Debunking the M&A Tidal Wave – Part I: Setting the Terms

After the Justice Department lost their anti-trust lawsuit against AT&T–which allowed the merger with Time Warner to go through–a consensus emerged in the entertainment press that I would summarize like this:

“The approval of this merger will start a wave of acquisitions and mergers in entertainment.”

This isn’t a straw man argument: I saw this in the Hollywood Reporter, Variety, The Washington Post, Deadline and Bloomberg. (And probably more I just didn’t capture in link form.)

Natural skeptic that I am, in my initial reaction that week I wondered, is this true?

And if we’re asking if it’s true—and we don’t know because it will take place in the future—that means it’s a prediction. And if you agree with the above sentiment—meaning you find it true—you’re predicting the future too.

Predicting the future is hard.

Let’s play a game. It’s the prediction game. Many writers made the prediction above. Many analysts echoed those in stock price moves or recommendations. And you likely agree with it. So answer this: If mergers and acquisitions are increasing, what do you think the percentage increase in mergers and acquisitions in entertainment will be in 2018? 2019? For the next five years?

Write it down if you can. Or lock it in your head. We’ll return to it at the end.

Once I started thinking about this question, I started scouring the internet for data on M&A activity. Then I started writing. Then the article kept going. And going. All of which is to say, I’m going to dive deep into this topic and hopefully return over time. The merger of AT&T and Warner Media Group is probably the first or second most important news story of the year, so we should understand it.

Making a prediction about the future is a good way to understand it. However, my prediction will be quantified and written down on this website by Monday. But we have some work to do to get there.

Gut Reaction

I have a process for these things, that I laid out here. When I first come up with a question I try to write down my thoughts quickly and with some reflection. My gut thinking is pretty clear on this: I don’t think M&A activity will increase above current levels. Not that M&A activity won’t happen, it’s just that, as you’ll see, it’s been going on non-stop since the recession ended. So once I know current levels, I’ll predict we continue at that pace and rate of growth.

Setting the Terms

We (try to) do good prediction making over here, so we want to clarify our terms as much as possible to get a grasp of what we’re predicting. When we say “M&A activity in entertainment will increase” we should be clear what that means.

First, who are we talking about? The prediction says “entertainment”. That could mean that we’re just looking for the major studios. But that doesn’t make sense and really limits our data set to just six studios and some TV networks and production companies. On the other hand, tech companies merge all the time, but they aren’t quite entertainment.

So we’ll define mergers or acquisitions as between movie studios, television networks, streaming video and music platforms, production companies, and MVPD distributors (cable, satellite and telecom), or groups clearly in that ecosystem. Oh, and if a tech company buys one of those above, we’ll count that too. I’m going to include social media because, aren’t all social platforms making video now? We’ll call this grouping “media, entertainment and communications”.

Second, how do we measure this? I see two ways: the unique number of deals or the value of deals. Both are interesting measures, but by “wave” I think it is pretty clear we’re discussing the number of deals. However, we should consider limiting deals to above a certain size. So we’ll set a limit of deals worth $1 billion or more in total value. (We could count all deals period, and I’ll show that in the data section but it rapidly gets out of control.)

So we have our first potential prediction:

The rate of mergers and acquisitions in media, entertainment and communications valued above $1 billion will increase by X over the next Y years.

The thing about tsunamis is they are large, and the above prediction counts all deals above the threshold as the same size. So Disney buying out BAMTech is the same as Charter merging with Time Warner Cable (now Spectrum. And since Time Inc merged with Meredith publishing…I guess Time as a company name is gone?). Since they clearly are orders of magnitude different, we should capture that by measuring the total value of the proposed or finalized deals. I would phrase our section prediction as this:

The dollar value of mergers and acquisitions in media, entertainment, and communications will increase by X over the next Y years.

Hmm. We’re missing the X and Y’s above. Let’s fix that.

Setting the Baseline

It’s pretty tough to make predictions when you don’t even know the base numbers, right? As a sobering exercise, try to predict the dollar value of mergers and acquisitions in 2015. Tough, right? And yet we all just made those predictions.

So I went out to find the levels of M&A in media, entertainment and communications. It was both plentiful and tough: easy to find people collating this for me, tough to find all the numbers in one place. Two services seems to dominate the merger space, Thomson Reuters and Mergermarket. PwC then writes summary reports with Thomson Reuters data, that are often picked up by The Hollywood Reporter, Variety and others.

I found enough reports by PwC that I could summarize the data going back to 2010. (Further back then that, honestly, but I believe their methodology changed around 2009/2010.)

I found three specific numbers, two of which we’re using in our prediction: the total number of deals, the value of all those deals and the total number of mega-deals (PwC defines as deals above $1 billion in value). Just because I found all the data doesn’t mean I could just put it together. In some cases the numbers changed from year to year as deals didn’t go through. In others, I couldn’t find the base data but only the percentage change from the year before. The “mega deals” rate, though, all come from one report so it is the cleanest.

I cleaned up all the data into a chart, using my best judgement for values year to year, updating if the numbers moved down. If you want to see the links, maybe I’ll put them at the end (or you can email me). I’ll show you it in two forms, table (for those who want clean numbers) and chart (for those who love visuals):

3 Metrics MA Slide to update

ma-ppt-chart-e1531262858670.jpg

It should be clear that M&A activity has increased in total value, and that mega-deals were slow from 2007-2010, but have then picked up to a steady level. However, to make our specific terms, we should pull some averages. I made another table with the last year of data, the 5 year average, 8 year average and CAGR. Here it is:

M&A with Entertainment MediaWe can update our two predictions with the baseline data. We have some choices, but to keep the data the same, let’s use the 5 year average. The mega-deal data only goes back seven years, and five years seems more relevant. So now we have:

The rate of mergers and acquisitions in entertainment, media and communications valued above $1 billion will exceed X per year, from a baseline of 16.6 mega-deals average over the last five years.

The dollar value of mergers and acquisitions in entertainment, media and communications will increase by X over the next five years, from a baseline of $143 million in total annual value averaged over the last five years.

So we have our baselines to fill in with our predictions. We just need to put numbers where the two “x’s” are. Tomorrow, we’re going to review the qualitative data. 
By the end of that Monday article, I’ll make my predictions.

(By the way, how did your prediction from the beginning hold up so far? You can still change you mind if you want.)

  1. […] As I collected my data/thoughts on M&A, I found it hard to really look beyond the US shores. I forget that T-Mobile is owned by a German company and Sprint is owned by a Japanese company. But deals do happen where US firms acquire foreign businesses to expand internationally, they just usually have price tags well below the $1 billion mark. This deal definitely surpasses that and signals that as firms look to grow, they may not just consolidate but expand overseas, underscoring how much the international Pay TV assets, like 21st Century Fox’s, are driving the merger frenzy. […]

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  2. […] them scheduled on the calendar. The problem is that bigger articles like my series on Lucasfilm and M&A in media and entertainment can suck up a ton of time and posting space. So I don’t finish those other […]

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