Pros and Cons if Comcast and Disney Merged, Research Paper Example

Introduction

This paper explores the Pro’s and Con’s of a potential merger between that of Comcast and Disney Corporations.  The analysis is examined from each Company perspective and considers the 8-K forms submitted by both Companies.   Comcast Corp eventually abandoned its plans for the merger, indicating that the Disney Board showed no real interest in the deal.  The objective was to bring Comcast’s delivery networks with Disney’s content and creative abilities. The Comcast Executive thought that would provide them with media dominance.  Comcast is valued at $66 billion  and its share prices slid to $44 billion following the initial bid.  The deal worth $54 billion was rejected by the Disney Board as being too low.  ” Being disciplined means knowing when it is time to walk away. That time is now – Comcast CEO Brian Roberts in a prepared media statement” (Cowley)

The Comcast Perspective

The Pro’s

• The new Company in which they would acquire a majority interest is called “E! Entertainment Television” would be a cable service with more than 42 million subscribers providing all sources of entertainment, news, information and programming in the world of entertainment and celebrity personalities;
• The Owners Walt Disney and Comcast would hold 68.8% of the new Company.
• The New Company to be managed by Comcast’s Programming partnership retaining Richard H Frank as the Chairman. Frank is also President of Walt Disney Studios.
• The combination of ABC Networks , together with their marketing and programming expertise, as combined with the experienced production team of C3 will provide tremendous opportunities for E! ET both at home and abroad.
• The revised !E ET corporation will gain revitalized brand image strength capitalizing from the best of both Comcast and Disney.
• ABC networks have outstanding cable coverage which will create tremendous diversity and opportunity in which to expand the E! franchise
• Comcast Board, being the largest Cable provider in the USA feel they have the power to drive this through and appeal to the Disney shareholders if not enough enthusiasm is generated by the Disney Board. They are confident of their power base ” So, instead, they’re going to make an offer and try to get every Disney shareholder to sell their shares for a predetermined price. The price that Comcast offered Wednesday morning put the total value of all Disney shares at about $66 billion (minus around $11 billion in debt).”  (Stroup)
• The deal is financially lucrative for Comcast and saves them millions of $ ” To offset that cost, Comcast gets to sell two minutes of advertising per hour. If Comcast owns ESPN, it doesn’t have to pay the $54.8 million—and it gets to sell all of the advertising for its own subscribers. Additionally, Comcast essentially get a piece of every non-Comcast cable and satellite subscriber in the United States and beyond. Comcast (a cable company) will charge Cox Cable (another cable company) $2.61 per subscriber, and get 80 percent of the advertising revenue from ESPN appearing before Cox Cable subscribers ” (Stroup)
• It is the big networks owned by Disney which really attracts  The movies are a bonus too  as they’ll provide content for the networks Comcast would own.
• Comcast may feel that ABC Television network management has been underperforming there is plenty of investment return to be found simply by replacing that management.

The Con’s

• Comcast did not feel the Disney Board fully supported the offer and as such went Public with the offer. The Disney Board responded by saying that it would receive careful evaluation;
• The initial Comcast offer was considered by Analysts to be low and as such a successfukl bid would need to go much higher than the initial offer;
• Comcast has a successful record of transition on the cable side of the business, where its core strength resides, this is not true of the content side;
• The deal would receive extremely close scrutiny by the regulators ” Federal Communications Commission Chairman Michael Powell said Wednesday the agency would give the proposed deal “ruthless and rigorous” scrutiny ” (Monica)
• Comcast would need to further invest in Disney in order to improve upon its existing levels of profitability. ” “We are not talking about taking Disney to unseen heights,” Burke said, adding Comcast could improve ABC’s results and get better distribution deals for some of Disney’s cable channels, such as ESPN, ABC Family and the Disney Channel. (Monica)
• If the deal completely falls through this means that Comcast will have to spend heavily in its programming area. A deal with Disney potentially saves Comcast from this spend programme ” Comcast will have to spend fortunes developing programming to put through its own pipe to compete with Murdoch’s production arm. Better just to develop and extend it from Disney’s studios, the way General Electric intends to do from Universal.”  (Cramer)

The Disney Perspective

The Pro’s

• Comcast is the largest US Cable Company with a rich and successful history. This will be very appealing to the Shareholders of Disney who will view a merger as strengthening their investment and financial position;
• Disney benefits from synergy and distribution. ” Owning the content is good for the distributor. Owning the distribution is also good for the content provider.” (Stroup, Comcast, Disney, and the business of hostile takeovers )
• If a merger with Comcast was to succeed Disney’s  assets would gain sweetheart access to 21 million subscribers. Further it would ensure guaranteed placement of the lesser cable networks. The attraction of not having to compete with the other content providers for the attention of a distributor.
• Disney could optimize the relationship with Comcast and benefit from the fringe elements contained within the package deal;
• Disney company, in its entirety, would be given greater advertising access to over 21 million homes. This has great marketing and revenue earning potential for Disney.
• Comcast stated that it would invest heavily in sprucing up Disney’s theme parks and generally improving its image in this area; ” Comcast said it plans to drive attendance at the parks through advertising and cross-promotion at attractions, hotels and concessions.”  (Olsen)

The Con’s

• Despite the stated advantages for Disney, the Comcast approach will be viewed to a large extent as a hostile takeover with the balance of benefit being firmly in the court of Comcast. The remaining Board will also question the competence of the Disney CEO in the handling of this situation and in general protecting the best interests of Disney, particularly after recent poor performances ” The 61-year-old Eisner, who faces accusations of mismanaging the company’s fortunes by Roy Disney, the nephew of company founder Walt Disney and the man who recruited Eisner 20 years ago when the company was battling corporate raiders, faces new threats to his board seat.  On Wednesday, Institutional Shareholder Services recommended Disney shareholders withhold their vote to re-elect Eisner to the board, in a gesture to display its disapproval with Eisner and broader issues about Disney’s corporate governance”  (Olsen)
• Comcast offered a lucrative deal to Disney, particularly attractive to the shareholders and their intention to make that point public. The deal however was considered to be low by the Board of Directors and in the first instance remained somewhat silent on the offer, preferring to say that it was being given consideration. The details of the deal were described in the Comcast press release as follows:
  • Comcast would issue 0.78 of a share of Comcast Class A voting common stock for each Disney share.
  • Disney shareholders would receive a premium of over $5 billion, based on yesterday’s closing prices, plus full participation in the combination benefits.
  • Comcast’s proposal values Disney at $66 billion (which includes assumption of $11.9 billion of Disney’s net debt), offering a multiple of approximately 14x Disney’s 2004 estimated EBITDA.
  • Disney shareholders would own 42% of the combined company.[1]
• The letter from the Chairman of Comcast to the of the CEO of Disney Corporation was somewhat intimidating considering going public with the offer. In essence jumping over the Board of Disney directly to the shareholders.  This did not seem to be a good psychological move on Comcast’s part and demonstrated a degree of arrogance and to an extent dominance in the proposed merger.  This must have angered the Disney Board and further alienated them from a perceived hostile takeover.  The appropriate response was one of silence and that it will be considered seriously. Comcast heard no more from them..

“I am writing following our conversation earlier this week in which I proposed that we enter into discussions to merge Disney and Comcast to create a premier entertainment and communications company. It is unfortunate that you are not willing to do so. Given this, the only way for us to proceed is to make a public proposal directly to you and your Board.”  (Source: Letter from Brian Roberts CEO Comcast to Michael Eisner, CEO Disney Corporation)

The following part of the letter was directly pitched at the Shareholders of Disney and aimed at securing their support over what Comcast perceived as a luke warm Disney Board

“We believe that improvements in operating performance, business creation opportunities and other combination benefits will generate enormous value for the shareholders of both companies. Together, as an integrated distribution and content company, we will be best positioned to meet our respective competitive challenges. We have a stable and respected management team with a great track record for creating shareholder value. In fact, our shares have consistently outperformed leading stock indices by significant margins, including the S&P 500 by a margin of more than 2 to 1 since Comcast went public in 1972.”

The proposed merger eventually stalled with the CEO of Comcast stating that they would not consider raising the bid on Disney until more information had been forthcoming from them.  They further stated that this was not an essential acquisition for Comcast ” Roberts told fellow CEOs on Wednesday that “some facts would have to change” before his company would consider a higher offer for Disney. Disney owns the ABC television network, as well as broadcast TV stations and stakes in several cable channels, such as ESPN and the A&E Television network.”  (Grant)

“Shares of Disney ended down 33 cents, or 1.3%, at $24.77 Wednesday, compared with a $27.60 close on Feb. 11, the day Comcast announced its bid to merge the two companies.

The deal would give Disney investors 42% of the combined company.

Comcast finished at $28, down 16 cents, or 0.6%.” (Grant)

The Disney Board announced that it rejected the Comcast offer and threw its weight behind the Disney CEO stating :  ” Walt Disney’s  board of directors in Burbank, Calif., said late Monday that they unanimously rejected Comcast’s $48 billion, all-stock takeover offer as inadequate but would consider a higher bid”  (Michael McCarthy). The Disney Board further added ” “We are committed to creating shareholder value now and in the future and will carefully consider any legitimate proposal that would accomplish that objective,” said the board, led by former U.S. senator George Mitchell. ”  (Michael McCarthy).

There still remains time for Comcast to reconsider its’ initial offer and come in with a counter proposal worth more  than $30 a share or equally consider a cash offer in order to divide or split the  Disney’s board away from Eisner’s side. However, with the current downturn in  Comcast shares and Disney’s stock rising over the past few days, the revised situation could see Comcast shareholders ending up  with less than half of the combined company vs. 58% in the initial bid.

The Disney board decision might see that Company going off in a different direction.  Disney’s best defence to the current situation  would be improved results and a rising stock price.” It could make an acquisition, taking on debt, to make itself harder to take over. Or it could buy back shares to further boost its stock price.”  (Michael McCarthy).

“The best defense of all would be for Disney to continue putting up good numbers — and convince investors that Disney is worth a lot more than Comcast has bid or might bid,” says Mike Gallant, media analyst at CIBC World Markets.  One observer suggests that even if Disney survives, Eisner’s 20-year hold on the Magic Kingdom will not. ”  (Michael McCarthy).

Another important aspect of the proposed merger between Comcast and Disney is one of monopoly and the impact this might have on the American consumer.  The CEO of Comcast was accused of being out of touch with popular opinion in the USA and such a merger represented a threat to the very democracy of the USA.  ” It’s clear that Brian Roberts knows no limits to his media ownership ambitions, having already swallowed AT&T Broadband (which in turn had gobbled up both TCI and Media One). More importantly, Roberts and Comcast fail to appreciate that such heightened media consolidation in cable, broadcast, and online distribution and content is a threat to American democracy. That Comcast would make the announcement the same day that a federal Court of Appeals in Philadelphia is holding a crucial hearing on new FCC media ownership policies suggests that they are out of touch with how millions of Americans–who opposed the recent ownership changes–feel about further media consolidation. ”  (Chester)

Works Cited

Chester, Jeff. Proposed Mega-Media Monster Monopoly Direct Result of Powell Policies . 2 11 2004. 14 12 2009.

Cowley, Stacy. Infoworld. 28 4 2004. 11 12 2009 <http://www.infoworld.com/print/10710>.

Cramer, James J. New York News and Features. 1 5 2004. 14 12 2009 <http://nymag.com/nymetro/news/bizfinance/columns/bottomline/n_9926/>.

Grant, Lorrie. USA Today. 24 3 2004. 14 12 2009 <http://www.usatoday.com/money/media/2004-03-24-comcast_x.htm?loc=interstitialskip>.

Michael McCarthy. USA Today. 16 2 2004. 14 12 2009 <http://www.usatoday.com/money/media/2004-02-16-disney-rejects_x.htm>.

Monica, Paul R. La. Money.com. 18 2 2004. 14 12 2009 <http://money.cnn.com/2004/02/11/news/companies/comcast_disney/index.htm>.

Olsen, Eric. BC Culture. 12 2 2004. 14 12 2009 <http://blogcritics.org/culture/article/key-to-comcast-deal-trip-to/>.

Stroup, Alex. Comcast, Disney, and the business of hostile takeovers . 12 2 2004. 11 12 2009 <http://www.mouseplanet.com/dan/bm040212as.htm>.

—. Comcast, Disney, and the business of hostile takeovers . 12 2 2004. 14 12 2009 <http://www.mouseplanet.com/dan/bm040212as.htm>.

Synergy is always a difficult thing to assess. Even when it seems obvious it can be very difficult to pull off. There are large parts of the Disney package where you have to wonder if Comcast would really be interested in them.

What do the people of Comcast know about running a major broadcast network, the largest amusement park in the world and a cruise line? This uncertainty leads some to wonder if all Comcast really wants are the networks and eventually the other pieces would be spun off or sold. I certainly don’t know.

However, if they are retained, there are several obvious synergies for promoting these fringe elements (to think that Disneyland might be fringe!). You could certainly bet that the PGA events held at Walt Disney World courses would get great play on the Golf Channel.

Essentially, the entire Disney company would be given greater advertising access to over 21 million homes. Comcast will certainly have a lot of explaining to do in this area before shareholders or the board can be sold on an offer. It is interesting to note that in its official term sheet, Comcast barely mentions the theme parks and completely skips over the Mighty Ducks, Disney Cruise Line, or the Disney Vacation Club property.

[1] Source :  Comcast Press Release, New York, Feb 11th 2004