bid $320 million, but it later emerged the next highest bid was $180 million. The producer’s famous shows were all in their last network series and none of its current pilots were picked up. It didn’t end well.
Recently, several network providers have tried to hedge their bets in content by buying content companies (despite one of them having only recently flogged off its previous ill fated content play). If they are lucky the investments will come off, but it will be luck, as it is a bet on individual creativity and collective consumer taste. Not exactly easy items to forecast.