Media Cos Could Benefit More From Break-Upgrades Than Mergers

Media companies should pursue break-ups, where they've had more success, than marriages, given the industry's poor track record on big deals.

That's the opinion of some long-time industry observers as talk of media consolidation intensifies following Walt Disney Co.'s (DIS) agreement in August to buy Marvel Entertainment Inc. (MVL) for $4 billion, and reports of talks between Comcast Corp. (CMCSA) and General Electric Co. (GE) for NBC Universal.

Big media companies may be tempted to get even bigger as they face revenue and audience declines amid the rise of digital media. High cash piles, low valuations and an easier credit market make deals possible, but heartbroken shareholders are less willing to commit.

"There will be other deals, but don't look for the swashbuckling era of the 1990s to come back to the media industry anytime soon," said Harold Vogel, who was a senior entertainment industry analyst for Merrill Lynch for more than 17 years and now runs Vogel Capital Management.

"The mergers and acquisitions that defined this business for so long haven't proven to be terribly productive, and there's a lot of extra caution about it now," Vogel added.

Since news of Comcast's potential deal for NBCU emerged last week, shares of the nation's largest cable provider have shed almost 11% amid a burst of skepticism from analysts and investors.

"Comcast does not need content since it has excellent growth prospects with other initiatives such as digital voice, its new commercial offering and high-speed Internet," Gimme Credit analyst David Novosel said.

Novosel added that the deal's "synergies seem elusive," pointing to recent separations of Viacom Inc. (VIA) and CBS Corp. (CBS), as well as Time Warner Inc. (TWX) and its cable arm, Time Warner Cable Inc. (TWC).

Even as it sits on $7 billion of cash, Time Warner remains in shrink-mode, planning to spin off AOL around year-end, with some speculating that its magazine business could be next.

While Time Warner Chief Executive Jeff Bewkes has said he would consider acquisitions, he has repeatedly acknowledged the media's dismal track record with dealmaking, noting that media executives have too often been seduced by public acclaim at the expense of shareholders.

"Shareholders appear to have smartened up somewhat," said Jonathan Knee, co-author of "The Curse of the Mogul: What's Wrong with the World's Leading Media Companies." "In general, the trend over the last few years has been towards increasing fragmentation and an increasing focus on deconsolidation, and that's likely to continue."

His book, which was also authored by Bruce Greenwald and Ava Seave, shows that major media conglomerates have written down $200 billion in assets since 2000 after "relentlessly overpaying for acquisitions" and delivering subpar returns to investors.

Underlying that performance is the rapid rise of digital communications and the damage it's doing to the media's traditional business models. Just as the Internet has spelled trouble for the music and publishing businesses, a decline in DVD sales is crimping profits at movie studios and the ability to watch video on-demand and skip commercials is hurting the television industry.

Cable networks have been an exception, benefiting from audience fragmentation and steady subscription revenue from TV distributors, making them a favored subject of acquisition speculation. But they depend on pay-TV distributors for subscription revenue, and Comcast's push for content doesn't look like a vote of confidence by the cable giant in the future of distribution amid the rise of online video.

"Cable networks are consolidating now, but I think they've topped out," Vogel said. "The business isn't going to get any better from here."

-By Nat Worden, Dow Jones Newswires; [phone]; [e-mail]