What is to blame for the poor performance of media and entertainment companies? An obsession for growth and the accompanying deal making is the major cause, say the authors of “Curse of the Mogul”, in this third part of our coverage
As noted in the previous two installments, the authors of “The Curse of the Mogul” (for bios click here) are not avid fans of the ‘grow at all cost’ philosophy that underpins the strategy of many media conglomerates, and the moguls that often operate at their heads.
For the authors, the causes for this rash of bad growth are two-fold: bad acquisitions, and over-emphasis on revenues to the detriment of margins.
Distracted by deal-making
In their pursuit of growth, the media moguls often chase deals in which the seller makes the windfall, and which the buyer regrets later on. As an example of the mogul-led shortsightedness, the authors turn to Jean-Marie Messsier, one of their favorite whipping boys. In the case of the Vivendi-Universal merger in 2000, JMM wanted the deal too badly and ended up overpaying. The case of Universal studios is exemplar: here was a movie studio that had been under stable, well-versed management for 30 years and despite changes of ownership (including the Japanese Matsushita), none of the owners had been able to unlock any hidden value…
For those who wish quantitative proof of the no-value-in-acquisition theory, the authors recommend turning to the study by an analyst from Bank of America Securities (page 208 of the book). In the close examination of cases regarding Time Warner, Viacom, Disney and Comcast, the analysis shows that without acquisitions, stock prices would have more than doubled. Sometimes it may be best to let sleeping deals lie.
The second cause of poor performance, according to the authors, is the misdirected understanding of potential benefits from strategic combinations. Here we confront the problem of returns from investment being below cost of capital. A further complication is the peculiar ownership structure, namely with supervoting shares. Lastly, but not leastly, there is a ‘systematic overestimation of the economic benefits of combination’ (page 217).
This brings up the issue of synergies from deals. Although the mogul may have the strategic vision for a deal, the troops behind often forget to do the footwork of properly estimating the synergies (namely the cost savings) before the deal is done. Strategy and synergy have a tight connection, and any deal cannot be declared beneficial until the synergies have been properly assessed.
Granularity of growth
Even though growth by acquisitions has been put into question, the authors do not question that growth is good, but how and at what cost? This is where a recent McKinsey book (Granularity of Growth, 2008, Viguerie, Smit and Baghai) provides relevant and intriguing analytic insight.
In their analysis, the consulting firm outlines three cylinders in the engine of growth:
- cylinder 1 is growth from acquisitions;
- cylinder 2 is growth from ‘portfolio momentum’ (i.e. growth in line with the sector);
- cylinder 3 is organic growth via market share gains.
What does this have to do with media moguls, you may be asking. Well, according to the research figures, the media and entertainment sector far outweighs other sectors in its reliance on acquisitions. Indeed, 56% of media growth derives from acquisitions.
Blame the Internet
Acquisitions may provide the number one cause for poor performance. However, the newspaper industry can seek solace in the fact that excessive deal making was not its comeuppance. Here the Internet, and the fantastic suitability of online tools, proved to be its downfall.
Add chart of newspaper margin evolution
The newspaper industry relied on advertising for 80% of its revenues. And the bulk of that advertising was not the glamorous stuff, but rather the column-inches of boring but highly profitable classified advertising: help wanted, real estate and automotive for the most part.
The authors explain that the first killer application on the Internet was classified advertising, which offered users the ability to reach millions of potential buyers at a fraction of the cost of print. No wonder then that the share of online for jobs jumped from a piddly 2% in 1998 to a whopping 51% in 2008.
For the unlucky newspaper owners, not much could be done against this structural earthquake that undermined the foundations of a long-established business model. To make matters worse, the high fixed costs of newspapers (for printing and distribution equipment) meant that the hit to the advertising topline transferred directly to the bottomline.
Bridge that disconnect
For the authors, the solution to overcoming the systematic poor performance in the media industries lies in bridging ‘the fundamental and consistent disconnect between the strategies pursued by the moguls and (the) structure of the industries in which they operate’ (page 257).
Published September 2010.
The last installment will appear on October 27 and will examine how to build a better media mogul.