What is going on between Comcast and Walt Disney

University Degree Business and Administrative studies

Economics assignment Thuy Bui-20027219

2-IBMS 2

INTRODUCTION

Economics involves in all facets of our life. Manifestly, all activities people engage are affected by the economics decision taken by human being. The study of economics, therefore, is very interesting but complicated, indeed. This paper is written to motivate the economy theory by a real case of today’s business. It explains the relationship between a part of the book Economics by John Sloman and a recent article concerning microeconomic issue. The article is taken from “The Economists”. It looks at one of the hottest issue in the media industry. It discusses about the bid from Comcast, a cable TV company, for Walt Disney Company.

The paper is designed as follows. Firstly, I am going to summarize the article to give an overview about what is going on between Comcast and Walt Disney. Secondly, since the article is selected to clarify one of the microeconomics theories, I would also like to summarize a short part of Sloman’s book. That part is about alternative maximizing theories and I would like to focus on the theory of merger. Thirdly, the linkage between the article and theory is discussed in the next part. Lastly, I would like to give a conclusion as well as my own comments about the situation in the article.

A copy of the article in attached at the end of this paper.

ARTICLE SUMMARY

As introduced above, the article is about a $66 billion bid from Comcast to one of the most venerable entertainment firm- the Walt Disney Company. Comcast was taking advantage of a particular weak point in Disney history to launch its proposal. Disney was very successful in the past under the management of Michael Eisner. In his first 13 years in charge, he has raised revenue from $1.65 billions to $22 billions and market value from $2 billions to $67 billions. However, he lost his way some year ago. At this moment, Disney current profits are a third lower than they were in 1998 and its share price is at the level it was in 1997.

There are three factors contributing to this failure. The first one is the bad luck of Disney parks. Those parks are seriously suffered in the wake of the 11 September event. The other intractable problem is from ABC network. ABC has kept on losing money from 1995. Importantly, the biggest problem is from Mr Eisner. He seems to have difficulty getting on with people and thereby retaining their senior talent. A long list of executives and board members has left Disney such as Paul Presler, Steven Bornstein, Roy Disney, Stanley Gold…. Besides, Pixar, an animation studio, one of the most important business partners has divorced Disney as conflicts between Eisner and Steve Jobs, Pixar’ CEO, can not be solved.

At this very moment, Comcast decided to launch a hostile takeover after Mr Eisner refused its friendly merger talks. Comcast has been proving its power by taking over AT&T Broadband 15 months ago and well controlling it up till now. If this takeover proposal to Walt Disney works out, Comcast will create by far the biggest vertical-integrated entertainment giant in the media industry with a market capitalization of over $120 billion.

The article also mentions that the Comcast’s bid provide both support and challenge for two of Disney’s critics, Roy Disney and Stanley Gold, who resigned their positions in December in order to mount a public campaign against Mr Eisner. Disney and Gold will try to persuade shareholders to oppose the election of Mr Eisner. Perhaps, they would prefer Mr Eisner simply to go so that the firm can remain independent or a “White Knight” to acquire Disney. Indeed, Comcast’s offer may trigger either of those outcomes.

The burden is now put on Mr Eisner shoulder. He is ...

This is a preview of the whole essay

The burden is now put on Mr Eisner shoulder. He is fighting to the survival of Walt Disney. However, in economists’ eyes, if Disney board really want to keep the company independent, its best strategy may be to replace Mr Eisner immediately. Otherwise, Comcast will soon be doing it instead.

THEORY SUMMARY

Traditionally, firms are assumed to pursue short-run profit maximization goals. In this section, we are going to explore other alternative maximizing theory. They are long-run profit maximization theory, sale revenue maximization theory and growth maximization theory. This paper is designed to discuss about one of the two means used to achieve growth maximization. It is growth by merger.

Mergers maybe the result of the mutual agreement of two firms come together. Alternatively, one firm may put in a take over bid for another. There are three types of merger:

A horizontal merger is where firms in the same industry and at the same stage of production merger.
A vertical merger is where firms in the same industry but at different stages in the production of a good merger.
A conglomerate merger is where firms in different industries merger.

There are many motives for merger which have been identified by economists:

Merger for growth: when two firms merger, they can take the advantages of acquiring new capacity as well as additional consumer demand to expand their market.
Merger for economies of scale: Reduction in cost can be result from reorganizing through a process of rationalization
Merger for monopoly power: By reducing competition and gaining market power and larger profit, a unite firm can gain monopoly power.
Merger for increased market valuation.
Merger to reduce uncertainty: Two firms may merger to reduce the uncertain behaviour of rivals and uncertainty in the economic environment.
Merger due to opportunity: Some merger may occur in response to opportunities that may suddenly and unexpectedly arise.
Other motives: Other motives include getting bigger to become less likely to be taken over oneself, merging to prevent being taken over by an unwanted predator, asset stripping, and empire building and broadening the geographical base of the company.

Merger has a very close relationship with growth and profit. In order to finance the takeover, the firm must be sufficient profitable. As a consequence, the faster it tries to growth and the more takeovers it attempts, the higher must be its profitability. Conversely, merger is an effective mean to the growth of the firm as well as increasing profits since it can lead to both lower average cost and higher average revenue. In the other words, merger, growth and profit are very close and they reinforce each other.

ANALYSIS

The link between the article and the assigned theory part is presented in this part of my paper. In order to give deep insights into this acquisition, I am going to answer 3 following questions:

What type of merger in this case is?
Why does Comcast want to takeover Disney?
Can Comcast and Disney achieve growth from this takeover?
Do customers benefit from mergers in the media industry?

What type of merger is?

There are three types of merger, which have been explained in the previous part. In this case, we can clearly see a conglomerate merger between Comcast and Disney. They are two firms who come from different industries. Comcast is the biggest cable operator in the USA. Comcast products are mainly digital cable, high speed Internet, digital phone and some entertainment and golf programs. Disney, on the other hand, is already a conglomerate with studios, theme parks and television channels. This combination may help Comcast become the biggest player in the media market.

Before going on, it is very essential to emphasize on one important thing. Although some people have seen this combination as a conglomerate merger, it is truly an acquisition. In this case, one firm is trying to buy another, while the latter is unwilling to be bought. So, why does Comcast want to acquire Disney?

Motives of the takeover

From the information mainly taken from the article and some other sources, I have defined five possible motives. Those motives are listed below.

Takeover for growth. One of the obvious reasons given for the desire of acquisition is that Comcast believes they can expand their market through distributing new Disney content to its old subscribers. Definitely, Comcast can acquire the new capacity by buying Disney.

Takeover due to opportunity: When people first hear about the acquisition between Comcast and Disney, they simply think that Disney is buying Comcast. It is logical because Disney, in practice, is relatively bigger than Comcast in corporate size as well as in revenue. Paradoxically, the takeover works the other way around. Disney, apparently, cannot be an easy target for a takeover intention. However, Disney now is in a very vulnerable situation and becoming an inviting target for Comcast. This graph below is a clear explanation of the stagnant growth of Disney’s stock price in the last few years, which is indirectly; show the bad situation Disney is facing with.

Graph 1: Share prices- Growth of $10,000

(Source: CNN-stock performance)

--- Stock: Walt Disney

--- Index: S&P 500

--- Industry: Media Conglomerates

The stagnancy is contributed by three main factors:

Bad management of CEO Eisner: In the recent year, Eisner seems to be in a bad luck with retaining his talents. He has a long history of battling with Pixar

and Miramax, who are regarded as the key success of Disney. Besides, he has driven a number of excellent executives as well as board members out of the company. For instances, Paul Presler left Disney to head Gap, Steve Burke quit Disney and now may head Disney for Comcast. Roy Disney and Stanley Gold have left Disney as well.

Bad acquisitions: In 1996, Disney bought CapCities ABC, a distribution channel. The deal so far has not helped Disney generate growth. The deal of buying Internet portal Infoseek in 1999 even caused Disney a loss of nearly $1 billion. In addition, a $5.2 billion purchase of Fox Family in 2001 has not produced any hit.
Theme park disaster: Disney theme parks, which make up nearly a quarter of its revenues, suffered badly after the 11 September event. Also, because of subsequent economic weakness, those theme parks could not make as much revenue as expected.

Takeover for monopoly power. The combination, for sure, will give Comcast a higher market power. Owning Disney gives Comcast control power over a large market and other privileges. For example, Comcast may require other cable operators who want to carry a local ABC station to also take some of the new over channel.

Take over to reduce uncertainty. Recently, there is a trend of merger or acquisition among players in the media market. This trend has created a consolidated media business in which the power is concentrated in few hands such as New Corp, Time Warner, and Viacom. Who know for sure that these companies are not interested in Disney? The article suggests that Viacom, Liberty Media and even Microsoft may also fancy Disney. It is a big pressure for Comcast to keep its recent market share. So, why Comcast does not do anything to defense itself? This $66 billion bid can be seen as a respose of Comcast to reduce the uncertainty in behavior of its competitors.

Takeover for empire building. Since Comcast is striving for its monopoly power, it is reasonable to say that they are also attracted by the empire-building motive. Usually, managers of large companies love size. The bigger you are, the more chance of being respected by other people, the more chance of becoming famous. Although this is a straightforward comment, it should not be left outside.

When looking at those motives, you may wonder about the motive of gaining economies of scale. I myself think that it should not be included here. Firstly, since Comcast and Disney are from different industry, there is a little chance of cost reduction through a process of “rationalization”. Besides, although Comcast may gain the power to require its old cable operators to take some of the new channel of Disney, Comcast may still not reach economies of scale. Comcast just uses it power to impose the new channel to its customers. And if customers are forced to adopt, they will leave them soon. For the long run, this method may even reduce efficiency of both firms and seems to be dangerous.

Can Comcast and Disney achieve growth after the takeover?

Obviously, the answer is yes. As discussed above, the need for growth is one of the important motives leading to this bid.

Moreover, let us have a look at the key assets Comcast and Disney owning at present. If they came together, Comcast-Disney would own 21 million cable subscribers, 5.3 million broadband subscribers and (most of any cable company), 1.3 million phone subscribers, ABC television network and over 60 radio stations. Moreover, Disney and Comcast together had $45 billion in revenues last year. If a deal is reached to combine the companies, they would leave behind Time Warner, a top of media and communications companies with last year’s revenue of $39 billions. Market will be redistributed and Comcast-Disney will take the top place according to annual revenue. A chart in the next page can illustrate it.

Source: BusinessWeek

In principal, both Comcast and Disney can benefit from this acquisition. Disney benefits by the increase in stock value. Disney stock, which has lagged over the past six years or so, has risen slightly after the takeover offer. Comcast, on the other hand, would benefit in the other way. Swallowing Disney would give Comcast control of programming that would make it more competitive with New Corp and Time Warner. Besides, the takeover also provides Comcast additional capacity and additional demand from customers. Those opportunities create avenue for growing.

Do customers benefit from mergers in the media industry?

In the recent years, the media market in the USA has been becoming more and more consolidated. Started by the merger between Time Warner and AOL, the trend of merger is continued by the merger between New Corp and Direct TV. At this moment, Comcast is trying to takeover Disney. In addition, NBC is going to combine with Vivendi Universal Entertainment. So, when is the end point of all those mergers? What is going to be if Comcast buys another company and New Corp buys the others?

One the one hand, concentrated market definitely brings some benefits to customers. Combining programming producers and cable providers can save money, create efficiency and benefit shareholders. Furthermore, bigger companies will have solid finance, allowing them to put more resources in creating more TV program for viewers.

On the other hand, some disadvantages do exist in the consolidated market. First, the concentration of power in some hands means less competition and higher price for customer. Secondly, programming quality and variety may suffer because fewer people will decide what to broadcast. Lastly, there will be no chance for small programmers to raise their voice if few giants control content and distribution.

CONCLUSION

In the previous part, we have already examined all substances of the potential combination between Comcast and Disney. In general, the takeover makes senses and brings benefits to both parties as analyzed above. However, it is necessary to look at it from customer’s side. Actually, Comcast’s bid just makes the USA media market more and more concentrated. The disadvantages of market with few players have outweighed its advantages, as my point of view. Therefore, in this case, I think that Comcast and Disney should stay where they are. Accepting the bid is not the only choice for Disney to overcome their current difficulties. Replacing Eisner may be a good idea to save “the Mouse House”.

BIBLIOGRAPHY

John Sloman, Economics, 4th edition, Prentice Hall, Upper Saddle River, New Jersey 07458
The Economist, February 14th, 2004
BusinessWeek, February 23rd, 2004