By Ronald Grover
Media honchos have been falling faster than bad guys in an Arnold Swarzenegger action flick: Vivendi CEO Jean-Marie Messier, AOL Time Warner President Bob Pittman, and most recently, Bertelsmann CEO Thomas Middelhoff. In each case, there were various issues that contributed to their graceless departures. But a common factor is that all three were card-carrying members of the media-mogul club, where the passwords are buy, buy, buy.
Indeed, the club's theme song for the last few years is that big is beautiful -- and even bigger is downright bodacious. Hang the debt, and don't worry about whether the vision makes sense -- or whether the honchos can manage the workings of the huge sprawl that they create.
In fact, getting bigger does matter to a media company. Studios that make TV shows are more efficient if they also own the distribution, be it TV stations or cable channels. With the costs for making those shows skyrocketing, it helps to have a TV network so that you can make sure it gets on the air. And it also helps if the studio can sell ads to help pay the freight on the broadcasters it owns. But the question is one of balancing the need to insure distribution with the outrageous amounts media outfits have been paying to buy some of those assets. Just ask Messier, who spent $1.5 billion to buy a 10% stake in the EchoStar satellite, insuring him the right to launch five cable channels at a breathtaking $300 million a channel (Rupert Murdoch spent about $100 million to get his Fx channel on the air just a few years back.)
WHAT'S BIG ENOUGH?
"The problem is that all of these guys decided they needed to be bigger, but none of them knew exactly how big was big enough," says media-management consultant Peter Kreisky, a former CBS strategic planner. "So they just bought and bought -- and tried to figure out how to make the pieces work later."
Kreisky points out that Disney is still suffering the ill effects of its 1996 acquisition of ABC CapCities, which gave Michael Eisner & Co. a prized asset in sports channel ESPN but a headache in ABC, which Kreisky calls a "declining asset." So when cable and a bunch of new networks conspired to take audience from ABC, Eisner and his top managers paid a ton of attention to it, meantime failing to notice that Disney's core audience -- kids and their folks -- were falling out of love with its animated films, consumer products, and theme-park rides. Says Kreisky: "They took their eye off the ball."
A lot of media executives say they have reformed -- at least for now. At News Corp. -- which last year chased a $40 billion deal to buy DirecTV -- Rupert Murdoch's group says it has sworn off big deals and is looking to squeeze profits out of acquisitions that it has made in the past. And their numbers look stronger. Focused on cutting overheads as it merges the 10 TV stations it bought last year from Chris-Craft Industries for $5 billion, News Corp. reported $108 million in earnings at its Fox Entertainment Unit in its most recent quarter, vs. a loss of $9 million a year earlier. (It helped that the company also released a hot animated film, Ice Age, but that's another story.)
At Disney, which paid a steep $5.1 billion to buy the Fox Family Channel, the Mouse House is in the latter stages of a complete overhaul, having restructured its film and consumer-products units while closing down many of its Disney Stores. "What you're going to see is these media companies hunkering down and returning to the principle of just running a business," says investment banker Steven Rattner, a managing director of New York-based Quadrangle Group.
Ah, if only it were that simple. Media moguls make deals as easily as they breathe, and it won't be long before they're out there swinging for the fences again. Their current restraint owes as much to slack stock prices, which make deals difficult, as it does a genuine change of heart -- especially the fear that Wall Street will further pummel them if they try to buy. "There's a fear of being left behind when other companies get larger," says former Viacom president Frank Biondi. "These guys think being a media company means being large enough that your content can be seen everywhere in the world."
Meanwhile, there are juicy assets waiting to be bought. Burdened with tons of debt, Vivendi wants to sell its Universal Music unit and its film studio. The French giant is carrying the cost of the music unit at $10 billion or so and will likely get about half of that, while the studio may generate near its $20 billion carrying cost.
Then, there are smaller deals. Cablevision, the New York-based cable operator, may sell Bravo and other cable channels to raise cash and help pay down debt. John Malone's Liberty Media has made noises for months that it might sell its 49% stake in Discovery Channel to the right bidder. And DirecTV may come back on the market if, as is starting to look more likely, EchoStar's deal to buy it falls apart in a Washington lobbying muddle. "There's still a lot of interest in consolidation out there," says MGM Chairman Alex Yemindjian, who has made no secret of his studio's desire to become part of a larger company. "Maybe not now, not at these stock prices, but it will happen."
How long will it take? Hard to say, but plenty of outfits have been building cash in anticipation. News Corp. has $3 billion in cash on its balance sheet, Viacom has nearly $4 billion in cash and receivables. Word around town is that Viacom has already asked Vivendi about its cable channels.
Media-management consultant Michael J. Wolf of McKinsey & Co. figures that, at least for a while, media executives will shy away from large, transforming deals of the sort that Time Warner and AOL struck. Instead, he says, they'll likely fill in the blanks -- adding cable systems to their existing cable units or small film units to their studios. "The day of the big deal is over, for now," he says.
Viacom president Mel Karmazin tends to agree. "I still think there are benefits to being larger," he says. But his outfit is known as one of the industry's most disciplined buyers, adding TV or radio stations or cable channels to existing operations. That allows it to stay focused on pieces it can sell together to advertisers. It also may explain why Viacom's stock price has slipped only 27% in the last 12 months, much better than the 40% fall registered by Bloomberg's U.S. Media Index.
Not every media group has Viacom's discipline, and the downside of buying too much too quickly is swift justice. "If there's a problem with your collection of assets, maybe it's how they're being run," Karmazin says. "Then, it may be time to get somebody in there who can run them better." Right. Just ask Messier, Pittman, or Middelhoff.
(With additional reporting by Tom Lowry in New York)
Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online
Edited by Patricia O'Connell