CHICAGO -- There is something fundamentally wrong with the blanket notion being floated by some so-called experts that the only way to realize more value from media conglomerates is to dismantle them.
Aside from being an overly simplistic, one-size-fits-all view, it smacks of an unproved knee-jerk response to the industry's complex and challenging digital broadband transition. It fails to address some of the formidable underlying reasons why media stock prices are languishing and full values are not being realized.
Just maybe, it isn't the mix of media assets, but the way they are being managed.
Just maybe, it is an absence of visionary leadership and enterprising strategies necessary to adapt to the change and make the most of new opportunities.
Just maybe, the financial markets and media executive are a long way from knowing for sure the new-media economic return on investment and other financial implications of this ongoing sea change.
Media's new rule book is bound by interactivity and an empowered consumer; on-demand content and services; and a highly personalized, targeted dynamic. It is everything that traditional media isn't.
Still, the media conglomerates, largely assembled in the 1990s, have been swept into the technology-driven whirlwind with their longtime executive management teams, legacy infrastructures and costs intact. The schism created has caused a tremendous turmoil that can't be solved simply by breaking apart the pieces. Maybe, as Viacom chairman Sumner Redstone said, bulk doesn't ensure success, but neither does minimization.
A sale or spinoff of individual assets by media giants in some cases could accomplish little more than creating far less potent pure-play operations with the same legacy management and structures, in dire need of strategic alliances and synergies that will give them needed heft in a highly competitive media marketplace.
In some ways, the results of this month's Viacom split will be telling. It will be interesting to see how long the two public spinoffs can go before they expand their reach through acquisition, merger or alliance.
The new Viacom, whose core holdings are MTV cable and broadband networks and Paramount Pictures film studios; and CBS Corp., whose key holdings include the CBS and UPN broadcast networks, Paramount Television production division, radio stations and outdoor billboards, will at the very least seek scale in their primary businesses to maximize their economic and competitive clout. Both companies also have signaled plans to expand into each other's media territories, yielding the specter of two new sprawling media concerns.
Even the most successful, smaller, more narrowly focused media companies -- such as Pixar Animation, DreamWorks and Lions Gate Entertainment -- struggle for proper value recognition in public markets that rarely understand or appreciate creative businesses, much less fundamental sea change.
Smaller and simpler isn't usually much better, and ironically, most smaller players are looking for ways to fold into bigger concerns. Investors, who also appear unfazed by sizable stock buybacks and dividends to which media players have recently resorted, will remain unsettled about the dramatic digital broadband changes they can't measure or digest.
This week, the stock market will get its first chance to trade and value the new Viacom and CBS Corp. even though the companies will not officially be split and independent until year's end. It will be interesting to see where investors price the more narrowly focused media companies initially and for the long haul. The companies' new executives teams, which are, in fact, their former executive teams, will be under pressure to demonstrate that they not only "get" the new-media world but also that they know what to do with it.
Banc of America analyst Douglas Shapiro pegs the current fair value of the new Viacom at $46 a share and the fair value of CBS Corp. at $33 a share, compared with the $34 trading price and $40-per-share target of the current Viacom. Other analysts forecast that the new Viacom's stock price will exceed $48 a share. Combined, the two new companies' stock prices should exceed the old Viacom's trading and target stock price.
The worst that can happen is the stock of broadcast-based CBS Corp. trades down while the mostly cable-based new Viacom soars, as it did Monday.
The new Viacom and CBS Corp. issues could get a pop this month ahead of the Dec. 31 split (just as the old Viacom stock has appreciated 7% in the past six weeks, and momentarily spiked in March when the split was announced. Even then, there are no guarantees it would be sustainable. The stock prices of comparable media companies -- either mostly cable network- or broadcast-based -- aren't exactly wowing investors. Although the new Viacom and CBS importantly are content and distribution hybrids.
The stock market that continues to struggle with a transforming media landscape might require metrics that are not yet available, including forecasted revenue and earnings from new-media sources, consumer and advertisers response to digital broadband options just barely in place and a read on the shifting balance between traditional and emerging media platforms.
That kind of prevailing uncertainty, which investors hate, will continue to work against all media companies. With only the promise of new digital business models, the cyclical, hit-driven, slower-growth economics that have historically vexed industry players also will continue to take a toll.
The last time Viacom did something about that was in 2000 when it acquired CBS and Infinity Broadcasting on the heels of consolidating acquisitions including King World, Paramount and Blockbuster, none of which materialized in t¢ªhe soaring shareholder value predicted. Then, Viacom was valued at $80 billion, compared to its presplit market cap of $55 billion.
"By acquiring CBS in 2000, Viacom unwittingly created a 'reverse hedge' in which structural growth of cable networks was offset by structural declines in broadcast and radio," Bernstein Research analyst Michael Nathanson observed this year. "The shift to separate these assets is tacit acknowledgment that management has badly erred."
Surely such media conglomerates as Time Warner and News Corp. could trade up to higher new-media valuations if they just knew how to more aggressively and effectively integrate advancing digital broadband interactive options. They are working on it.
Time Warner president and CEO Richard Parsons' superb untangling and peacemaking at the troubled giant is not the same as the entrepreneurial insight and new tech savvy needed to reinvent such giants for a new age. And a revitalized America Online stands all too separate from Time Warner's cable, television and print pieces.
Investor Carl Icahn and his band of dissident shareholders are seeking a better return on their Time Warner investment, which they could get from a one-time boost if AOL is sold to the likes of Yahoo!, Google or Microsoft. But why would Time Warner sell off AOL only to become completely beholden to its rivals for online portal access, as well as other cable and broadband services? The new-media learning curve remains steep.
Likewise, spinning off the Time Warner-controlled cable systems won't necessary elicit more market value. Just look at Comcast, the industry's dominant cable provider, whose pure-play stock price also is languishing.
JP Morgan analyst Spencer Wang recently wrote that the credible reasons to consider deconsolidation include the realization of limited benefits from consolidation synergies, the slowing organic growth rate for large media companies, a dearth of meaningful assets to acquire, an unsupportive regulatory climate for media concentration, underperforming equity prices and a greater focus on return on investment capital as a metric (which is depressed by merger and acquisition spending).
Rather, the focus should be on how media companies big and small make the leap into high values using what they have in a more proactive enterprise in a way that demonstrates their extensive knowledge of and enthusiasm for digital broadband technology and the ways it is altering constituent relations, with consumers, advertisers and content providers.
What the market surely will respond to is to a more proactive plan of attack and tangible results from integrated new- and old-media operations. It needs to be invigorated by clear evidence that a next generation of leaders is reshaping media fundamentals rather than reshuffling the deck chairs. Only then can you expect to see media values take off.
Diane Mermigas can be reached at dmermigas@hollywoodreporter.com.
