On the face of it, Comcasts unsolicited $54 billion buyout offer of the Walt Disney Co. conjures up painful memories of some of the failed turn-of-the-century mega-mergers.
Comcasts deal-making and vaulting ambition to become a media giant is uncomfortably reminiscent of the dizzying ascents of WorldCom and AOL-Time Warner. WorldCom used the Internet investment bubble and fraudulent accounting to become a bloated telecommunications behemoth until it collapsed under the crushing weight of its debt load.
AOL, seeking to wed its Internet access network with a world-class entertainment and content producer, used grossly inflated stock values to become the scrawny tail that wagged the Time Warner mastiff.
There is no indication that Comcasts growth has been built on foundations of financial quicksand. Nor can it exploit a humbled stock market that spent the last three years taking a severe cure for the irrational exuberance of the late 90s.
But we can only hope that the market regulators do a better job than they did a few years ago to ensure Comcast isnt biting off more than it can chew in its quest to buy Disney.
Comcast is offering 0.78 of a share of its Class A stock for each share of Disney stock. This would give Disney shareholders 42 percent of the merged companys stock. The deal would include Comcasts assumption of $11.9 billion of Disney debt, make the total cost of the merger $66 billion.
Using its 2001 acquisition of AT&T Broadband as a springboard, Comcast is seeking the same kind of vertical integration that drove AOLs merger with Time Warner. It wants to combine Disneys rich entertainment, television and sports assets with its cable subscriber base that totals more than 21 million and a service network that is dominant in 22 of the nations top 25 metropolitan areas.
How to Maintain Growth
This is nothing new. Media distribution companies, such as Viacom and Liberty Media, learned years ago that the way to maintain profit growth in a competitive distribution market is to buy media and entertainment properties.
But Comcast is playing impudent upstart to Disneys imperious aristocrat of the entertainment world. Disney generates one-third more revenue than Comcast and Disneys staff is 40 percent larger than Comcasts.
Comcast claims there will be great natural synergies between its cable audiences and Disneys media and content assets. Furthermore, it contends that it has the management experience on board to wring greater efficiencies out of Disney operations that are no longer the stellar profit generators they were in the previous decade.
But Disneys management may justifiably feel that it can afford to buy new distribution channels at advantageous prices any time it chooses and will likely scoff at Comcasts claim that it holds the cure for any management ills. Its not likely to accept a deal that makes Comcast management senior partners in a merger agreement. Look for Disney to dismiss this initial hostile bid out of hand.
But that wont be the end of it. Comcast just wants to pull off the same kind of negotiations coup that it achieved in the merger with AT&T Broadband. AT&T rejected Comcasts initial unsolicited $58 billion buyout offer. But it resulted in lengthy hard-nosed bargaining that enabled Comcast to acquire AT&T broadband for $72 billion.
Disney is under the same kind of stress as AT&T three years ago when the telecommunication giants stock price was flagging and investors were demanding greater return on their equity.
Dissident Disney shareholders led by former board members Roy E. Disney, nephew of founder Walt Disney, and Stanley Gold are making the same demands and are criticizing the effectiveness of CEO Michael Eisners administration. Disneys recent animation releases have not fared well. Profits from Disneys theme parks have been stunted by recession and post 9/11/01 terrorism fears.
Pixar Animation Studios, whose digitally animated movie features have brought Disney the most success in recent years, recently broke off talks about extending their production agreement. Since then Pixar CEO Steve Jobs and Disney have traded verbal barbs, with Jobs suggesting that in the latter years of Eisners leadership Disney had lost its marketing touch.
As a result, Eisners tenure as chief executive is as much in play in this buyout bid as the company he heads. Comcast is using dissatisfaction with Eisners performance as a lever to get major shareholders and the Disney board to seriously consider its offer.
Playing One Side Against
Comcast has a golden opportunity to play one side against the other. Dissident shareholders may use the offer as a way to oust Eisner and turn around the companys fortunes. Eisner may see it as a way to fend off the dissidents demands and remain head of the merged companies.
But Comcasts pitch for Disney will likely prove to be an even harder sell than its effort to buy AT&T Broadband. AT&T was a highly motivated seller. Seeking a way to reap shareholder value, AT&T was already casting about for a suitable buyer for its broadband property. In that situation Comcasts job was the show that it was willing and capable of meeting AT&Ts steep price. AT&T Broadband fit into Comcasts core business.
Despite Comcasts claims of natural synergies, it may have a hard time demonstrating that it can lead Disney in profitable new directions. Its significant that Comcast assigned Steve Burke, president of Comcasts cable division, who worked for 12 years as an executive in three Disney divisions, as front man for its merger bid. His presence is an effort to lend credibility to Comcasts claim that it has the management expertise to run a media and entertainment company.
However, over the past 20 years, Eisner has ensured that Disney maintained its brand identity and management leadership in any of its major television and cable acquisitions. Disneys management will be extremely reluctant to make a deal that eclipses that leadership and independence.
Disney must avoid being cajoled into creating another short-lived corporate Frankenstein like those misbegotten creatures of the last stock market boom.
eWEEK.com Enterprise Applications Center Editor John Pallatto is a veteran journalist in the field of enterprise software and Internet technology.