Plenty of buyers and sellers are eager to do deals. There is an abundance of untapped liquidity being held hostage by fear and confusion. As transactions start to flow again, they will be fewer, smaller, more strategic and less leveraged. They will be driven by a need to restructure and grow core businesses in the digital age.
The groundswell of plausible deal rumors (most companies decline to discuss) is fueled as much by logical expectations as by investment bankers' longings. Private-equity investors raised $300 million in 2007's record deal market. Now, they are slowly re-entering the fray with more creative, longer-term deals for distressed properties. The need to continue consolidating all Internet categories, telecom and content is a major catalyst. Mostly, it's plummeting stock prices that make many companies relatively cheap.
eBay chairman and CEO Meg Whitman's decision to retire has rekindled speculation that it could sell some of its assets, like Skype, or be a takeover target for Microsoft and Yahoo. Cablevision stock is trading 30% off the shareholder-rejected $36 share price the controlling Dolan family offered to take it private last year. Despite their own issues, Time Warner Cable and Comcast could be logical rival bidders for Cablevision's New York footprint.
Under the new leadership of CEO Jeff Bewkes, Time Warner could sell, spin off or even combine assets, such as AOL and Time Inc. Satellite provider EchoStar Communications is another media concern whose parts are worth more than the whole. That dynamic is behind InterActiveCo.'s planned five-way split of assets, which could flip HSN and Ticketmaster to Liberty Interactive, which owns rival QVC.
Traditional media will continue to acquire Internet firms whose online communities and social networks can be wrapped around its television, print and film content. That's why News Corp. is eyeing Monster.com, and CBS is reportedly eyeing Digg.com. Broadcasters especially will be flipping some TV stations ahead of the digital conversion next year; the most high-profile is Young Broadcasting's KRON in San Francisco--valued at $241 million, according to Wachovia analyst Bishop Cheen. On the content side, DreamWorks could still defect from Viacom to NBC Universal, and the private-equity owners of MGM could sell the studio, possibly to 20% owner Comcast. Lionsgate also could come on the block, analysts say.
Impatient shareholders who don't want to wait for a permanent stock market rebound may be fanning the flames of takeover and merger speculation about undervalued media companies, such as CBS and Yahoo. The speculation also cuts the other way, focused on what well-heeled buyers such as Google and Microsoft--each with more than $20 billion in cash--will acquire. (That said, Stanford Group actually downgraded Google to hold Thursday, based on concerns about slowing online advertising and e-commerce.)
Still, Microsoft and Google may give the word "deals" a whole new meaning as they set new standards for altruistic investments.
Although the inability to secure solid valuations for assets due to the stock market volatility and extraordinary debt is an obstacle to deal-making domestically, it has not deterred controversial investments by the sovereign funds. James Murdoch, News Corp.'s new chairman and CEO of Asia and Europe, recently met in Riyadh, Saudi Arabia with Prince Alwaleed bin Talal to discuss collaborative media deals with his Kingdom Holding Company.
A flood of investments from $2.5 trillion in sovereign wealth funds in media and financial companies has fueled demands for improved transparency. A less than 5% stake in Sony Corp. by Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum has been among the high-profile U.S.-related media investments by foreign government-controlled funds. Many companies are increasing their bets on fast-growing emerging markets in India, China and elsewhere in Asia to bolster their bottom line. General Electric, which owns NBC Universal, spends much of its $8 billion war chest on international operations.
Technology worldwide is considered by many to be the safest deal haven now because of its tangible results, innovation and an ROI that is not possible from conventional entertainment companies. Also, the focus on what happens to assets and investments after deals close is becoming more intense.
For instance, it is unclear how many of Tribune Co.'s assets will be sold by its new owner, real-estate investor Sam Zell. More important is how innovative he will be with transferring Tribune's media value to digital platforms, outsourcing expensive print production and managing price hikes. The protracted regulatory review encountered by the Tribune deal--and still-pending XM Satellite Radio-Sirius Satellite Radio merger and Bain Capital's acquisition of Clear Channel--may scare off tentative buyers and sellers.
The biggest looming concern is that a full-blown recession will deflate M&A activity by half in 2008, as it has in years past. Others point to deep-rooted debt and credit issues that could bring deal-making to a virtual halt. Hedge Fund manager George Soros at the World Economic Forum in Davos this week declared the end of "an era of super-leverage" and the beginning of "systematic failure" of financial systems. Domestically, economists argued that the government's proposed $150 billion stimulus package will only foster more debt.
What's going on under the deal-making radar could make anyone's head spin. Yahoo's articulate president Susan Decker may have the right approach, having quipped in a CNBC interview from Davos: "We stay paranoid all around."