A second big buyout for Time Warner. Should investors run?
AT&T’s (T) planned $85 billion purchase of Time Warner (TWX) announced Saturday may face some of the same challenges as a megamerger from another era: AOL’s $182 billion acquisition in 2001 of, yes, Time Warner, the parent company of Warner Bros., HBO and CNN and the target of what many veterans of mergers and acquisitions consider to be Wall Street’s worst deal ever.
Of course, many circumstances of the two deals are different. AOL was hurt as dotcom mania peaked by its fading dial-up Internet business. Plus, accounting gimmicks had goosed its growth numbers, which caused the combined AOL Time Warner to take a whopping $54 billion write-down in 2003 to reflect its diminishing value.
New York-based Time Warner eventually spun off AOL in 2009, and the Internet publisher was acquired in 2015 for a modest $4.4 billion by AT&T rival Verizon (VZ). Verizon now also plans to buy Internet pioneer Yahoo (YHOO) for $4.8 billion.
“AOL and Time Warner were about as different culturally as two companies in the same sector could be,” Kevin Werbach, an associate professor legal studies and business ethics at the Wharton School of the University of Pennsylvania, told CBS MoneyWatch. “AT&T and today’s Time Warner are a somewhat closer fit, but ‘content people’ and ‘network people’ still tend to see the world differently. This deal is the old story of a network seeing gold in sexy content businesses. That has rarely proved a successful model in the past.”
Comcast’s (CMCSA) acquisition of NBC Universal in 2011, which merged the world’s largest cable operator with the parent company of the NBC TV network and the Universal film studios, could serve as a potential road map for AT&T and Time Warner. However, as Werbach noted, Philadelphia-based Comcast has a long record of integrating acquisitions over the years.
“Time-Warner is a tough company to run -- I’m skeptical AT&T has the DNA for it,” he said.
AT&T, though, probably will face tougher regulatory scrutiny than Comcast, according to experts. For one thing, Time Warner’s content teamed up with AT&T’s DirecTV business (acquired just last year for $48.5 billion) and wireless network (second largest in customer count) could create a combination that could have anticompetitive problems.
“Regulators will also ask the critical question of how all-important diversity in the delivery of political, social, and economic information and commentary will be affected by AT&T-Time Warner’s unified control over content and distribution,” Diana Moss, head of the American Antitrust Institute, noted in an email.
Time Warner has slimmed down in recent years. Besides jettisoning AOL, the New York-based company has shed its music business, its cable TV operator and magazine publisher Time Inc. Its aim is to focus on higher-growth businesses such as its cable networks and the Warner Bros. film studios, the name behind the multi-billion-dollar Harry Potter films franchise.
AT&T Chief Executive Randall Stephenson has made no secret of his interest in expanding into original content as growth in the wireless market has stagnated. The telecom formed a venture with Peter Chernin, a veteran of Rupert Murdoch’s media empire, called Otter Media in 2013, which unsuccessfully tried to buy Hulu and also made an offer for Yahoo. In a statement announcing the tie-up with Time Warner, Stephenson argued that “premium content always wins.”
“We’ll have the world’s best premium content with the networks to deliver it to every screen,” Stephenson said. “A big customer pain point is paying for content once but not being able to access it on any device, anywhere. Our goal is to solve that.”
Easier said than done, unfortunately. DirecTV, the largest paid TV service, faces pressure from the growing ranks of so-called “cord-cutters” -- people who quit their pay-TV service and view video content over apps like Netlfix (NFLX).
Moreover, formidable rivals such as Apple (AAPL) and Alphabet’s (GOOG) Google are said to be interested in original content. Apple, which historically hasn’t shown much interest in the media sector, reportedly considered making an offer for Time Warner, according to The Wall Street Journal. And Google is expanding its original offerings on its YouTube service.