Question

There is a surge of mergers and acquisitions among television networks, entertainment, and internet-related companies since 2010. Some have been completed, some have been stopped by regulators, and others are still in progress. How are these different from the AOL-Time Warner merger of the year 2000? Are the recent mergers and acquisitions likely to be successful? Why or why not?

Answer 1

These questions are very subjective and probably there is no right or wrong answer to them. My suggestion will be to use my answer below as a backbone and create your own answer.

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Sector comprising of television networks, entertainment, and internet-related companies have come a long way since last two decades. It's important to understand how macro environment these companies operate into had changed over a period of time:

• Way back in the decade ranging over 1990 - 2000, internet had just arrived. It's penetration was quite low. Usage was also low and mostly restricted to affluent areas and affluent people.
• There was not much consumer activism. They accepted and viewed what was shown to shem.
• Preferences over content was limited. People usually watched what was shown to them. Consumers were quite passive.
• There had been no marriage between online and offline media.
• Smartphones and smart TVs were not there then.
• Over a period of time, all these factors have changed significantly. Internet penetration has increased massively. People's dependence over internet has seen a paradigm shift. Today we can't imagine a world without internet, smart phone and smart TV.
• Consumers have become active. Their choices and preferences are clear. They just don't digest any content that's shown to them. The demand for richer content has gone up.
• The definition, type and mode of entertainment has changed over a period of time. People are willing to pay for their preferred mode of entertainment.
• The barrier between online and offline has thinned out. In fact, online is soon to eat up the offline space.

All these changes in macro environment has given way to:

• Large number and varieties of companies in this sector
• Companies with different age profile (some are newly incepted unicorn, some are as old as a century)
• Companies of different sizes (from a few thousand dollars to a few billion dollars)
• Companies in different scale (big, business across the globe to a few restricted to some local areas)
• Companies in different profit zones (some are struggling while others have so much free cash flow that they are acquiring a company every year)

Needless to say, in a mature economy with globalisation where world have become an internet village, there is not much place for so many companies. This has therefore led to a wave of merger and acquisition in the media space so that there is consolidation leading to emergence and success of select few.

But probably most of the mergers and acquisitions that have happened recently in the media, communication, TV, broadcasting and internet segments are different from the AOL-Time Warner merger in the year 2000:

• The merger of AOL-Time Warner laid the foundation of a marriage between media and internet. It was a paradigm shift in itself. No other merger would have created such a paradigm shift.
• AOL was an internet space leader, simple and relatively newly incorporated. AOL was still in the investment phase through external financing. Time Warner was stable, mature and more established. It was a giant in media space and was generating enough operating cash flows to take care of investment needs and was retiring its debt and paying dividends. Thus this merger was an alliance between a growing company with a s relatively stable and mature company.
• This merger is also a classical case of vertical integration. In the entire value chain, they played different role. While Time Warner created and supplied content, AOL used to distribute it on internet. So, in a way AOL was the customer and Time Warner was the supplier. Recent mergers in the space have taken place for horizontal integration either to increase financial muscle or gain geographical spread or gain penetration or business consolidation.
• The size of the merging entities: pre and post transaction. Prior to the transaction and way back in the year 2000, the market capitalization of AOL and Time Warner were $ 164 bn and 97 bn respectively. The size of the merged entity was supposed to $ 361 bn, thus resulting into creation of probably the tenth largest firm in terms of market value then. The merger transaction was biggest ever in the history of USA. No transactions in this space, since then had achieved this kind of size. (Please note the figures being talked about here are the figures of the year 2000)
• The deal ran into troubles within two years, mostly on count of burst in internet bubble. Many reasons can be ascribed in the hindsight right from timing of the deal through execution through cultural difference and to the logic or rationale behind the deal. In fact, there is an acceptance amongst the experts that this deal was a failure. Many of the cases of mergers and acquisitions, since then had been quite successful.

Are the recent mergers and acquisitions likely to be successful? Why or why not?

There is no magical wand that makes a merger or an acquisition successful. Success or failure of a transaction is dependent upon various factors:

• Is there a rationale?
• Is there a strategic reason for combination?
• Is there indeed a value creation or synergy?
• What are the drivers of value creation and synergy?
• Are they clearly identifiable and visible?
• Are they implementable.

If the answer to any or more of the question above, is "NO", then the deal will fail, sooner or later.

The transactions which are primarily driven by gaining international sale, scale or access in the short run; gaining market share or size in the medium run etc are bound to fail.

I personally believe that recent mergers and acquisitions might not be successful because:

• These transactions are are not directed at creating the value in the target. They are not aimed at improving the target's performance. Recent acquisitions are primarily to grow by horizontal combination (A + B) without any incremental value creation. Recent transactions are primarily to increase the might to push other competitors out of market. Such transactions may not survive in the long run.
• Such mergers are not able to gain cheaper access to technology. Their costs quantum and structure are by and large the same as they were prior to the transaction. Thus there is no cost savings, no synergies evident.
• There are cultural integration and business integration issues that were probably not picked up by lawyers and bankers at the time of merger. Such factors are bound to hamper the success of any business combination.