Media Value: Enhance Current Assets, Then Acquire

There is nothing more costly than a missed business opportunity, and in these skittish times, they are likely to be more abundant -- especially in the transforming media and tech space.

The Microsoft-Yahoo tug of war has been the highest profile fumble in creating deal value. Since Yahoo rejected Microsoft's initial $31 a share, $45 billion unsolicited offer, both companies' stock has fallen below $25 a share. Eventually acquiring Yahoo for less than $30 a share (much to the chagrin of major institutional shareholders) would allow Microsoft to save on its cost of capital, while improving its ROI after realizing large cost synergies and skilled execution. Outsourcing its search business to Google and achieving a 25% headcount reduction would represent about a $32 a share value to Yahoo. A joint venture with Time Warner's AOL (with both continuing to outsource to Google) would represent a $46 a share-plus value to Yahoo, according to Bernstein Research. Maybe.

Remember, this is the same Jerry Yang-built company that reportedly passed up the chance to sell to Microsoft at $34 a share deal (or $47 billion) early in 2008. Now, its assets could be split between Microsoft, News Corp. and Time Warner for the ultimate faux pas in lost and destroyed value, according to the latest reports.



The mind-boggling hemming and hawing over Yahoo's destiny has devalued the company -- something other media players risk. The only dealmakers realizing and creating any substantive new value are international investors, particularly in the Middle East, which explains why King Abdullah II of Jordan will be addressing the annual Sun Valley gathering of media moguls hosted by Herb Allen. The ghosts of deals past hatched at the retreat (Walt Disney/Capital Cities/ABC, AOL and Time Warner, Google and YouTube) do not portend what's to come.

In fact, there are more potential missed opportunities lurking in the shadows.

After years of deflecting sell speculation, General Electric appears ready to fling the NBC Universal albatross in a piecemeal asset sale or a merger with Time Warner or Liberty Media. Vivendi's right to sell its $4 billion stake in NBC Universal in November will trigger GE's move to buy the stake or risk it being sold to a crafty, potentially takeover minded investor like Liberty's John Malone. Chances are Malone would be most interested in the NBCU cable stable that now includes The Weather Channel and Oxygen, as well as partnered interest in A&E and History.

By hanging on to NBC Universal through NBC's ratings dive and the digital transformation of its broadcast business, GE has lost hundreds of millions in annual profits. It is indicative of the value deconstruction and deconsolidation occurring throughout the industry. Barry Diller spent a decade building conglomerate IAC only to spin off the pieces, the value of some, such as Cornerstone Brands, is being questioned. Separating Viacom from CBS has failed to create the new value sought. And Sam Zell concedes he can't move fast enough selling off or reducing costs at his recently acquired Tribune Co.

With the media and entertainment market suffering from deal paralysis for all but the most basic and safe acquisition (like buying the Weather Channel), it is unclear how GE will maximize the sale or spinoff of NBCU as long as advertising and stock markets are tanking. Even the most bullish long-term institutional media investors are uneasy about big media's continued capital deployment on acquisitions. Big media's stock prices and valuations are free-falling to mid-1990s lows. (News Corp. and Time Warner are trading less than $15 a share.) And, yet, with multiples plummeting in a distressed economy, smart deals abound. It's a vicious Catch-22.

Ultimately, lasting value creation opportunities have to occur with a company's existing assets, before it can happen with acquisitions. Time Warner has struggled to do as much: having its Sports Illustrated franchise beat to the cable sports punch by ABC's ESPN, its People franchise outdone early on by NBCU's "Entertainment Tonight," its Fortune-Money-CNN Finance franchises outdone by CNBC, and its Pathfinder online portal having been overshadowed by AOL and Yahoo. Even merging with AOL hasn't created nearly the new value expected.

The sale of AOL to Yahoo would be positive for Time Warner, by 33 cents a share if sold for $8 billion and as much as $3.45 per share if sold for $12 billion, according to Citibank. Even that situation could come down to: hesitate and lose.

With banks, private equity and event venture capital drying up for all but the sure bets -- and Internet startups still proliferating -- companies are on the lookout for one-offs that can extend and create new value from existing operations and assets. LinkedIn, Digg and Ning are being eyed by established new and traditional media. Rejecting a compelling additive move could cost players more money than if they pass on a strategically sound acquisition. Not making the most of existing operations and assets in a new interactive marketplace is just as bad.

Active or passive, media players can be comforted by the knowledge they are united by one freak, fundamental problem: the metrics, multiples and core financial elements of their businesses will need to be redefined over the next five or so years in order to make sense of what their actions (or inactions) and companies are worth. And that will bring a whole new level of meaning to the words "missed opportunity."

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