Feature: Is Synergy Still A Dirty Word?
News that Carlton and Granada’s proposed £2.6 billion merger has been referred to the Competition Commission raises the question: What can we expect to see in the mergers and acquisitions (M&A) market in 2003?
Following a raft of M&A activity in 2000, which peaked with the (arguably disastrous) AOL Time Warner deal, the number of high-profile mergers and acquisitions has declined significantly, with media players scorning investment bankers for bearing over stretched synergy statements. However, a new report from financial advisory group, KPMG, suggests that there will be an upturn in media mergers in 2003.
According to the survey of private equity investors specialising in the media sector, there will be greater investment in the marketplace in 2003, with the proposed liberalisation of the media ownership regulations providing a much needed boost to the sector, which was depressed in 2002. Optimism is nevertheless relatively guarded, with one investor commenting wryly that “there must be more deals this year – there couldn’t be any fewer.”
Callum Chance, a director at KPMG, believes that investors are relatively confident of an upturn in media activity in 2003. He says: “Executives have pinned most of the blame for last year’s lack of deals in the media sector on the difficulty of forecasting revenues and vendors’ unrealistic high price expectations.”
These factors are seen shifting in 2003, with investors citing business to business publishing and trade publishing as the most promising in the media sector.
The survey, which will provide welcome reading to the beleaguered media industry, shows that most investors believe that the forthcoming Communications Bill will make it easier to do deals in the sector, providing further impetus to the recovery of M&A activity in 2003.
The trade press has been brimming with blue-sky theories of US media conglomerates such as AOL and Viacom swooping on UK media assets as soon as the Bill comes into force. However, such scenarios ignore the fact that many media groups are too highly-leveraged to take advantage of the theoretical opportunities that the Bill presents.
Post-AOL Time Warner, the rhetoric of synergy savings is not so easily swallowed by investors or analysts, who have already questioned unrealistic expectations for cost savings from the proposed Carlton and Granada merger.
A study of the likely effects of the Bill from corporate finance house, Long Acre, also suggests that it will lead to further M&A activity in the media market. However, the group views the much-predicted influx of foreign ownership of UK media assets as the last stage of consolidation, claiming that very few major synergies typically exist in cross-boarder deals. Instead it predicts intra-domestic consolidation, followed by cross-media domestic consolidation (such as TV groups purchasing radio groups).
Long Acre does, however, believe that the potential for US acquisitions exists, claiming that in the TV market there are only two types of programming: indigenous and American. Looking to the future, the group predicts that global and pan-European advertising opportunities may drive synergies for global media operators, following the example of MTV.
Increasing confidence amongst investors, combined with the liberalisation of the media ownership regulations, may finally shake the media sector out of its post 9/11 hangover. However, there are still significant risks facing the media market in 2003.
Growth in the US economy weakened significantly in the final quarter of 2002; in addition the uncertainty over a possible war with Iraq and the associated large fall in equity prices in early 2003, are contributing to low forward visibility of media business activity.
However, history suggests that markets tend to suffer most from uncertainty about the timing and nature of any military conflict rather than from the direct economic effects of an actual war, if and when it does occur.
Recent figures from the Advertising Association, suggest a turn-around is already underway, with UK advertising expenditure rising by 4.9% year on year during the fourth quarter of 2002. Perhaps investors will take the opportunity to enter the market in a time of relative weakness and the breathless declarations of unique and unprecedented synergies will dominate the sector once again.
Subscribers can access ten years of media news and analysis in the Archive