Does it make sense for media companies to consolidate again?

New book 'Curse of the Mogul' analyzes mergers

Talk to any CEO these days and you get the same message: A major period of consolidation looms for the entertainment industry. But some voices in the wilderness are starting to ask: Does any of it make sense?

The portents are clear: Comcast wants to figure out a way to acquire NBC Universal. Cash-rich Time Warner has to make a big move soon or become bait for a takeover. Rupert Murdoch yearns for still more assets — even another film studio. The Japanese mandarins at Sony, too, may get restless about their holdings.

But while investment bankers are activating their dealmaking machinery, some major players are looking at the big deals of the recent past and concluding that many simply didn’t work.

Arguing this point is "The Curse of the Mogul," a shrewdly titled analysis of media mergers that has been eliciting surprised responses in the New York Times and Wall Street Journal.

Written by three credentialed banker-economists (two of whom are professors at the Columbia Business School), the book contends that the major media companies consistently offer the wrong response to the challenges of the day.

Digital technologies have basically turned out to be not the friend of media companies but rather the adversary, they note. "Benefits from the Internet are overwhelmed by the damage done by the lowering of barriers to entry," say the authors.

The corporate answer to this disruption is the doctrine of growth — the wrong kind of growth. CEOs have bonded with Wall Street dealmakers not in building their own businesses but in acquiring other ones.

The result, according to the authors, is that the top media conglomerates have written off some $200 billion in bad deals over the last decade alone. The worst transactions are not hard to trace: the AOL-Time Warner fiasco and the Viacom-CBS deal. And remember the Sumner Redstone-Tom Freston intrigues on the vaunted MySpace deal?

Jonathan A. Knee, a banker and director of the media program at Columbia who is the lead writer of the book, points out that media moguls tend to embellish their cosmic results at their respective companies. But, according to his calculations, between 1995 and 2005 the major media companies returned an average of only 2.5% to shareholders while the S&P stock index returned three times that amount. He includes Disney, Viacom, Time Warner and News Corp. in his figures.

If Knee and his colleagues are skeptical about growth-through-acquisition , what would that mean for future deals? If major consolidations do indeed take place, would the combined entitles yield greater value for shareholders — or, for that matter, offer better product to consumers?

Jeff Bewkes, the nimble CEO at Time Warner, has been slimming down his company, to focus more directly on the content business (cable and publishing). His apparent aim has been to create a sharper, more focused company. Is this mission anachronistic?

I remember a man named Charles Bluhdorn, whose Gulf & Western company was one of the early conglomerates. Bluhdorn loved the fact that he mined zinc, marketed cigars, built automobile parts, owned sugar plantations and also, by coincidence, produced movies.

Bluhdorn was so eager to conglomeratize that he even tried to persuade Fidel Castro to form a sugar cartel. (Castro demurred.)

Ultimately Bluhdorn’s company ran into a blizzard of stockholder revolts and SEC investigations and Bluhdorn himself imploded. The company finally changed its name to Paramount and focused on the content business — until Sumner Redstone came along and reconglomerated it.

Was this fulfilling "The Curse of the Mogul"?