The return of media merger madness

It seems like everyone is wheeling and dealing in the media sector. Are more mergers on the horizon?

By Paul R. La Monica, editor at large

NEW YORK ( -- It's media merger mania all over again on Wall Street.

With News Corp (Charts, Fortune 500). making an unsolicited $5 billion offer for Dow Jones (Charts), Thomson hoping to buy Reuters in a merger worth $17.5 billion and potential deals in the works to take Clear Channel Communications, Cablevision and Tribune private, it would seem to be a great time for investors to bet on more takeovers.


According to figures from research firm Dealogic, 372 mergers in the traditional media business (print, broadcast and cable TV, radio and movies) have taken place so far this year across the globe. Eighty-one of those were for U.S.-based companies.

While that's down slightly from the 448 deals done through the same point of 2006 (109 in the United States), the mergers are getting much bigger. This year's deals are worth $93.8 billion compared to a value of $55.5 billion for last year's media mergers.

And these numbers don't even factor in the deal-making in the world of online media. Google (Charts, Fortune 500) agreed to buy DoubleClick for $3.1 billion last month and Yahoo! (Charts, Fortune 500) announced it was acquiring the 80 percent in Right Media that it didn't already own for $680 million.

Media experts expect many more deals on the way, particularly since the "old" media companies are seeking to reinvent themselves in order to cash in on the growing number of viewers/listeners/readers/ that are flocking to online media sites like the ones owned by Google (i.e. YouTube) and Yahoo.

"There is a lot more consolidation ahead," said Tolman Geffs, a managing director at Jordan Edmiston Group, a media mergers and acquisitions investment bank in New York.

"There isn't such thing as old media anymore. There's diversified media," Geffs added. "Every major media company is working hard on reshaping their distribution model to reach new audiences and that's going to take years to pan out. Plus, you have the ocean of dollars moving from non-digital to digital."

For this reason, some companies are willing to pay what are, at first blush, exorbitant prices for media firms in the hopes that "old" media assets will become even more profitable online.

To that end, Rupert Murdoch-controlled News Corp.'s bid for Dow Jones values the publisher of The Wall Street Journal at a higher price-to-earnings multiple (based on 2007 estimates) than Google.

"You can turn old media into new media and make it very very profitable. That's why you see Murdoch offering to pay what appears to be a wild number for Dow Jones," said Richard Dorfman, a managing director with Richard Alan Inc., a financial advisory and investment company focusing on the media industry. "Maybe he's right. Maybe he's wrong. But clearly he's taking an old media asset and putting a new media multiple on it."

So media companies could see their takeover premiums increase if more companies are willing to offer Internet-like valuations for them.

Another factor that could drive up prices is the heavy interest in media companies by private equity firms, many of which are flush with money and attracted to the steady cash flow that media companies generate.

And one investment banker suggested that even the largest media firms could find themselves the subject of a takeover effort by private equity firms.

"There is no reason in the world that private equity firms couldn't go after a major media conglomerate. Is the pace of media mergers going to stop? Unequivocally, no," said Roland DeSilva, managing partner with DeSilva & Phillips, a media investment bank based in New York.

Still, the recent spate of media mergers brings to mind the last major wave of media consolidation in the mid-to-late 1990s and early part of this decade.

Remember some of those mega-deals? Mergers brought about the marriage of CBS (Charts, Fortune 500) and Viacom (Charts, Fortune 500), the creation of Vivendi Universal and the union of AOL and Time Warner (Charts, Fortune 500). Those deals, to put it mildly, have had their difficulties.

CBS and Viacom merged in 1999 only to split last year. Vivendi bought Universal Studios parent Seagram in 2000 and USA Networks in 2001 and ultimately wound up selling a majority stake in Universal Studios to GE in 2003.

And Time Warner, which owns, has just finally begun to tap into the online advertising growth potential of AOL after watching subscribers steadily flee the AOL access service since the two companies merged in 2001.

Will the lessons of these deals scare off media companies and private equity firms from pursuing more big mergers? Experts didn't think so.

"The reshaping of the media landscape will take years so it is too soon to declare megamergers dead," Geffs said. "Companies will continue to reshape their businesses through acquisitions large and small but they hopefully will take a lesson from the less successful large ones."

DeSilva agreed that media companies probably aren't going to be deterred from doing big deals despite some notable merger mishaps.

"People will still see value in huge megamergers and a number of them won't work out. We know that from history but a lot of people don't learn that and keep repeating history," said DeSilva.

So that should be a lesson for investors currently trying to cash in on the next big media merger.

Deals are often hyped as something that will offer shareholders of both the acquired company and the buyer a lot of promise. But media companies often find that successfully pulling off a media merger is a tricky proposition.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan. Top of page