Social Network, Media Firms Seek Deals in Downturn
The media and technology sector, which has seen a spate of failed merger attempts in 2008, should brace for more aggressive dealmaking next year spurred by bargain-basement valuations.
Top executives at the Reuters Media Summit in New York this week said they saw increased opportunities for the strong to buy the weak, as the recession causes share prices to tumble further.
And with tight credit markets making it tough for many companies to borrow money for acquisitions, executives expect more creative deals, such as share swaps between distressed companies without a lot of cash.
IAC/InterActiveCorp Chief Executive Barry Diller said he was building a $2.2 billion stockpile of cash and could swoop in on a "cascade of acquisition opportunities" in the media and entertainment sectors.
"I don't think now is the time to buy frankly anything unless you desperately need it," Diller said, noting that valuations will only get lower in coming months as the economy worsens.
Chris DeWolfe, co-founder and CEO of MySpace, the social networking site owned by News Corp, was equally aggressive, pointing out that start-ups valued at between $200 million and $300 million just six months ago are now willing to sell themselves for as little as a tenth of that value.
With venture capital funding for start-ups expected to trickle off if the economy worsens, DeWolfe expects valuations to get even cheaper, creating more deal opportunities.
Such comments were echoed by many executives, from No. 2 U.S. cable company Time Warner Cable's Chief Financial Officer Robert Marcus to leading cinema chain Regal Entertainment Group's CEO Mike Campbell.
But they also said the low valuations would make target companies reluctant to sell unless they had to, and frozen lending markets also makes financing for deals tough.
Take Two Interactive Software CEO Strauss Zelnick, who turned down a takeover bid from larger video game publisher Electronic Arts this year, said he expects more innovative dealmaking ahead.
"What you may see are stock-for-stock transactions, where people say, 'we don't really care about the stock value because the relevant fundamentals look attractive and there are synergies," he said.
Depressed stock prices also provide large, diversified media conglomerates the opportunity to make strategic buys of high-growth companies such as video game publishers or digital media providers, Zelnick said.
Media conglomerates, which typically trade at low price-to-earnings multiples, have sometimes shied away from buying smaller companies that trade at higher multiples for fear that the resulting dilution would anger shareholders, especially if a deal doesn't immediately add to earnings.
But the topsy-turvy market frees companies from these constraints and smart buyers could easily use the opportunity to do deals to boost their assets, Zelnick said.
Even then, most acquirers will proceed very cautiously.
Regal CEO Mike Campbell said he liked the movie theater assets owned by Sumner Redstone's National Amusements, but added that limited access to credit would make any acquisition tough, even if the target has an attractive price tag.
"The same lending markets that may be creating the opportunities creates a barrier for potential acquirers, whether it's National Amusements or anybody else out there today," he said.