• by Diane Mermigas , February 22, 2008

This year’s merger and acquisition free-for-all caught fire with Microsoft Corp.’s stunning $45-billion unsolicited bid for Yahoo and John Malone’s assault on the Barry Diller–led five-way break-up of InterActiveCorp. The catalysts reshaping media and entertainment will keep deals lively despite the drag of a troubled economy.

The continued consolidation of Internet companies seeking to scale their advertising-powered social networking and search sites will run counter to the continued deconsolidation of traditional media conglomerates such as Time Warner, seeking to create shareholder value by spinning off their parts.

The cash reserves and strong balance sheets of companies such as Microsoft, Google and General Electric enable them to pursue undervalued, highly sought after assets that could be game-changers. Yahoo would instantly strengthen Microsoft’s search capabilities, and provide a dominant Internet audience for its products and services. Google can leverage its 5 percent stake in AOL by partnering with or acquiring the portal before Yahoo pursues it as a defensive move. Despite defensive moves like the acquisition of Maven for $160 million, Yahoo’s inability to further leverage its functionality on its own raises the question of how long autonomy prevails for the likes of Facebook, which could become an target ahead of its plans to consider going public sometime next year.

The flip side of deal-making will be what comes of it. News Corp.’s acquisition of Dow Jones and its prize gem, The Wall Street Journal, could have a profound impact on moving the lagging newspaper business further online just as News Corp. continues reshaping MySpace into a major niche advertising platform. Real Estate investor Sam Zell will aggressively sell off and outsource operations of his recently acquired Tribune Co. to make ends meet.

More deal making will shift to integrating logical assets to achieve cost-efficiency and drive revenues. Liberty Interactive’s QVC could acquire IAC’s Home Shopping Network and Ticketmaster. Time Warner Cable could finally buyout Cablevision. DreamWorks could defect from Viacom to NBC Universal. In an improved public market, News Corp. could spin off its Fox Interactive Media to create a new stock currency for acquiring other Internet assets such as monster.com.

Although the big unknown is how much M&A will be stifled by economic recession, a lot depends on individual investor perspective. Hedge fund manager George Soros has declared the end of “an era of super-leverage” and the beginning of “systematic failure” of financial institutions. But that hasn’t kept Google from investing billions of
dollars in space travel and building an online science research repository.