TIME Earnings

Time Warner Posts Solid Earnings But Shares Still Lag

Murdoch Said To Mull Sky Proceeds To Boost Time Warner Bid
Pedestrians walk past the Time Warner Center in New York, U.S., on Monday, July 21, 2014. Bloomberg—Bloomberg via Getty Images

After 21st Century Fox withdraws its $80 billion merger offer

Time Warner posted solid quarterly earnings Wednesday, but investors are still punishing the company for rebuking a takeover bid by 21st Century Fox. The media giant generated a profit of $850 million and adjusted earnings per share of 98 cents during the second quarter, topping analysts’ estimates of 84 cents. Revenue for the quarter was $6.79 billion, missing estimates of $6.87 billion.

Time Warner shares took a pummeling in after-hours trading Tuesday when Rupert Murdoch’s 21st Century Fox announced that it was withdrawing its offer to buy the company for $80 billion. The offer valued Time Warner at about $85 per share, and the company’s stock rallied above that figure as some investors guessed that the merger was a foregone conclusion. With Fox out of the picture, Time Warner shares dove more than 12 percent in after-hours trading to below $75.

That swiveled the pressure back on Time Warner CEO Jeff Bewkes to prove that his company can be just as prosperous without joining forces with Fox. In a conference call with investors, Bewkes said he wouldn’t comment on the 21st Century Fox offer, but he went to great pains to outline his company’s rosy future. He noted that Time Warner has had the greatest shareholder returns of any company in its peer group (that would include Fox) over the last six years.

“Our strong performance this quarter and the last several years is evidence that our strategy is working,” he said. “The board and our senior management team appreciate very much the continued support of our shareholders.”

Bewkes touted the performance of HBO as a company highlight. The premium cable network generated $1.4 billion in revenue for the quarter and had the largest growth of any division. Operating income from HBO was $552 million. The medieval drama Game of Thrones was likely a big driver, as it became HBO’s highest-rated show ever during the quarter. The company is reportedly looking to expand the network’s international footprint by offering the streaming service HBO Go without a cable subscription in more countries.

Time Warner’s Turner division also saw growth, generating $940 million in operating income on $2.7 billion in revenue. However, the company’s Warner Bros. production studio saw revenues dip 2% to below $2.9 billion. The division’s operating income rose 28% to $236 million.

Bewkes also noted the spinoff of magazine publisher Time Inc. in June as a signal of Time Warner’s future as a more singularly focused company (TIME is owned by Time Inc.). The media giant has steadily shed parts of its business over the last decade, including AOL and Time Warner Cable, to focus almost exclusively on movies and television. “We’ve only just begun to reap the benefits of being a nimbler … video content company,” he said.

So far Bewkes’ arguments haven’t swayed investors much. Time Warner shares were trading at about $75.20 at 11:30 a.m., up marginally from their open of $74.90.

TIME mergers

Why Big Mergers Are Bad for Consumers

When big companies merge, it’s good for the bankers — but not so good for the rest of us

Rupert Murdoch’s 21st Century Fox wants to take over Time Warner. Comcast wants to buy Time Warner Cable. AT&T and DirecTV may hook up to compete against them. T-Mobile and Sprint are looking to connect, as are any number of other large communications firms, not to mention technology and pharma giants. We are in a new golden age of mergers and acquisitions–M&A activity was up sharply in 2014 and is already at pre-financial-crisis levels. Now bankers are salivating at the billions of dollars in fees such deals generate. The question is, Will the deals be any good for the rest of us?

Since the early 1980s, antitrust regulators like the Department of Justice and the Federal Trade Commission have tried to answer that question by asking another: Will a given merger bring down prices and improve services for consumers? If the answer was even remotely yes, then the merger–no matter how big–was likely to go through. But voices on all sides of the antitrust debate are beginning to question whether that rationale is actually working anymore.

Nobody would argue that the megamergers that have taken place over the past 30 years in pharmaceuticals, for example, have brought down drug prices. Or that the tie-ups between big airlines have made flying more enjoyable. Or that conglomerate banks have made our financial system more robust. “Merging companies always say that they’ll save money and bring down prices,” says Albert Foer, president of the American Antitrust Institute, a think tank devoted to studying competition. “But the reality is that they often end up with monopoly power that allows them to exert incredible pressure in whatever way they like.” That can include squeezing not only customers but also smaller suppliers way down the food chain.

Take the book business, for example. Though publishing is minuscule as a percentage of the economy, it has recently become a focal point in the debate over how our antitrust system works (or doesn’t), mostly because it illustrates the incredible power of one corporation: Amazon. In 2012, the Department of Justice went after tech giant Apple and a group of five major book publishers for collusion, winning a case against them for attempting to fix the prices of e-books. The publishers argued their actions were a response to anticompetitive monopoly pricing by Amazon. Apple is appealing.

Did the verdict serve the public? Many people, including star trial attorney David Boies, say no. Boies, who’s been representing large firms on both sides of the antitrust issue as well as the DOJ over the past several decades, says the verdict is “a failure of common sense and analysis.” Regulators often bring collusion cases, for example, because they are relatively easy to prove. Yet in this case, argues Boies, it led to an outcome in which the entrenched market participant, Amazon, was strengthened, and new participants–Apple and the book publishers–that hoped to create a competing platform in the e-book industry were shot down. “The result is that Amazon gets bigger, and eventually regulators will have to go after them,” says Boies. “We really need a more realistic, commonsense view of antitrust enforcement.” Amazon declined to comment.

The “Bigger Is Better” ethos of the 1980s and 1990s grew not only out of conservative, markets-know-best thinking. It was also fueled by a belief on the left that antitrust enforcement was wasteful and that regulating big companies was preferable to trying to stop them from becoming too big in the first place. Neither side got it right. Big companies aren’t always concerned first about the welfare of their customers–or particularly easy to regulate. The idea of letting companies do whatever they want as long as they can prove that they are decreasing prices may be far too simplistic a logic to serve the public–or even the corporate–good. Amazon shares have tumbled as investors worry about the future of a company that has so successfully compressed prices that it generates as much as $20 billion in revenue a quarter but no profit.

How to fix things? We need a rethink of antitrust logic that takes into consideration a more complex, global landscape in which megamergers have unpredictable ripple effects. We also need a new definition of consumer good that encompasses not only price but choice and the kind of marketplace diversity that encourages innovation and growth. Tech and communications firms today are like the railroads of old: it will take a strong hand to rein them in. That’s a task not for regulators but for Congress and a new Administration. Until then, with corporate coffers full and markets flying high, the big are only likely to get bigger.

TIME mergers

Tobacco Mergers Are Creating a More Efficient Killing Machine

Several brands of cigarettes are arranged for a photograph in Tiskilwa, Illinois, U.S., on April 17, 2012.
Several brands of cigarettes are arranged for a photograph in Tiskilwa, Illinois, U.S., on April 17, 2012. Bloomberg/Getty Images

It’s been a year of colossal mergers or proposed mergers among some consumer goods and services companies. Comcast wants to take over Time Warner Cable (not affiliated with TIME) to form the nation’s largest cable company. AT&T and DirectTV want to combine to compete against them. The market also expects T-Mobile and Sprint to hook up, further reducing competition in mobile phone service.

Now add to that the tobacco industry. Reynolds American announced a deal to acquire Lorillard Inc. which it values at $27.4 billion. It’s a combination of the second and third largest cigarette makers after Altria Group, which owns Philip Morris USA. As part of the deal, British American Tobacco Plc retains its 42% stake in Reynolds by providing $4.7 billion in funding.

That’s a lot of dealmaking for the Federal Trade Commission and the antitrust division of the Justice Department to bless or deny. The goal of antitrust statutes is to preserve competition in any industry segment. Trustbusters don’t care who provides that competition, just as long as enough of it exists. That’s the ongoing debate in the proposed cable combination. It’s axiomatic that when two dominant players mergers prices rise and consumers suffer.

The proposed tobacco merger has a similar competitive profile. Combining the second and third largest companies will certainly reduce competition, giving Reynolds a 34.1% market share after divestitures. Unlike the media mergers, though, this one takes place in a shrinking market, as smoking continues to decline. Consolidation in a declining market certainly makes sense from an economic point of view. And there’s a clever wrinkle in this deal, in that Reynolds will sell off the KOOL, Salem, Winston, Maverick and blu brands to Imperial Tobacco for $7.1 billion—the idea is to create a stronger No. 3 competitor to keep the antitrust forces at bay.

There’s one other big difference, though: the merger will allow these two companies to be more efficient in killing people with their products. In its merger document, Reynolds says the deal would produce $800 million in cost savings and produce double digit profit gains by the second year. Not that Reynolds is a laggard. The company had already doubled its operating profit margin to 36.7% since 2004. And its 10–year return to shareholders of 542.2% has dwarfed the S&P’s return. This is a profit machine, even if a lethal one. According to the American Cancer Society, about 224,210 new cases of lung cancer will be diagnosed this year and 159,260 people will die from lung cancer—that’s more than colon, breast, and prostate cancers combined, says the ACS.

The new company will feature brands including Camel, one of the top premium smokes, and Vuse, a fast growing e-cigarette, but the prize in deal for Reynolds is Lorillard’s Newport, now the No. 1 menthol brand. Newport now owns a 12.6% share of the entire cigarette market in the U.S. and it’s growing —33.7 billion menthol “sticks” were sold last year. According to the Reynolds’ presentation, Newport has an “attractive demographic profile.” That profile, says smokefree.gov, includes blacks, women, Hispanics and younger people, all of whom are higher-than-average consumers of menthol cigarettes. These very characteristics have put menthol under the regulatory spotlight, leading to speculation that the Food and Drug Administration might ban menthol. But Reynolds clearly doesn’t believe that the feds will make any such move. “While cigarettes are dangerous there is not a significant difference between a menthol cigarette and a non menthol cigarette,” noted Murray Kessler, Lorillard’s CEO. “And ultimately the science will prevail.”

The same science holds the view, which none of these companies disputes, that tobacco use is deadly. And smoking costs our health care system billions of dollars annually to treat smokers. Should the FTC or Justice factor public health considerations into the deal? For instance, if the FTC believes that cigarette prices will increase, would it still bless the deal because rising prices might help ration demand—force more smokers to quit. Conversely, would blocking the deal, and keeping the competitors in place, have the opposite effect and lower prices, thus attracting more smokers?

That’s not necessarily an analysis that antitrust regulators are willing to make. Typically the antitrust agencies look only at the competition effects. As a former FTC official told me: “The traditional view has been that if the health and safety regulators wish to impose conditions, that’s their call entirely.” Expect the FTC to stick to the economics, which will be great for the tobacco companies, and their investors. The customers are on their own.

TIME mergers

Dish Network Slams Potential Comcast-Time Warner Cable Merger

Dish Network
A satellite television system is installed at a residence in Denver, Colorado, on Aug. 6, 2013. Bloomberg—Bloomberg via Getty Images

Satellite operator Dish Network has come out against the proposed merger of Comcast and Time Warner Cable.

Updated July 9, 4:45 p.m.

Satellite operator Dish Network has come out against the proposed merger of Comcast and Time Warner Cable. The pay-TV giant voiced its concerns with the pending merger in a meeting with the Federal Communications Commission earlier this week, according to a filing released Wednesday.

“The pending Comcast/Time Warner Cable (“TWC”) merger presents serious competitive concerns for the broadband and video marketplaces and therefore should be denied,” Dish wrote in its filing. “There do not appear to be any conditions that would remedy the harms that would result from the merger.”

Specifically, Dish said that a merged Comcast-Time Warner Cable would be able to undermine over-the-top video services such as Netflix by altering streaming speeds either on the so-called “last mile” of the Internet delivered into people’s homes or at interconnection points where video content is transferred among various Internet providers. Dish also argued that the merged company would be able to leverage its size in anti-competitive ways by forcing programmers to offer content at a lower cost. Smaller providers such as Dish would end up being forced to pay more to make up for networks’ lost revenue, the company argued.

In a response, Comcast Vice President of Government Communications Sena Fitzmaurice said Dish not wanting stronger competitors wasn’t surprising or new. “Dish has long been one of our most vigorous competitors, and unlike us has a national footprint available in tens of millions of more homes than a combined Comcast –Time Warner Cable,” she said in an email. “Any issues regarding NBCUniversal programming and other video services, whether they be traditional or over the top are already amply covered by pre-existing FCC rules and deal conditions.” (As part of the terms of its deal to purchase NBCUniversal, Comcast agreed to adhere to certain net neutrality principles until 2018).

Dish is one of the odd men out at a moment of mass consolidation in the pay-TV industry. In addition to the proposed Comcast-Time Warner Cable deal, AT&T and DirecTV are also seeking regulatory approval to merge. Dish said that merger also presented “competitive concerns” because the combined company would be able to leverage programming content to the detriment of customers.

TIME Companies

Google Buys Music Streaming Service Songza

The music streaming service says its product will remain unchanged, for now

The music streaming service Songza announced Tuesday that it’s being purchased by Google, adding to the tech giant’s already sizable presence in the online music sector.

“We can’t think of a better company to join in our quest to provide the perfect soundtrack for everything you do,” Songza said in a statement. “No immediate changes to Songza are planned, other than making it faster, smarter, and even more fun to use.”

Songza didn’t reveal a purchase price. The New York Post, citing unnamed sources, reported last month that Google was offering about $15 million, far less than the billion-dollar-plus valuations of online music behemoths Spotify and Pandora. Songza streams music in “smart playlists” curated by experts and tailored to an individual users habits.

The acquisition adds to Google’s subscription music service launched in 2013 as well as its ownership of YouTube, already a heavyweight in the online music sector, which the company says will be launching a paid streaming service.

The news comes after Apple’s announcement in May that it would buy Beats Electronics, which sells high-end audio equipment in addition to a music streaming service.

MONEY stocks

Amid the Hype, Finding Value in Big Pharma

Don't get caught up in the wave of mergers & acquisitions taking place among large drugmakers. Instead, look for good value.

Drugmakers have become fond of one another.

Merger activity in the industry was 21% greater, in dollar terms, at the start of this year versus the fourth quarter of last year, reaching $44.9 billion, according to PricewaterhouseCoopers.

The wheeling and dealing has helped draw in investors, judging by the double-digit gains this year in many drug stocks. But it is also stirring caution among fund managers with heavy exposure to the industry.

Don’t get sidetracked by the prospect of further mergers, money managers say. Instead, focus on the basics: valuations, earnings growth and dividends.

One takeover bid that caused much consternation in the sector didn’t even go through—AstraZeneca ASTRAZENECA PLC AZN -0.1913% said “no thanks” to Pfizer PFIZER INC. PFE 0.347% . The episode caused Eric Sappenfield, co-manager of the John Hancock Global Shareholder Yield Fund, to turn cautious on Pfizer, although he still owns some shares.

“The bid for AstraZeneca was a 180-degree turn,” says Sappenfield, whose fund is a top performer over three and five years among world equity funds, according to Lipper, a unit of Thomson Reuters. He added that “the jury is out on what management is trying to do at Pfizer.”

Pfizer is the largest holding in T. Rowe Price Institutional Global Value Equity Fund, which ranks in the top quintile in returns over the last year among world equity funds, according to Lipper. “They’re very well managed, they’re great at generating cash from their existing franchise, and they’re skilled at deals,” despite the failed attempt to woo AstraZeneca, says the fund’s manager Sebastien Mallet. He likes Pfizer’s price/earnings ratio of 13, based on 2014 earnings, plus its 3.5% dividend yield.

Three of the other top 10 holdings in the T. Rowe Price fund are large drugmakers, too. Overall, healthcare represents 16% of the portfolio. (The fund has a total expense ratio of 0.75%.)

“After strong growth in the 1990s, the drug industry “became complacent, with unfocused (research & development) and very little to show in their pipelines,” Mallet says. “The stocks were cheap and controversial, so I bought a lot of them.” In recent years, he contends, drug companies have become more efficient businesses, and their research efforts are improving.

One of his holdings, Novartis NOVARTIS AG NVS 0% of Switzerland, swapped some of its assets in April for others belonging to GlaxoSmithKline GLAXOSMITHKLINE PLC GSK -0.0419% . Mallet expects the move, sort of a merger-lite, to allow the companies to play to their strengths — cancer treatments in Novartis’s case.

A big draw of another holding, Teva Pharmaceutical Industries TEVA PHARMACEUTICAL INDUSTRIES LIMITED TEVA -0.2985% , is its cheap P/E ratio of 11, based 2014 earnings. Concerns about the imminent expiration of patents on its leading drug, Copaxone, a multiple sclerosis treatment, are “overblown” because the Israeli company is developing easier, less expensive, less painful methods of administering Copaxone that he expects to limit the appeal of generic versions.

Mallet describes another portfolio holding, Johnson & Johnson JOHNSON & JOHNSON JNJ -0.3768% , as “a sleepy company with fantastic assets that became more focused and started to have a better pipeline on the pharma side.” At a P/E of about 16, its valuation is in line with the broad market, but “it’s a very high-quality company, solid as a rock,” he says.

Sappenfield is less interested in value than growth, which he considers vital to a company’s ability to pay and increase its dividend. He has a modest stake in Johnson & Johnson, which he admires for having “an abnormally high growth rate for the kind of battleship company they are.”

Sappenfield prefers other drug stocks, though, including Novartis, Glaxo and two others in Europe, Sanofi SANOFI S.A. SNY -1.9725% of France and its Swiss counterpart Roche Holding ROCHE HOLDING AG RHHBY -0.3293% . He favors them not just for their ability to grow but to do it reliably.

“Pharma companies generate a reasonably predictable stream of profits,” Sappenfield says. “You want to see that consistency. That’s why we’re in the big guys. They’re marketing machines with sustainable pipelines.”

His fund has about a 9% stake in healthcare stocks — less than average — but he rates drug stocks highly while shunning other segments of the healthcare group, such as medical equipment providers and hospital operators. The John Hancock fund has a total expense ratio of 1.34%, according to Lipper.

Sappenfield isn’t too worried about paying the right price for stocks, but he hates to pay the wrong price. He sold Bristol-Myers Squibb BRISTOL-MYERS SQUIBB CO. BMY 0.3801% because it got too expensive, he says. “Expectations for some of their drugs were so outrageous that everything had to be perfect for Bristol-Myers to work.”

Mallet expresses some valuation concerns of his own. Although his exposure to drugmakers remains high, it has come down slightly as price-earnings ratios have increased, and he expects to cut back further if the trend continues. But he still finds far more working for them than against them.

“They have refocused their business models and cut costs,” he says. “The stocks are less cheap, but they still have good cash-flow generation and dividend payments.”

TIME wireless industry

Meet the Man Who Brought T-Mobile Back From the Brink

T-Mobile Holds Announcement Event In New York
Steve Sands—WireImage

If Sprint goes through with its rumored acquisition of wireless carrier T-Mobile, it will acquire about close to 50 million wireless subscribers, a company that generates $24 billion in annual revenue and a loud-mouth CEO that is said to be the leading candidate for steering the new, combined company.

John Legere was once a buttoned-up corporate suit for the international divisions of companies like AT&T and Dell, as well as the CEO of the now-defunct telecommunications company Global Crossing Limited. But he dumped the typical executive attire in favor of a blazer, jeans and a magenta T-shirt when he took over the ailing T-Mobile in the fall of 2012. The unusual attire fits his brash corporate strategy, which is basically to dismantle all the money-making fees the wireless industry has baked into cell phone plans over the years.

Through its “Uncarrier” campaign, T-Mobile has eliminated two-year contracts, gotten rid of international data charges and offered customers huge subsidies to lure them away from competitors. At first, the moves seemed like a desperate ploy from a last-place company. But T-Mobile has steadily added subscribers as it has offered more headline-grabbing deals, racking up 2.8 million additional postpaid subscribers since Legere took charge. The other carriers have tried to stop the company’s rise by lowering prices and offering some bribes of their own, but that hasn’t blunted T-Mobile’s momentum. In the first quarter of the year, T-Mobile added more new subscribers than the other three carriers combined. “T-Mobile’s results since they started this almost two years ago speak for themselves,” says Bill Menezes, principal research analyst at Gartner. “It really has changed the way all the big carriers now offer their service.”

Beyond overseeing strategy, Legere has given T-Mobile’s brand awareness a huge boost. He has almost 250,000 Twitter followers and regularly mocks his competitors by name. At the Consumer Electronics Show in January, he got kicked out of an AT&T party, generating tons of free press for his company. He issued a fake press release earlier this year in which he compared AT&T to Darth Vader. Is the rebel act all for show? Perhaps—Legere has been in the telecommunications industry for more than 30 years and at one point worked for current Sprint CEO Dan Hesse at AT&T. But Legere’s persona, authentic or not, aligns well with T-Mobile’s branding as a disruptor.

“Legere has been very successful in translating his personality style and kind of getting that across to the industry as someone that’s disruptive, someone that’s unorthodox in his presentation and his language,” says Wayne Lam, a wireless communication analyst at IHS technology. “He’s kind of personified that new T-Mobile brand.”

Legere’s marketing skills and business smarts have made him the primary candidate to lead the combined Sprint-T-Mobile, according to Bloomberg. “He’s seen as a dynamic figure who’s been successful at changign things in the cellular industry, and that’s really something that Sprint needs,” Menezes says.

Masayoshi Son, the CEO of Softbank, which owns Sprint, said last week at a tech conference that he admires Legere. Son has also indicated that he is fan of T-Mobile’s deep-discount strategy and believes it could be effective at scale. “I’m not content for Sprint to remain No. 3 because if we could grow bigger, we will offer aggressive discounts and services, just like we did in Japan,” he said earlier this year.

Still, T-Mobile is on a bit of a running clock because its effort to attract new customers is wildly unprofitable. The company posted a $151 million loss in the first quarter and missed analyst estimates for both earnings and revenue. A merger would instantly give the combined Sprint-T-Mobile about double the subscriber base, as well as the financial backing of Softbank, which generated more than $5 billion in profit in the 2013 fiscal year. The combined company would also have a more reliable network that would come closer to approaching the quality of AT&T’s and Verizon’s, Lam says.

Legere wins in a potential Sprint merger no matter the outcome. Either he becomes CEO of a larger telco that could legitimately compete with the top two carriers, or he gets a severance package of up to $42 million if he’s not hired at the merged company. Legere has said that a merger could be good for T-Mobile, but he’d like to stay in control. “I have no desire to turn T-Mobile into the son of something else,” he told Business Insider earlier this year.

Consumers hardly have such clear winning scenarios. There’s no guarantee that a larger, less desperate T-Mobile wouldn’t roll back its disruptive ambitions. The brand itself might eventually be swallowed whole by Sprint, which is what happened to former carriers such as Cingular Wireless and Alltel. And company consolidation is what created the fee-ridden industry that T-Mobile has so effectively disrupted in the first place. This four-horse race has been good for consumers, but there’s no telling how competitive dynamics may shift if the number of competitors dwindles to three.

“You’re eliminating a consumer choice,” Menezes says. “Any time you eliminate choice, I don’t believe that that’s good for consumers.”

TIME mergers

Mega-Mergers Are Killing Innovation

The latest mega-merger in the telecommunications sector, that of AT&T and DirecTV, would be the fourth largest in history, and it comes only months after the nation’s largest cable operator Comcast announced that it was buying Time Warner Cable, the second largest cable operator. Nor is telecommunications the only sector to see such acquisitiveness. Microsoft purchased the devices and services business of Nokia for $7.2 billion late last year, Google snapped up Nest for $3.2 billion in January, and Facebook bought WhatsApp for $19 billion in February.

Such consolidation can be good for consumers as bigger companies have the resources to innovate and provide new products and services which might otherwise never materialize. However, the vertical integration of the telecommunications and technology sectors can also restrict innovation due to decreased competition and the limitation of research to specific technologies that support existing business lines.

Take, for example, the acquisition of WhatsApp. Facebook’s primary reason for acquiring the company is to utilize the chat technology on its social media platform to bolster its existing messaging application, which currently lags WhatsApp in the smartphone market. Beyond that, Facebook will no doubt try to leverage WhatsApp’s own user base, currently more than half a billion, to promote its social media offering. But either way, the integration of Facebook with WhatsApp is the main goal and driver of value instead of some trailblazing technological development in the chat space itself.

Similarly, Comcast’s acquisition of Time Warner Cable enables the company to enter complementary markets without actually having to build new infrastructure in those markets or to innovate in any way. Such plug-and-play growth engenders laziness and deprives the U.S. of necessary infrastructure improvement and development. The U.S. is currently ranked a pitiable 35th in the world in broadband capacity according to the World Economic Forum, with even smaller nations outpacing us in cutting edge telecommunications.

Even when it comes to ‘pure’ or fundamental science that can form the basis of future technology, the relentless drive for commercialization limits its destiny to whatever fuels profits in the short term and can impede future research that does not support that. True, third parties could conduct research for other applications but the ironclad patents that major corporations hold on their technology can make such efforts unprofitable. In other words, the acquisition of promising technologies by major corporations can actually limit them by forcing them along proscribed lines in the future.

Some of the greatest scientific discoveries that have fueled mankind’s advancement were made in the vacuum of human curiosity without the profit motive that has now become the norm. Today, unless the process of discovery is sponsored by some major corporation or has an obvious application to industry at the outset, there is little motive to pursue it. Even research institutions, which have historically been neutral havens for such discoveries, now require corporate money to survive and are bound by corporate rules. This is a loss for the spirit of innovation that drives human achievement.

That is not to say that all acquisitions are bad or that our biggest companies don’t move us forward technologically, but if the pace of consolidation by major players continues, it could shrink the playing field to such a degree that innovation will become the sole domain of a handful of companies who, for the most part, will only finance targeted research that promotes their own bottom line, and use patents to prevent others from advancing that technology in other directions. That may be a win for commerce but not necessarily for the type of unexpected discoveries that could improve our world in the future.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

TIME directv

How the NFL Could Blow Up the AT&T-DirecTV Merger

Direct TV
Reed Saxon—AP

Forget the federal regulators—it’s actually NFL commissioner Roger Goodell who could have final say in whether AT&T’s proposed $48.5 billion acquisition of DirecTV comes to pass.

AT&T is trying to swallow up the satellite television provider to get access to its 20 million U.S. subscribers, large international footprint and healthy cash flow. But those American customers may start jumping ship if DirecTV fails to keep hold of its most valuable exclusive property, the National Football League’s all-you-can-watch Sunday Ticket package. DirecTV’s contract with the NFL for Sunday Ticket, which offers live coverage of every out-of-market game each Sunday, expires at the end of next season. In an SEC filing, AT&T revealed that if the deal is not renewed, it reserves the right to back out of the merger. DirecTV won’t be on the hook to pay AT&T damages for the botched deal as long as the company uses “reasonable best efforts” to woo the NFL.

For now, the merging companies say NFL negotiations are on the right track. On a conference call with investors Monday morning, DirecTV CEO Mike White said both he and AT&T CEO Randall Stephenson had already talked to Goodell and that negotiations for NFL Sunday Ticket should be completed by the end of the year. “I am still highly confident that we are going to get our deal done,” he said.

DirecTV pays about $1 billion per year for Sunday Ticket, which has around 2 million subscribers. The fact that football has been placed at the crux of this mega-merger will give Goodell significant leverage to ask for even more money at the negotiating table. The cost for Sunday Ticket could rise by as much as 40 percent to $1.4 billion, according to the Los Angeles Times.

TIME mergers

AT&T’s $50 Billion DirecTV Buy Is Risky, Probably Not Great for You

The telecom giant will pay $48.5 billion in stock and cash as it looks to keep up with rival Comcast, but it's a risky deal that may not benefit consumers

+ READ ARTICLE

I’m as guilty as anyone: Readers of business news hunger for big numbers. The bigger, the better. On that front, the $48.5 billion that AT&T said Sunday it will pay to buy DirecTV did not disappoint. Eat your heart out, Mark Zuckerberg.

In its announcement of the deal, AT&T threw out even more mega numbers. Toss in DirecTV’s net debt and the deal’s value rises to $67.1 billion. The combined company will have 26 million customers in the US and 18 million in the growing market of Latin America. AT&T even said it expects “cost synergies to exceed $1.6 billion on an annual run rate basis by year three”—whatever that means, but it has a ten-digit number in it, so it sounds impressive.

But there’s something about AT&T’s big numbers that grow stale quickly. The problem with big spending is, if you don’t put it toward something worthwhile, it’s just a waste. Time’s Sam Gustin noted on Twitter that the sum AT&T is spending on DirecTV could deploy a hell of a lot of gigabit-fiber service to homes that want it. Instead, it’s going to buy one more aging incumbent in the fast-changing TV market.

So once the transitory buzz of the large numbers ebbs, the strategy behind the deal will start to be scrutinized a bit more. And so far, the strategy seems to be: Well, Comcast has gotten big, so AT&T needs to get bigger too. This isn’t AT&T’s only recent big-ticket bid. In 2011, the company tried to buy T-Mobile USA from Deutsche Telekom for $39 billion, but that deal fell through after the Justice Department intervened.

Why is AT&T so keen to buy its way into growth? Because no matter how much blood the company tries to squeeze from its customers, the stock can’t break out of the flatline it’s been in for a while. As this graph shows, AT&T’s stock has risen less than 10% in the past two years. The S&P 500, during the same period, has risen more than four times as much.

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Some people have taken a look at the strategy behind the DirecTV purchase and not been kind in their conclusions. When rumors surfaced last week of a possible acquisition, analyst Craig Moffett suggested that the acquisition could be a distraction from an inevitable decline in AT&T’s growth. “When DirecTV begins to shrink, then the price paid will no longer matter,” Moffett wrote. “It will merely be another liability that AT&T will need to offset by growth somewhere else.”

Aging companies often make big acquisitions when facing a decline in their own businesses. In the best case scenario, the acquired company is snapped up at a discount and revives overall growth for years to come. More commonly, the big buyouts are merely attempts to buy time. Integrating incompatible operations for a couple of years, and providing excuses for large-scale layoffs. The smoke and mirrors works only for so long. Then another expensive deal is required to keep the ruse going.

The DirecTV deal is looking like it will fall into the latter camp–an expensive gambit that may at best offer growth and cost-savings in the short-term. Pay-TV has an uncertain future in an era where over-the-top offerings like Netflix and video consumption on mobile devices are seeing much stronger growth. DirecTV’s stock has quadrupled in the past five years, but there’s little reason to think growth will continue at anything close to that rate.

Moffett, who was a top-ranked analyst at Sanford C Bernstein & Co. before setting up his own research firm, put it more severely. “Like skid row junkies in the final wretched tremens of downward spiral, telecom/cable/satellite investors now appear to need a deal fix almost daily to stave off the messy crisis of incontinence that comes with the inevitable withdrawal.”

Other analysts speculated about AT&T’s motives for the deal, but few of them shared the sunny interpretations of the acquirer. The timing, coming after Comcast’s plans to buy Time Warner Cable, could be an attempt to piggyback on another telecom deal, one likely to win regulator approval. Or maybe Comcast sparked a merger mania in the telecom industry, with DirecTV the first to be snapped up. Sprint may be prompted to buy T-Mobile. Dish Network could also be in play soon.

In other words, no matter how you slice it, this deal has little to do with helping the consumer. Yet in announcing the deal, AT&T referred to the consumers who are its customers (19 times) nearly twice as often as it did its shareholders (10 times).

So far, the consensus is that DirecTV is unlikely to draw the regulatory criticism that T-Mobile did for AT&T. But AT&T isn’t taking any chances. The company took a $4 billion writedown after the T-Mobile deal fell through, most of it related to breakup fees. AT&T made clear today it wouldn’t pay a fee to DirecTV should regulators foil the deal this time.

That’s good for AT&T, but it adds an air of desperation to DirecTV. Another sign DirecTV wanted to sell quickly: Rumors of the deal last week put the price at $100 a share, but the actual deal is only $95 a share. DirecTV’s stock only rose as high as $86.90 on the $100-per-share rumor, reflecting the Street’s skepticism on the price. Some of that skepticism, it seems, was warranted.

For consumers, the bigger question is, when will these telecom mega-mergers end? Benefits from mergers are usually passed on to shareholders in the form of share repurchases or higher dividends. They rarely benefit customers—in fact, reduced competition in telecom has historically meant higher fees.

That’s why consumers should be wary of these big-ticket mergers. Don’t be too dazzled by the big, flashing numbers of the headlines. The more and the merrier the mergers grow, the more the consumer becomes an afterthought.

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