The Hindu Business Line : Why does Comcast want to take over Disney?

IT LOOKS like we are about to be exposed to another instance of managerial hubris on a gigantic scale. Over a week ago, Comcast announced a hostile bid to takeover Disney.

Comcast is the largest cable company in the US in terms of sales revenues ($18.35 billion or Rs 84,410 crore) and number of subscribers (21 million). It also owns an entertainment channel and a golf channel. Disney is a $27-billion (Rs 1,24,200 crore) conglomerate with studios, theme parks, and television channels.

Disney is perhaps ripe for a shake up and if nothing else, this offer is yet another signal that all is not well with that company. Performance has been an issue for some years now. That brought focus to its leadership problem. Mr Michael Eisner, who took over as CEO in 1984, performed magic for a while but rapidly overstayed his welcome. Unable to find or get along with a successor, Disney has seen a string of very highly paid severance deals as prospective number twos have found it more lucrative to pick-up a few hundred millions and leave for better opportunities elsewhere. Just a few months ago, two directors (one of whom is the founder Walt Disney's nephew) resigned (more likely eased out) from the company and have been doing the rounds challenging Mr Eisner's leadership and calling for his resignation.

The company also suffered from an ineffective board which was packed with Mr Eisner's `yes men'. There were several directors with serious conflict of interest issues with the company. While the board has gone through a slight revamp, a major problem is that the company has not been paying attention to its core competency, namely, creative animation, which has been in decline. To compensate for this weakness, Disney had a deal with another company, Pixar (run by Steve Jobs of Apple fame) under which Disney co-financed and distributed computer animation films produced by Pixar. With its own animation films not doing too well, the deal gave Disney lots of profits. But this cosy arrangement is ending for recently Pixar decided not to renew its contract with Disney.

So Comcast wants to buy damaged goods cheap? First let's get the terms straight. Although some have called it so, this is not a merger. It is an acquisition with one firm trying to buy another, while the latter is unwilling to be bought. (In a merger, we would see two firms combining to form a third new entity.) A merger or acquisition (M&A) has to make sense. M&A is not a strategy on its own, but a means to a corporate strategy which involves not just thinking about new products and markets but also an examination whether the competencies can be combined and whether they make sense in a combined fashion.

The confusion between means and ends in this attempted deal is best exemplified by a quote in the business newspaper, the Wall Street Journal, reporting on the event. Apparently, the Comcast board/management team had a meeting with their advisors about a `strategic direction' for the company but everyone knew they were really meeting about the Disney acquisition. The mantra in US corporate management seems to be: If you are running out of ideas, go and buy somebody.

The ostensible reason given for the present acquisition is that Comcast believes it can increase profits of the combined companies by coming up with new ways of distributing Disney content (that is, programmes and shows) through its subscribers over cable and the Internet. That argument in favour of the benefits of vertical integration does not stand too long since Disney itself, as a combination of content and distribution provider, has not got much out of it. Disney owns Miramax and Walt Disney studies (content providers), and also the ESPN sports network, and ABC television studies (distribution channels). ABC channel has been trailing in the ratings for a long time now.

Sure, the combined firm would have market power. They may require other cable operators who want to carry a local ABC station to also take some of the new channels. But this is not economies of scale, it is using muscle to push your products on unwilling customers, and will not last very long. When combinations are not demand-driven, they only end up reducing efficiencies for all. Moreover, with the market being internalised in the Comcast-Disney deal, market signals will go blank, which is key in the entertainment industry.

Let us not forget the case of the disastrous merger of AOL with Time Warner, where a few managers and their consultants came up with an idea of combining disparate producers of content and distribution (with a good bit of technology thrown in) to produce a mess that has been in turnaround mode ever since.

The friendly merger costed the shareholders of the two companies about $200 billion (Rs 9,20,000 crore) in lost market value. The respective CEOs (Mr Steve Case of AOL and Mr Gerald Levin of Time Warner) were both ousted, but not before they and their advisors who helped put it together managed to leave with fat compensation checks in their pockets. The hype at that time called the merger the ``first global media and communications company of the internet century".

The markets have already sent us a signal. The value of the bid was $48.7 billion (Rs 2,24,020 crore) in a stock offer which is a 7 per cent premium for Disney's shares. But with the announcement, Disney's price jumped about 15 per cent and Comcast's share price fell about 8 per cent.

For those who are listening, the market is trying to tell us that this is a better deal for Disney (which is not in great shape and how it has been offered a premium) and Comcast is going to hurt in profitability after the combination. Of course, the game has only begun. Disney's CEO has already said no to Comcast when initially broached with the offer.

Now that it is a formal one, the Disney board will have to consider it seriously. Perhaps Comcast will raise its price, making the idea even less attractive for itself.

There may be other suitors too, as cash-rich companies will start eyeing the Disney empire for the pieces they can keep, and those they can sell to raise some funds.

The only explanation for the deal is the one I started with, namely hubris. Managers love size. The larger you are, the more chances to make a splash on the front pages of the newspapers, and the greater can your own personal compensation be. Perhaps this is an even more acute problem when it comes to managers in the entertainment business. They are so close to celebrities that at some point they start thinking that they too should have similar status.

Comcast has been riding this wave for some time and had acquired AT&T Broadband in 2002 for $51 billion (Rs 2,34,600 crore). It was a horizontal acquisition, just aimed at building size without adding anything new. It is now entering new grounds and is looking ahead to some troubling times.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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