Increased duress is framing some of the most high-profile merger and acquisition activity so far this year: the waffling bank support for private equity's $19.5 billion leveraged buyout of Clear Channel Communications; Electronic Arts' $2 billion acquisition of Take-Two Interactive; Microsoft's proposed $45 billion acquisition of Yahoo; and Liberty Media's continuing litigious quest for InterActiveCorp. assets. The latter is moving from a bitter legal battle, decided Friday in IAC's favor, to Liberty's high-pressured maneuvering to shake loose Home Shopping Network and possibly Ticketmaster from IAC's planned breakup into five public entities--which has been Liberty's goal from the start. Experts estimate about only one-quarter of M&A now is considered "friendly."
While this year's cantankerous M&A market is not for the faint of heart, it is being powered by a handful of predictable elements that are central to much of the deal contention. For instance, plummeting and fluctuating valuations, off of inflated highs, are leaving both buyers and sellers perplexed about where asset values will settle after the ongoing economic turmoil, advertising recession and digital shift.
That's why the stand-off between Microsoft and Yahoo, and Electronic Arts and Take-Two, are likely the beginning of many more buyouts-turned hostile-takeovers and shareholder proxy fights--as long as it is difficult to reconcile multiples. That is also why the banks backing the $19.5 billion acquisition of Clear Channel radio by Thomas Lee Partners and Bain Capital are trying to squirm out of the deal, even under court order to close. The transaction remains near collapse, with Clear Channel stock trading at a 31% discount to the proposed takeout price of more than a year ago.
It is unclear how many of the 128 announced and pending media and entertainment deals collectively valued at $87 billion at the end of 2007 could be in jeopardy. Bidders refuse to bid against themselves; sellers resist valuations well below their expectations; lenders and underwriters are having their feet held to the fire.
Some traditional media properties with plummeting revenue forecasts must be sold in these worst of times to allow sellers to reduce their overall risk exposure, raise funds to make debt payments, and offset core declining advertising income. Tribune Co. has such assets on the block as does Newsday--a unique newspaper operation that has caught the eye of Rupert Murdoch, Mort Zuckerman and James Dolan--in order to make an imminent $12 billion debt payment. There will be a growing number of television station and newspaper owners straining to sell assets to meet debt covenants in the face of stagnant or declining advertising-supported revenues, even in this election year. Time Warner, Motorola and IAC lead the pack of media, entertainment and Internet companies seeking to realize elusive shareholder value by spinning off and selling their parts.
The paramount challenge for them all is settling on accurate, sustainable asset valuations--a process complicated by shifting and unsettled economics, an advertising recession undercutting core revenues, and an imbalance in sale inventory supply and demand.
On the other hand, the accelerating bottom-up rollup of all size companies across the media, entertainment and Internet spectrums is spurred by the desire for more economic efficiency and competitive scale. These early-stage growth stories often fueling innovation continue to be the domain of venture capital and private placements that appear miles away from the troubled bank, investment band and private equity firms deadened by the mortgage and credit crisis, and proposed federal regulatory reform. On the other hand, the $280 billion raised domestically by public equity last year to back 40% of the deals has to be invested somewhere. At the most fundamental level, these deals will keep the digital revolution in motion, some of which may increasingly be backed by foreign funds seeking to capitalize on the weak dollar. All funding sources that remain willing still face the quandary of meeting aggressive return-on-investment timelines and overall exit strategies in the face of slowing initial public offerings.
This year's more sanguine deal market will be driven in large part by major corporations seeking to put their cash hordes to work by snatching bargain-priced assets to shore up specific competitive positions. Such high-profile strategic deals include AOL's $850 million acquisition of the social networking site Bebo and Microsoft's sights on Yahoo's user base and services. Indeed, the rush of smaller, spry, niche companies--all too happy to be scooped up at valuations that are less at issue--are providing more traditional and new-media players next-level applications and functionality desperately needed to make their assets more digital-ready. The process will be hastened this year by major Internet players--from Google, Yahoo and Microsoft to MySpace, Facebook and YouTube, to NBC, Fox, CBS and Disney--opening their platforms to third-party developers.
The monetization of established content and advertising distribution platforms and devices is challenging to predict, in light of the continual disruption of new technologies and changing economics. With historical valuation multiples becoming strained benchmarks, UBS analysts recently concluded that the price vacuum could stall at the forward-looking P/E multiples, which fell 35-times to 15-times over the past five years for large-cap entertainment companies, now slated for less than 3% long-term growth. Just where does that leave mid-to-small companies also struggling with devaluation and marginal growth? The overall 6% increase in advertiser and consumer domestic spending on entertainment and media to $649 billion in 2008 forecast by PricewaterhouseCoopers may be seriously tested by this confluence of volatile factors. Maybe in this crazy climate there's something to be said for opting to duke it out.