– by Nikolaos Antypas, ICMA Centre PhD student
There is a major acquisition in the making, which may have dominated your business news stream: AT&T (2nd largest mobile network provider in the U.S.; acquirer) has reached an agreement with Time Warner (4th largest content provider in the U.S.; target; also, Na na, Na na Na na Game of Thrones) for a deal valued at $85.4 bil (premium of 35% over the recent trading price).
That is a huge deal with material repercussions for the market. For instance, regulators (and Netflix, Hulu, Amazon etc.) are concerned with whether the combined entity will charge for the mobile data used on competitors, while charging nothing for Time Warner’s content. Considering the position of AT&T in the market of content distribution, this practice may impede competition, hurting the consumer in the long run.
Nevertheless, the deal may not be quite profitable for AT&T shareholders, as suggested by Bharat Anand, professor at HBS (Harvard Business School, not Henley!). You can read his blog here.The only expected origin of benefits is from synergies, although the sources of synergies seem ambiguous after closer examination. He argues for the new status quo of modern economy, where “complement” products (those accompanying/facilitating the sale of core products) have become increasingly important for technology giants such as Apple (partnership with HBO), Amazon (Prime Video as standalone business), Twitter (live feed of NFL games). In the new context, the cheaper the complements, the more value is added to the core business. This view of reality is in contrast to the significant premium paid by AT&T for the cash flows of Time Warner content.
We may also need to consider the scenario of AT&T distributing exclusive content on its mobile network. If this is enough to attract more data subscribers, then it would be more profitable to expand its content portfolio (e.g. TV series) on either quality, quantity, or both. Note that the “video-on-demand” industry (Netflix, Hulu etc.) does not have a pricing structure allowing for the winner to reap overwhelming benefits against the followers, as people can afford and do actually pay for more than one subscriptions simultaneously. However, it is improbable that the same holds for mobile plans: it is more likely for people to have a unique data provider, as the individual contracts are relatively pricey. We should consider whether AT&T plays the acquisition move not just to survive the advent of unconventional content providers such as Facebook, but also to strengthen its position in its own core industry.
Written by Nikolaos Antypas, ICMA Centre PhD student pursuing research in analysis of merger waves, takeover target prediction and corporate governance. View his profile on the ICMA Centre website.