ABC merger could be first of a series of corporate power plays in broadcast board rooms. Tuning in real-life radio/TV drama
Don't touch that dial. You may miss ``merger mania'' -- the hottest show in broadcasting. This program has it all: high rollers, intrigue, suspense. And nothing attracts audiences (or investors) like a corporate wedding.
Last week, America tuned in to ``fallen star takes a suitor,'' subtitled ``ABC promised to Capital Cities.'' Viewers on Wall Street loved it. Federal officials were beaming -- but were too professional to actually applaud. Other networks up for grabs
Meanwhile, on another channel, CBS is preparing to cope with ``merger mania.'' One recent episode teamed Sen. Jesse Helms (R) of North Carolina with a grass-roots group called Fairness in Media. A donnybrook erupted when Dan Rather and Company were accused of giving Americans the news with a leftward tilt. To set things right, Senator Helms called for all like-minded conservatives to buy up stock in CBS. The stated goal: ``To become Dan Rather's boss.''
More recent episodes starred Atlanta's cable-TV mogul Ted Turner, who has been openly shopping for a network to call his own. And last week, retired CBS chairman William Paley figured in rumors of a leveraged buyout. By Friday, CBS had a new beau to add to its list of suitors: Arbitrager Ivan F. Boesky reportedly has bought a 7 percent stake in the network.
Stay tuned. Such daring may give more suitors the courage to make a play for CBS. But at this point CBS is turning down all offers. ``We are deeply committed to the bright future of CBS as an independent company,'' said company chairman Thomas H. Wyman last Thursday.
What about NBC? Merger mania has virtually excluded NBC from its scripts. Analysts say NBC has a rather large protective parent in the RCA Corporation, which isn't about to let NBC be courted by just anyone.
But other broadcasting companies are certainly being written into the show. Last week, stock in MCA Inc., Storer Communications, and Taft Broadcasting jumped. In fact, most broadcast stocks were up as investors speculated on the next likely star to walk the aisle.
What started this interest in mergers in the broadcasting industry? No one reason, say media analysts, but, rather, a confluence of events has introduced and spread the concept to shareholders and management. Feds more relaxed
Under Reagan appointee Mark Fowler, the Federal Communications Commission has taken a let-market-forces-rule approach. In the past, the FCC would have been a serious roadblock to a broadcasting merger.
``Five, six, seven years ago, a hostile takeover would have been virtually impossible. That's no longer true,'' says Donald West, managing editor of Broadcasting magazine. ``The philosophy of Fowler's FCC has been that a broadcast company is no different from any other company. No impediment should be put in its way.''
Indeed, at a congressional hearing last week, Fowler said the FCC ``ought to not to encourage or discourage any party'' but ``be an impartial umpire'' in broadcast company takeover situations.
This past year the FCC reviewed ownership rules and relaxed several. The most significant change, crucial to the Capital Cities-ABC deal, was the expansion of the national ownership rule. As of April 2, companies are no longer limited to owning seven televison stations (5 VHF, 2 UHF). Instead, they can own 12 television stations as long as their total US market share does not exceed 25 percent.
``Now you've got 12 big companies with thick wallets in a position to make acqusitions they couldn't make a year ago,'' notes George C. Strachan, a Value Line Investment Survey analyst.
One argument voiced by FCC commissioners for the rule change was to encourage broadcasters to join forces and develop a fourth network and thereby increase the diversity of programming.
But the real motive, say observers, was to free up the industry from stifling government regulation. ``We're not going to have a fourth network. Who needs it?'' asks Christopher Sterling, director of George Washington University's Center for Telecommunications Study. ``Cable penetration has reached 45 percent. There are 30 cable networks out there. We've got billions of alternatives,'' muses Sterling.
Two other potential merger inhibitors, the Justice Department and the Federal Trade Commission, have allowed mergers in the oil and steel industry. Analysts expect few objections to broadcast takeovers. But before this laissez-faire philosophy changes, companies are making their acquistions. ``One group is gobbling up another while the gobbling is good. Because sooner or later the pendulum will swing back,'' says Mr. Sterling. Flush with cash
What makes another broadcast company so good to gobble?
One very attractive component: heavy cash flow. ``It's not unusual for a televsion station to have close to 30 to 50 percent operating margins annually,'' says Carol M. Lippman, media analyst at A. G. Edwards & Sons Inc. Cash flow is great because relative to other manufacturing businesses capital expenditures are low, and ``they're just raking in the money from advertisers,'' Lippman says.
True, network audience share has fallen over the last decade, but network television still can tune in 41 million sets during prime time. Thus a station commands big money because it remains the best mass market advertising outlet for manufacturers.
Still, ``one of the biggest challenges is to reinvest that cash flow,'' explains Lippman. A merger or a buyout of another broadcasting or publishing company is one way to spend that money.
Add to that a growing management recognition of the value of diversifying into other media outlets, says Joseph Turow, associate professor of communications at Purdue University. ``You hear words like synergism to describe what they're doing. For instance, Warner [Communications Inc.] has a number of different divisions. They're not viewed as independent profit centers but as centers that can be related to other divisions and produce profits there also. For example, Warner's cable music division strengthens their record division.''
In addition to complete mergers, many broadcast companies are using their abundant cash to buy or start businesses with a high front-end capital expenditure, such as celluar telephone and cable TV. But when companies sink profits into such areas that take a long time to produce earnings, shareholders may become impatient and disgruntled with management. That brings into play another force for mergers. Short-term vs. long-term
Over the last decade there has been a shift in the ownership of companies. The largest stockholders in many companies are now institutional investors, not individual investors. Mutual funds, money mangement firms, pension funds, and banks own a greater chunk of corporate America.
Some money managers are apt to lean toward short-term returns. They are judged, often on a quarterly and annual basis, by the performance of their portfolios. If their portfolio of stocks does poorly, their reputation and perhaps their jobs may be in danger.
Consequently, the institutional shareholders are more likely to be dissatisfied than individuals with a stock that lingers at a price much lower than the actual asset value of the company.
Or they may be impatient with companies that sink money in areas that may not produce significant earnings quickly. So, they leap at the opportunity to take the quick gains a takeover offer presents.
Or, as in the case of Storer Communications, shareholders may take things into their own hands. The company was performing poorly, so last week a group bought 5 percent of the outstanding stock. It plans to install a new board of directors in order to liquidate the company.
To escape from investors who want their money now, rather than later, some managements will take the company private. In a leveraged buy-out (LBO) the managers purchase the company themselves, rather than risk a takeover. Carol Lippman at A. G. Edwards cites Metromedia (the largest independent station owner) and Wilmetco as two recent broadcasting LBOs. Feeding frenzy
Once takeovers begin in an industry, they focus investor attention on all likely candidates. The big financiers and arbitragers move in to take advantage of the speculation. Soon, someone takes the plunge and others follow.
With the Capital Cities-ABC agreement, a psychological barrier apparently was broken. As Mr. West at Broadcasting magazine explains: ``There's been a change in perception. Ownership in one of the big three [networks] can change and the republic will not crumble. Now CBS is much more vulnerable.''
In the wake of the Capital Cities-ABC deal, a frequent query is how can a small company take over a big company? All one needs is the money to buy enough stock to gain a controlling interest.
Typically, banks or other investors will lend the money to make the purchase. The banks figure that the cash flow of the new company will repay the debt.
``Anyone can put together the financing if they have the credibility,'' says Strachan at Value Line. He points to the mergers in the oil industry. ``Have you been watching Boone Pickens lately?''
T. Boone Pickens operates Mesa Petroleum, a tiny oil concern in Amarillo, Texas. But because he can raise large sums of money, the largest of oil companies have been brought to their knees by his takeover attempts.