it is hard to see where the efficiencies from the deal are supposed to come from
That is an understatement. AT&T seems to have some combination of excess cash and ability to borrow at attractive interest rates. If I were a shareholder, I would want the company to pay me a large dividend, and then leave it up to me how much I want to invest in Time-Warner.
My guess is that the people who want to block the merger are concocting scenarios of bad behavior or excessive control that are highly implausible. However, I find scenarios in which the merger provides social benefits to be at least as implausible.
I see this sort of transaction as indicative of some sort of distortion in capital markets. One or both of those companies should have returned more cash to shareholders, and for some reason they didn’t.
The CEO will now be due a pay raise for managing a larger company.
Taxes on dividends.
Combined with lower taxes on capital gains? Maybe.
This is exactly right. Shareholders would much prefer capital gains over dividends because of the unequal tax treatment, so this leads to share buybacks, and inadvisable mergers over higher dividends.
I see this sort of transaction as indicative of some sort of distortion in capital markets. One or both of those companies should have returned more cash to shareholders, and for some reason they didn’t.
How is there some sort of distortion in capital markets? I am on the side of there is nothing strong enough to stop it but I don’t see any benefits of it. (I suspect some of this is based on cable companies better controlling content to slow the cord shaving/cutting in the market.) For the entire Post-War era, there is all kinds of waste of capital buyouts and it has really accelerated the last 35 years.
Frankly, it appears there is too much money in capital markets.
I think the answer lies in something specific to the entertainment content industry that makes transaction costs distinctly high, and relies on the special nature of IP. After all, why are Netflix, Hulu, and Amazon producing their own content?
And what about the old movie studio / tv network / record company content distribution+production combinations? This kind of vertical integration of distribution and production of content is also common in many countries.
So I’m guessing there is something special about the sector.
I think Buffett would call this kind of transaction: “getting more water for what moat there is.”
No distortion in capital markets. This is about low growth businesses with managers who have a vested interest in seeing their company grow and get personal rewards for it. Presumably, the share price of each of these companies with the announcement of the acquisition reflects the present value of the future wealth creation of the combined enterprise and if one is not happy about it they can sell their shares.
It is unlikely as Kling writes that returning cash to the shareholders will result in a better PV outcome than just selling shares in the marketplace
This seems like a March of Dimes effect. At one point these businesses were cutting edge, but the world has moved on and the markets they grew up to serve no longer exist. Management may unconsciously sense that they’re part of a dying industry, and are now looking for ways to maintain relevance / purpose for their businesses and so they going on a spending spree throwing good money after bad.
AT&T’s high cost premium service for communications is … dying; yet very much not dead yet.
IBM started selling its PC hardware business over 10 years ago (to commodity PC maker Lenovo), and then its servers, and is making less & less hardware. It’s gone down from a $120 bln to an $80 bln company (rev), and has been buying up little companies for its move into Cloud, Mobile, Security … and it’s AI star Watson (World of … now in Las Vegas).
Maybe AT&T should, for society, give back dividends to the shareholders, or share buy-backs (like IBM!) and have their CEOs and top managers accept slowly (or quickly?) increasing irrelevance. But it’s no surprise that a “rational agent” wanting to stay a top company CEO would rather gamble on a big merger than accept almost certain market death.
“many managers engage in empire-building by increasing the size of their companies, even at the expense of the shareholders.” << Tyler
Managers gotta … manage.
“it is hard to see where the efficiencies from the deal are supposed to come from”
Seems obvious. They are copying Netflix’s content creation+distributor model, except buying instead of building the content creation piece.