← The Prof G Pod with Scott Galloway
The Prof G Pod with Scott Galloway
No Mercy / No Malice: The Worst Acquisition in History, Again
00:19:48
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- [00:06]
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As a chef, I know flavor doesn't begin in the kitchen, it begins on the land. And West Home's Nature Led Australian Wagyu is a story written in the landscape of Northern Australia. Cooking is storytelling and West Home Wagyu carries a story of Northern Australia itself. Raw, powerful and deeply authentic. It's a testament to the passion and care raised in the rhythm of Northern Australia. I'm chef Meilin from 88 Club in Los Angeles and I invite you to visit WestHome.comMaitland to learn more and taste a story only Westholm Nature Led Australian Wagyu can tell. That's W-E-S-T-H-O-L-M-E.com M-E-I-L-I-N this episode is brought
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I'm Scott Galloway, and this is no mercy, no malice. When is a deal a bad deal before it's even consummated? When one of the companies is Warner Brothers, the worst acquisition in history, again, as read by George Hahn.
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After six months and eight failed bids, the Ellisons made the Warner Brothers Discovery board an offer they couldn't refuse. The potential Netflix acquisition would have been akin to fusing lvmh and Walmart, HBO's prestige TV and Warner's iconic IP plus Netflix's scale Paramount Skydance buying WBD is the fusion of a dog and a car bumper traveling 80 miles an hour. Spoiler alert. It's not going to end well. The story of Warner Bros. Is a recurring masterclass in ego cosplaying corporate synergy. The company has undergone seven sales mergers or structural separations since 1967. The script remains the same a new CEO decides Warner Brothers is the missing piece of their legacy, only to find they've partnered with a high maintenance spouse who after several years leaves with half of everything the acquiring company used to own. In 1989, Time Inc. And Warner Communications announced a merger of equals that would create Time Warner the world's largest media company to date. Things did not go as planned. First, Paramount's hostile takeover attempt passed as prologue, scuttled the proposed stock swap and bid up the price. A year later, the deal closed at a $14 billion valuation, 13 times EBITDA. To finance it, Time Warner took on $1.1 billion in annual interest payments to service $10.8 billion in debt. To avoid bankruptcy, Time Warner initiated Project Glass, a good bank, bad bank structure that put the company's crown jewels, hbo, the film and television studios and the cable assets under a subsidiary, enabling it to receive cash infusions from outside investors. Meanwhile, the merger became a case study in clashing corporate cultures. The Time Warner merger would provide a blueprint for future M and a disasters. Exhibit A, the ultimate destruction of shareholder value. AOL's $167 billion merger with Time Warner. This time, the culture clash was between a legacy media company and an Internet startup. The bigger issue, however, was that $167 billion valuation premised on.com era hallucinations. AOL's market cap was nearly double Time Warner's, while Time Warner had five times the revenue. As the dot com bubble began to deflate, news broke that AOL had been propping up its growth narrative by fraudulently inflating its advertising revenue. In the end, AOL Time Warner never came close to justifying a multiple of 25 times to 30 times EBITDA. And within a year of securing regulatory approval, the company took a historic $99 billion write down. By 2003, Time Warner dropped AOL from its name and in 2009 it spun off the unit. AOL's value at the spin was $3 billion, a shadow of the $167 billion assigned just 10 years before. But wait, there's more. In 2018, the synergy delusion struck again. This time AT&T acquired Time Warner for $85 billion, creating WarnerMedia on the theory that its dumb pipes were the chocolate to Warner's peanut butter that is great content. But WarnerMedia struggled to make streaming profitable. Its theatrical business was devastated by the pandemic, and once again, there was a culture clash. The bigger challenge, however, was a 2.9 times debt to EBITDA ratio, which trapped the telco in a pincer between dividend payments, a utility company's raison d' etre and servicing the interest on $180 billion in debt. Ultimately, AT&T spun Warner, combining it with Discovery in a deal that netted the telco $43 billion. A 50% haircut. The WBD sequel combined all the elements of the worst acquisition in history franchise Another culture clash, this time between Discovery's unscripted empire and Warner's premium sensibilities A wannabe mogul overpaying so he could cosplay as Robert Evans Ask Claude and a five times debt to EBITDA ratio. The good news? The sequel had a short runtime. CEO David Zaslav slashed costs, engineered a good bank bad bank structure to spin WBD's declining linear assets and ultimately orchestrated a bidding war that restored shareholder value as an operator. ZSASZ's Ed Wood see the worst branding decision in history deprecating hbo. But as an investment banker, he's Steven Spielberg. What do you get? A Nepo baby who already has Paramount. A Warner Brothers According to one study that tracked 3,250 wealthy families over two decades, 90% lose their fortune by the third generation. Prediction Larry Ellison's great grandchildren will never forgive him for providing a personal guarantee so David could go to the Oscars. While the deal is priced at a multiple of 8 times to 12 times EBITDA, the E is anchored to a linear TV ecosystem that's unraveling faster than regulators can approve the deal. WBD Paramount equals 2 times the linear headache. Wall street is being asked to pay a premium for a story whose ending everyone already knows. And if valuation is the rock, leverage is the hard place. Last year the two companies generated a combined operating profit of $11 billion before depreciation and amortization. The Paramount WBD combo is two drowning men clinging to each other, hoping the combined weight of their 79 billion dol billion in debt will somehow act as a flotation device. It won't, which is why Paramount's debt was downgraded to junk status after the Ellisons won the WBD bidding war with his new toy having a leverage ratio north of 6x, David Ellison has promised $6 billion in synergies within three years. Netflix CEO Ted Sarandos put the figure closer to $16 billion after examining WBD books. Synergies is Latin for layoffs. Additional synergies could be found by consolidating HBO Max with Paramount into a Frankenstreamer no one asked for. Merging CNN with CBS News and going Cleopatra that is selling one or both studio lots to real estate developers c. Fox selling 300 acres of its backlot to create Century City. In Star wars. When Grand Moff Tarkin tests the Death Star by destroying Alderaan, a pained Obi Wan Kenobi says, I felt a great disturbance in the force, as if millions of voices suddenly cried out in terror and were suddenly silenced. Big Tech is the Death Star, and Hollywood's creative community is Alderaan. After acquiring Paramount, the ellisons laid off 2,000 employees 10% of the workforce. After acquiring WBD, David Ellison attempted to quell layoff fears among Warner employees, insisting the majority of cost cutting would come from non labor sources. Nobody believes that it's going to be difficult to cut billions in snacks while it's not yet fully operational. But armed with a TikTok laser, the Ellisons are fixing their AI Death Star's sights on Hollywood. For a sneak preview of coming attractions, see the credits of the Fantastic Four first steps. The Marvel movie employed 3,000 plus cast and crew members. More people that work at Lyft or Reddit. The Ellisons don't care if Hollywood is ready for AI. They believe AI is ready for Hollywood. Paramount, WBD is ground zero. Amazon, Apple, Netflix and YouTube won't be collateral damage. They'll be the beneficiaries. The Ellisons blow up Alderaan. Big Tech inherits the empire. After walking away from the WBD deal, Netflix's stock popped 14%, partially reversing a 20% to 30% drop in the share price since the deal was first proposed. As a parting gift, Netflix pocketed a $2.8 billion breakup fee, equivalent to 15% of its annual content budget. During the bidding war, Hollywood cast Netflix as the white knight and the Ellisons as the villains. Remarkable, given Hollywood's 2023 work stoppage was called the Netflix strike. When I was pitching a television show, the money was better at Netflix. But everyone wanted to work for hbo, which punches above its weight in cultural relevance. The Ellisons won't just burn HBO's goodwill, they'll napalm it with a cocktail of AI slop and arrogance garnished with fascist flourishes. In Hollywood, reputation is currency, and the Ellisons are broke. But perhaps Netflix's biggest win is that it may have thrown the competition into stasis. Despite using their relationship with President Trump as a cudgel, the Ellisons must still clear EU regulatory hurdles as well as potential litigation from state attorneys, Chinese general. They'll likely get approval as antitrust Enforcers no longer break up behemoths. They just delay their agenda. Nevertheless, history demonstrates that any deal to acquire Warner Brothers has remarkably short shelf life. Ted Sarandos was on the verge of a transformative acquisition and still is. But it's not wbd. A decent test of value is to benchmark similar assets. By walking from the deal, Ted and Company saved $121 billion and their equity value has increased $60 billion since putting the WBD spliff down. Add the $3 billion breakup fee and you have an effective $184 billion opportunity cost for WBD. So what could you get for $184 billion a the Mouse Walt Disney Company $179 billion. A side by side comparison illuminates just how talented an auctioneer David Zaslav is and suggests the centerview bankers who talked Ellison into paying this price have a second career as psychedelic doulas. Let's shine a light on the unexploded IED that is wbd. For the same price. Wall street would have you believe that WBD was the value play. It isn't. It's a value trap. Disney generated $21 billion in operating income last year on $91 billion in revenue. WBD registered $11 billion in operating income on $42 billion in Reven came from a dying linear TV business that's shedding subscribers. But the real gap isn't in the financials. It's in the moats. Disney has theme parks that print $8 billion in operating income annually with 60 plus percent incremental margins. WBD has CNN and TBS reruns. Disney owns the IP that dominates global Marvel, Star Wars, Pixar, espn. WBD owns HBO Great and a back catalog that hasn't produced a billion dollar franchise in a decade. Disney's parks business alone, just the parks, is worth more than WBD's entire enterprise value. You're buying a recession resistant pricing power machine with Disney. With WBD you're buying a melting ice cube of linear TV assets wrapped in $40 billion of debt, trading at five times leverage. One of these companies will be worth $300 billion in 10 years. The other will be sold for parts to Netflix. The second generation of wealth ensures that the third generation isn't Sherry Redstone, Edgar Bronfman Jr. And now David Ellison. I've been having a lot of conversations with cable news anchors who are seeing their pay fall off a cliff. My advice is always the same. Seize the means of production, that is Start a podcast launch a substack, et cetera. We've transitioned from a fossil fuel based economy into an attention economy. Full stop. If you command attention, revenue follows. The Ellisons will do to CNN what they're already doing to CBS News at CNN. $3 million a year anchors are a cost center on a bloated P and L on YouTube or Substack. They're platforms with 90% margins. The smart money isn't betting on the logo on the building, it's betting on the X Wing fighter, the individual talent with the firepower to knock out the Death Star before it can recharge and hit its next target. I know I'm getting carried away with the Star wars stuff, whatever my bantha that is Newsletter There are only two ways to make money in the media business. Bundling and unbundling. We're in a bundling phase. The question isn't what the Ellisons will do with Paramount and wbd, but who will acquire those assets at fire sale prices when their AI synergy narrative can no longer provide cloud cover for their pair of overleveraged legacy media companies. My prediction? We'll see this movie again starring Netflix, Apple and Amazon as bargain hunters with delusions of grandeur that involve paying a failed CEO hundreds of millions for the right to fire hundreds of thousands of their employees. In Star wars, the good guys blow up the Death Star in Hollywood. You just wait for it to collapse under its own debt load. Same ending, lower production budget.
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Life is so rich.
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