Time Warner: No Disassembly Required
Much is being written about whether or not media giant Time Warner (TWX) should be broken into pieces in response to raider-cum-greenmailer-cum-hedge-fund manager Carl Icahn's demands. Icahn and his supporters, who together own only about 3% of the stock, say that a breakup would boost the value of Time Warner's shares, which -- like those of most major media companies -- have languished for several years (see BW Online, 12/21/05, "AOL-Google: Who Gets What").
I thought that Icahn's proposal would be quickly dismissed for the 1970s-like greenmail attempt it is: "You pay me off some way or another, and I'll quietly go away." But then a revisionist Steve Case, the America Online founder who merged his company with Time Warner and who bears much of the responsibility for its subsequent poor integration, joined the Icahn chorus. At that point, I concluded a further observation or two might be helpful to this ongoing debate.
GOING TOO FAR.
There is a solid case to be made for some limited structural changes at Time Warner, and I fully agree with Icahn that Time Warner should spin off its cable-TV systems, which are facing strong competition from satellite-TV services and soon-to-be upgraded telecom lines, and daunting technology challenges from competing broadband platforms. Time Warner's continued holding of its cable systems alongside its valuable content assets flies in the face of the long-term trends currently diminishing the value of all "distribution" assets encountering this withering competition.
But any further breakup of Time Warner's vast and relatively well integrated TV, film, and publishing holdings would be going too far. That's because the future of the media business will be driven more and more -- not less and less -- by the large integrated companies. Even today, 80% of the video content viewed in the U.S. is controlled by five large media conglomerates: Disney (DIS), NBC Universal, News Corp. (NWS), Time Warner, and Viacom (VIA.B).
NBC Universal, News Corp., and Viacom, however, are not subject to greenmailer whim, because they each have a controlling shareholder: General Electric (GE), Rupert Murdoch, and Sumner Redstone, respectively. And Disney recently bought immunity, of sorts, through its stand-down agreement last year with Roy Disney (see BW Online, 9/30/05, "How Eisner Saved the Magic Kingdom"). Time Warner is the only one of these giants not in control of its destiny.
DIVERSE, COMPLEX, AND CHANGING.
The five largest media combines are similarly constructed, admittedly, in each case, with some nonstrategic assets lying around. For example, Viacom still owns a billboard business. But that's a common problem for companies built through a series of stock acquisitions, where for tax reasons you have to buy everything the predecessor company owned. Yet because of the absence of a controlling shareholder, Time Warner is the only media giant facing huge challenges in the crucial area of building long-term shareholder value. It's currently vulnerable to Icahn's short-sighted and selfish demands, just as it was vulnerable to Case's semi-bear hug, which largely prompted the Time Warner-AOL merger.
Media is a sum-of-the-parts industry, unlike, say, the oil, aircraft, and automobile industries. It is by nature and by design a "portfolio" businesss, ideally serving multiple audiences through multiple distribution channels with multiple technologies. Since the media landscape continues to dramatically evolve, it's an industry which best builds shareholder value when it can do so over the long term, with an array of complementary, integrated, and -- in their own unique ways -- hedged assets.
Audiences are diverse, complex, and changing -- and the best media companies are similarly so. Because audience-based technology also continues to evolve in seismic and long-term fashion, the great media companies must be able to make long-term plans and investments around these technologies.
BYPASSING THE MIDDLEMAN.
If a company is badly managed -- which is absolutely not the case at Time Warner, in the able hands of Chief Executive Richard Parsons and Chief Operating Officer Jeffrey Bewkes -- then change the management. That happened at Disney with the toppling of Michael Eisner. But don't override the industry trends, which are being unassailably embraced by Time Warner's four major competitors.
To blow up this company now -- when audiences are finally able to be served as discrete communities of interest, and are reachable across a wide array of distribution platforms -- is uninformed, short-sighted, and not in the interests of all the shareholders. Furthermore, if Time Warner gets blown up, then no public media company CEO who's not in a control situation will ever feel comfortable making the right long-term strategic and investment decisions, because he'll always believe that there's another greenmailer just a phone call or headline away.
Extreme competition is under way in the media distribution business, which includes cable, satellite, and telecom networks. New technologies, such as the Internet, favor media content owners instead of media content distributors. That's because media companies can sell their wares directly to consumers over the high-speed Web, bypassing the cable, telecom, or satellite middleman.
INTEGRATION, NOT DESTRUCTION.
In the equity markets, value is shifting away from the cable companies and the regional Bell operating companies, or RBOCs, to the big content and Internet portal companies such as Google (GOOG) and Yahoo! (YHOO) (see BW Online, 12/27/05, "How Time Warner Clicks With Google"). Because of the quality, breadth, and relatively successful integration of its content assets, Time Warner, with its cable systems spun off into a separately capitalized entity, would be a perfectly positioned media company for the next decade.
Spin off Time Warner's cable systems? You have my full support. Better integrate the company's print assets into the Internet age? For sure. Continue to unlock the value of AOL? Yes -- and shareholders should be thrilled with the recent joint venture with Google regarding ad sales, which put a very high valuation (again) on AOL.
But blow up the entire company because a group that owns less than 3% of the stock wants a "quick turn," and because the revisionist Steve Case is being, well, revisionist? No way.