The Shape of Things to Come

The last few months have not been kind to communications conglomerates. The value of AOL Time Warner’s stock recently hit a post-merger low, having fallen about 70 per cent from the beginning of 2000 when the merger was announced. The French media giant Vivendi Universal is quickly catching up (or down) with AOL, its shares having suffered a comparable decline over much the same time period. In Canada, BCE and Quebecor are under extreme financial pressure; their shares are depressed and management do not appear to be happy either. Speculation is rampant that they will have to sell off major assets sooner or later. That is in addition to the $4 billion worth of assets BCE announced it was selling last December. So, what is wrong? The superficial answer is simple – indigestion due to debt. Their eyes were bigger than their stomach, as my mother would say. A slightly deeper answer is more complicated but ends in much the same place. Most mergers and acquisitions fail. Acquirers pay too much, focus on cutting costs instead of increasing revenues, ignore corporate culture differences and slowly (or quickly) bleed themselves into mediocrity or worse. According to a 1999 KPMG study, 83 per cent of mergers produce no benefit for shareholders. A more recent study by McKinsey & Company found that 89 per cent of mergers produced a revenue slowdown compared with their peers after nine months, and three years after the merger only 12 per cent of acquirers had accelerated their growth. Sounds grim, doesn’t it? Well, it is. And why should we care? Those of us who are employed by or hold shares in these companies have an obvious interest. But even the impecunious and unemployed have reason to be concerned – at least, if they are regulatory enthusiasts – because when big companies stumble, they look for support wherever they can find it, including public policy makers and regulators. And the fact is, the last thing we need now is a special deal for our communications conglomerates. The public policy concerns associated with consolidation in communications have been highlighted by numerous Royal Commissions and government task forces over the years. The 1970 Davey Report, the 1978 Bryce Commission, the 1981 Kent Commission, the 1986 Caplan-Sauvageau Report and the 1992 report of the Local Networks Convergence Committee all raised a red flag on consolidation, especially with respect to vertical integration of carriage and content and media cross-ownership. Nonetheless, during the late 1990s there was something of a public policy sea change in Ottawa. The siren call of mergers beckoned. And CEOs, investment bankers and lawyers went wild. The promises were spectacular, the share premiums marvellous, the fees and bonuses a beauty to behold. But here we are now, adrift on the high flown seas of convergence, surrounded by debt and deflated shares, waiting to see if the tide will rise or fall. Fortunately, this need not turn into a public policy and regulatory nightmare. Conglomerate structures raise significant concerns related to diversity and plurality of voices, freedom of expression, competition and privacy. However, clear rules vigorously enforced may yet prove adequate to the situation. It is not impossible for the current structures to work from a public policy perspective. It is just more difficult. On the other hand, if any of the fabled synergies that supposedly drove these mergers actually surface, then it may yet be smiles all around. And if not, well, as long as the regulators and policy makers hold firm, the worst that will happen is some CEOs will look embarrassed. And some shareholders will take a bath. And, some lawyers and investment bankers will rake in big fees as conglomerates are spun apart into rational, efficient, investor-friendly pieces. Pieces that, perhaps, are in the shape of things to come. Christopher Taylor is an Ottawa communications lawyer. He can be reached at cataylor@cyberus.ca. This commentary presents highlights from a paper Taylor will present at the New Developments in Communications Law and Policy conference in Ottawa April 26-27.

The Shape of Things to Come

News | 04/25/2002 4:00 am EDT

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