Is Comcast's Dealmaking Bad for Investors?
The two biggest U.S. cable-television companies are poised to merge in a deal worth tens of billions of dollars. Many people assume that this will be terrible for consumers (it might not), but the other question is how it works out for shareholders. Although plenty of big takeovers have been harmful and wasteful, there are reasons to think this deal may turn out better.
The first question is whether the deal will even take place. Comcast Corp. is offering $158.82 a share in stock to acquire Time Warner Cable Inc. -- significantly more than yesterday's closing price of $135.31. Time Warner Cable’s market value jumped in response to the news, and recently traded at about $145 a share. (That discount may reflect doubts about whether antitrust regulators will allow the deal to close.)
In the broadest terms, the historical evidence on mergers is ambiguous on whether this deal would be good for Comcast. Finance academics like to look at how share prices react immediately after a deal is announced, the theory being that any gains from combining two companies ought to show up in their market valuation. Evidence from the U.S. and Europe suggests that buying public companies is slightly negative for shareholders of the acquirers, although there is a lot of variation that makes the data inconclusive.
Other academics looked at the total effect of about 12,000 acquisitions in the 1980s and 1990s on the shareholders of acquiring companies and concluded that these deals were deeply destructive, with the biggest takeovers often causing the most damage. The most egregious case of value destruction was when America Online Inc. bought Time Warner Inc. in 2001 for $124 billion. The next year the combined company reported an annual loss of $97.2 billion.
That example tells us little about what will happen with Comcast and Time Warner Cable, however. It’s more useful to look at Comcast’s own history with acquisitions. The biggest and most relevant deal is Comcast’s purchase of AT&T Inc.’s cable assets in the early 2000s, which doubled Comcast’s size to about 22 million subscribers and valued the combined entity at $72 billion. A few years later, Comcast and Time Warner divvied up the assets of bankrupt Adelphia Cable Communications Corp.
According to Paul Sweeney of Bloomberg Industries, Comcast successfully integrated its purchases into a cohesive and relatively profitable company. Comcast now has better technology, and -- if you can believe it -- offers customer service that's better than some of its cable competitors. These improvements have shown up in the form of steadily rising margins and, since 2012, much better performance compared with the Standard & Poor’s 500 Index.
Despite all this, some investors are skeptical: Comcast’s shares closed down 2.3 percent after the announcement even as the S&P 500 index is up about 0.6 percent. This is a common reaction, which is why academics often argue that acquirers overpay for public companies. It will be interesting to see what happens if regulators let the deal proceed.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)
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