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Oct 24, 2016

DealBook | NYT Top Story: A&TT and Time Warner Seek to Mollify Deal's Critics - October 24, 2016



nytimes.com


Leslie Picker

AT&T and Time Warner C.E.O.s

Randall Stephenson, chief executive of AT&T, and Jeffrey Bewkes, chief executive of Time Warner, defended their big merger on CNBC’s “Squawk Box.”
By CNBC on October 24, 2016. Photo by CNBC. Watch in Times Video »
AT&T’s proposed $85.4 billion acquisition of Time Warner has no shortage of skeptics.
First, there are the analysts.
“Vertically challenged,” was the headline from a research note by Craig Moffett, a play on the term “vertical integration,” where a company combines with its customer, rather than competitor.
Morgan Stanley analysts called the deal a “bold step,” wondering whether the companies were “swinging for the fences.” Nomura said the deal was “puzzling.”
Then, there are the investors.
At midday on Monday, shares of Time Warner, the recipient of by all accounts a rich offer from AT&T, were down more than 2 percent, nearly 20 percent off the deal’s price tag. AT&T’s shareholders did not seem too thrilled either — its shares were off nearly 2 percent.
The question for the market is whether it makes sense for a cable and wireless provider to spend all of that money to acquire the home of HBO, CNN and Warner Bros.
On a conference call with analysts on Monday, AT&T’s chief executive, Randall L. Stephenson, and his Time Warner counterpart, Jeffrey L. Bewkes, sought to address some of their biggest criticisms:

The Strategic Rationale

During the hourlong call, a form of the word “innovate” was used 32 times. The two chief executives believe combining their companies will help them innovate around advertising, the shows and movies people watch and where they watch them (hint: on their cellphones).
Innovation, of course is not a strategy. It is something that every top executive is focused on, with or without a deal.
There is one aspect to this deal that could help the two companies foster such innovation: data. AT&T has access to 133 million mobile subscribers, as well as 25 million for video. Owning the content that its users are watching will give the company better insight on how to focus on their customers through both programming and advertising, the executives argued.
One analyst asked why the combination of cable and content made sense now, despite Mr. Bewkes’s decision to spin off Time Warner Cable in 2009. Mr. Bewkes responded by saying, “The world has changed,” citing new competition from companies like Netflix, Google, Facebook and Amazon.

Regulatory Risk

Over the weekend, politicians from across the political spectrum came out against the deal. Both Democrats and Republicans argued that too much consolidation between telecommunications and media could only be bad for consumers.
On the call, Mr. Bewkes argued that consumers would not feel the effect of this transaction, that the cost would be “borne by advertisers and consumers get a break.”

Opposition to an AT&T Giant

“From a regulatory standpoint – classic anti-trust analysis – this is kind of a no-brainer,” said James Stewart of The Times, “It’s classic vertical integration.”
By CNBC on October 24, 2016. Photo by CNBC. Watch in Times Video »
When asked about what gave him comfort on the regulatory approval process, Mr. Stephenson joked, “I’m not a lawyer, but once Time Warner closes, I’ll play one on TV.”
His non-lawyerly take, however, focused on the fact that the companies are proposing a vertical merger. Most of the pushback lately from the Justice Department has been on companies that were taking out competitors. Because Time Warner supplies programming for AT&T, their deal would not get that same type of scrutiny.
“In fact, I’m not sure I know of a situation where vertical integration has been blocked by the government in our two sectors,” Mr. Stephenson said.

Affordability

Vertical integration may help the two companies on the regulatory front, but it does not get them far from a cost-savings standpoint. The companies pegged so-called synergies at $1 billion in annual run rate, within three years of the deal closing.
That figure is small for a deal this size because there is little duplication by which to cut costs. The customer service representatives at AT&T cannot also anchor the news on CNN, for example.
Analysts have been dubious of AT&T’s ability to integrate another huge acquisition after closing on a $48.5 billion takeover of DirecTV last year. Why do another large acquisition now, they asked? Mr. Stephenson said that AT&T was ahead of schedule in achieving cost synergies from the DirecTV deal and that “the convergence of media and distribution is moving fast.”
“We want to be at the front of it. We don’t want to be chasing it,” he said.