When word leaked on Friday that AT&T, the wireless carrier that also owns Direct TV and the smallish U-Verse wireline fiber optic service, was preparing to purchase Time Warner, shares of the telecom utility immediately plummeted and those of the media conglomerate soared. In subsequent days, analysts have put forward various versions of the story from insiders in both companies as to why this is a good idea.
But it’s worth taking that initial market reaction seriously. The combined company, if it comes together, may well prove to be a well-managed and profitable conglomerate. But in order to purchase Time Warner, AT&T and its shareholders are going to have to pay a premium over the current price of its stock.
But there’s no reason to believe Time Warner’s shares are undervalued. There’s also no reason to believe useful synergies will flow from combining Time Warner’s portfolio of television and movie content with AT&T’s portfolio of cell towers, satellites, and fiber optic cables.
AT&T’s board and management, in other words, appear to be simply wasting AT&T’s shareholders’ money. What’s in it for them isn’t so much the opportunity to build a great new business as to break out of the dreary reality that their current business is boring. As the leaders of larger conglomerate, they’ll be able to pay themselves higher salaries and hang out with movie stars.
The government won’t allow anything lucrative here
People consume video content over various “pipes” that AT&T controls, and Time Warner either producers or owns the rights to a lot of video content. In theory, you certainly could combine these businesses. Right now, for example, many NBA games are exclusively available on Time Warner’s TNT network, which is only available to cable subscribers. A merged company could let cord-cutting AT&T wireless users stream those games without buying cable, enticing basketball fans to switch from Verizon or Sprint. Or HBO Go subscriptions could be sold at a discount as part of a “bundle” with AT&T telecom services.
One problem here is it’s not clear that the economics of this kind of integration pencil out. Nothing is stopping Time Warner’s constituent elements from striking these kinds of deals with today’s wireless companies. The deals don’t get done because there aren’t mutually advantageous terms. Combining the two companies into one could force the component elements to come to terms, but those arrangements wouldn’t necessarily result in higher profits — they would just shift gains from one subsidiary to another.
But even if some of these ideas do make sense, the government probably won’t let them happen.
We have a clear precedent from back in 2010 when Comcast, the gigantic cable company, bought NBC Universal, a media conglomerate similar to Time Warner (and also an investor in Vox Media, which owns this website). When the takeover plan was announced, the merging companies had all kinds of grand plans for bringing content and infrastructure together. That raised huge red flags for regulators who worried that Comcast was seeking to use its strength in the relatively low-competition infrastructure industry to gain leverage in the content industry.
Consequently, the government agreed to approve the merger only on condition that Comcast and NBC Universal disavow making any special deals with each other that were not available to other companies. The approval notice from regulators required the creation of “an improved commercial arbitration process for resolving disputes about prices, terms, and conditions for licensing Comcast-NBCU’s video programming” and “requir[ed] Comcast-NBCU to make available through this process its cable channels in addition to broadcast and regional sports network programming,” among other things.
This was considered, at the time, a relatively lenient settlement, and since then the regulatory environment has gotten more — not less — skeptical of this kind of merger. The Obama administration is widely perceived to have become more skeptical of mergers in the intervening years. Hillary Clinton has promised to step up antitrust enforcement relative to where it is today. And Donald Trump outright promised to block the deal during a Saturday speech.
The AT&T/Time Warner proposed merger will be a really good test to see if Clinton plans to live up to her rhetoric on antitrust.— David Dayen (@ddayen) October 22, 2016
We don’t know if the deal will ultimately be approved. AT&T badly misjudged the regulatory climate back in 2011 when it tried to buy T-Mobile only to have it disallowed by the Federal Communications Commission and Justice Department. So this could prove to be another overreach. But if regulators do approve the terms, they will surely insist on Comcast-esque terms that vitiate the ostensible business rationale for the deal.
Movie stars are more fun than telephones
Why did Comcast go through with the deal even after regulators axed the supposed synergies it was supposed to create? The cynical answer is that Comcast is confident it will find a way to cheat. The even more cynical answer is that Comcast’s executives don’t really care. Being a cable company is a great business, but it’s boring and unglamorous, plus everyone hates you.
The executives of a media company, by contrast, get to hang out with A-list celebrities and star athletes.
They also get paid very well. As the Associated Press reported last year, “six of the 10 highest-paid CEOs last year worked in the media industry.”
None of the top 10, by contrast, was the head of a utility company. Well, except for Brian Roberts, the CEO of Comcast, who counts for the purposes of AP’s list-making as a “media industry” CEO because his cable company also owns NBC Universal.
All of which is to say that AT&T CEO Randall Stephenson, who is currently paid less than Time Warner CEO Jeffrey Bewkes, and his team of executives have a perfectly good reason to want to buy Time Warner — whether or not it makes business sense.
The AOL Time Warner fiasco sets the bar low
Talk of buying Time Warner naturally brings to mind AOL’s disastrous 1999 acquisition of Time Warner, which over 15 years later is still remembered as the most catastrophically failed merger of all time.
This serves, in an odd way, to set the bar unreasonably low for an AT&T takeover. Pieces making the case for the merger frequently invoke the comparison only to debunk it, explaining that the current situation is totally different. And it really is different! This deal, if it goes through, almost certainly will not go down in history as the worst deal of all time.
In fact, the combined company should even be successful. AT&T is a profitable phone company and Time Warner is a profitable media company, and if you slap them together you’ll have a big, profitable company. The merged Comcast-NBC Universal entity isn’t doing anything special, but it’s a well-managed business that makes money. There’s no reason AT&T couldn’t pull off the same thing.
But when you pay a premium to buy another company, the test isn’t supposed to be “will the combined entity avoid being a huge catastrophe that ruins everyone’s lives and careers?” The test is supposed to be “will this be worth the money?” In the case of AT&T/Time Warner, the answer seems to be no. But it’s the shareholders’ money, so who’s counting?