The Merger Frenzy Explained
This is how the market views media right now: It loves video assets when they're in the hands of a well-regarded conglomerate like News Corp. (NWS ) or Walt Disney (DIS ). It likes companies with data that people will pay serious money for, like financial-information providers Thomson (TOC ) and Reuters (RTRSY ). It also likes players with a commanding presence in one media space and an Internet strategy that's considered smart, like cable giant Comcast (CMCSA ) and broadcaster CBS (CBS ). It doesn't like companies owning content and distribution perceived to be commoditized, like newspapers and radio. And when Wall Street hates a company that is admired in other quarters for its holdings, that company becomes deal bait.
Understanding all of that helps explain May's flurry of big potential hookups. (In brief: News Corp.-Dow Jones (DJ ), Microsoft (MSFT ) merging all or some of its media operations with Yahoo!'s (YHOO ), Thomson-Reuters, the speculation that Gannett (GCI ) might or should pursue help-wanted giant Monster.com (MNST ).) And understanding why, beyond simple earnings growth, the Street likes or dislikes a media company offers insights into the next deal or merger targets.
Considering the billions of dollars squandered in past deals that chased a mirage of synergy, it pains me to write the following sentence: The performances of News Corp. (stock up about 40% in the past two years) and Disney (up 34%) show that the markets like big, multi-platform combinations of content and distribution better than almost anything in media, especially when they're paired with a new-media story (hello, MySpace (NWS )!) the Street prefers. That fact, and News Corp.'s $5 billion-plus in cash reserves, enabled Murdoch to offer a 66% premium for Dow Jones.
SO DID THIS: Dow Jones traffics in premium information—consider the nearly 1 million subscribers claimed by wsj.com, The Wall Street Journal's online arm, plus the Factiva database service. But Dow Jones' stock isn't being valued like that of data players Thomson and Reuters, both of which were up over 25% in the past two years even before merger talks were made public. Dow Jones, whose stock had gone sideways for years before Murdoch's bid, is being treated like a newspaper company. If Dow Jones had had a couple of years of Reuters and Thomson-esque gains—and, um, decent profits—it would have been much harder for Murdoch to offer such a premium. And while Reuters' and Thomson's gains are fine, they don't match those of another key data player. The McGraw-Hill Companies (MHP ), which owns such data assets as Standard & Poor's (MHP ) and consumer ratings service J.D. Power & Associates (MHP )(as well as BusinessWeek (MHP )), has outperformed the stocks of even News Corp. and Disney in the past two years. Don't think this escaped the notice of Thomson's and Reuters' management.
Yahoo, another underperformer, has familiar ills—management missteps, coupled with the misfortune of facing direct comparisons with Google (GOOG ). That is making its stock lag behind where it should be. (As a dominant online player, Yahoo at least qualifies for being liked, if not to the lofty status of being loved, by Wall Street.) Hence the talks with Microsoft, the theory being that a combo or partnership would allow them to compete with Google. Similarly, those suggesting that Gannett hook up with Monster may remember how key Web acquisitions—comparison-shopping sites Shopzilla (SSP ) and uSwitch (SSP )—helped newspaper-and-cable conglomerate E.W. Scripps (SSP ) outperform its newspaper brethren, at least until those properties came up short.
Based on the current lay of the land, there is one company to watch: Viacom (VIA ). It owns top-tier content, including Comedy Central (VIA ) and Paramount Pictures (VIA ), yet its stock has badly trailed market indexes since it was uncoupled from CBS in January, 2006. Taking the day's dynamic to a logical extreme leads you to Viacom and Yahoo linking up. You'd get near-matchless Web distribution paired with content perfect for slicing and dicing online. You'd also get, I would bet, a corporate culture clash that would make your hair curl. But in moments like these, who knows? Of course, deal flurries often end badly. Just ask AOL Time Warner, whose stock took five years to begin its long climb back.
For Jon Fine's blog on media and advertising, go to www.businessweek.com/innovate/FineOnMedia
By Jon Fine