It's Showtime: Will the GE-Vivendi Deal Please the Critics?Published: September 10, 2003 in Knowledge@Wharton
Vivendi Universal’s agreement to sell its Hollywood assets to General Electric’s NBC entertainment division would further consolidate the global market, creating a sixth major media conglomerate with the creative horsepower of Seabiscuit and the reach of Friends.
After a bidding process that provided entertainment for the industry all summer, Vivendi Universal is now in exclusive negotiations to sell its entertainment assets to NBC in a deal that would create a company with annual revenues of more than $13 billion.
Vivendi is dismantling the entertainment empire created by its former chairman Jean-Marie Messier in an acquisition binge that brought the former French water utility to the brink of collapse last year.
The strategy of combining Universal’s entertainment content with NBC’s distribution network is similar to the rationale behind the 2001 merger of America Online and Time Warner which created the world’s largest media conglomerate, says Wharton marketing professor Peter Fader. “Vivendi is a throwback to AOL-Time Warner where you have content and distribution coming together. There are differences between the two, but basically the perception of the AOL merger is that it has been a disaster,” says Fader.
“There is still all this thinking about synergies and there is very little evidence anybody has been able to achieve them in this kind of setting. I’m not saying there’s bad news here, but the potential good news is not as dramatic as pundits” are suggesting.
Despite the experience at AOL, Fader adds, the Universal-NBC combination may have a better chance of success. “For one thing it’s a different era. Back then [the thinking was] up, up up. [The AOL merger] was trying to create [something] new rather than squeeze more blood out of stones like today’s economy. Expectations are more realistic.”
Another key difference, according to Fader, is the management strength of General Electric and NBC. “This is a much more cautious, conservative company than AOL. They know what they’re doing. This is a more calculated move using proper business metrics.”
Nor is General Electric expecting the assets to spin exponential value from imagined strategic synergies, Fader says. “NBC and GE are not counting on some secret homerun. They are content to get whatever they can out of the existing assets as opposed to counting on new magic they can create.”
Taking On ‘The Hulk’
Under the preliminary agreement, Vivendi would get $3.8 billion in cash and continue to own a 20% stake in NBC Universal. GE would also assume $1.6 billion in Vivendi debt. Analysts have put the value of the deal at more than $13 billion.
NBC, in addition to its broadcast network, owns local stations and cable channels CNBC, MSNBC and Telemundo. It would acquire Universal’s theme parks and Hollywood studios, which along with Seabiscuit released The Hulk, Bruce Almighty and American Wedding this summer. Universal is the nation’s third-largest studio with a 12.4% market share behind Sony (14%) and Disney’s Buena Vista (20%).
In annual revenue the combination would rank behind AOL-Time Warner with $40.9 billion, Disney with $25.3 billion, Viacom with $24.6 billion, Bertelsmann with $19.2 billion and News Corporation with $17.5 billion.
John R. Kimberly, a management professor at both Wharton and INSEAD, is skeptical about the merits of the deal for both GE and Vivendi.
First, he is concerned that GE’s management style will clash with the Hollywood creative culture. “This represents somewhat of a departure from the kind of [business] GE is used to managing – and managing extremely effectively. They have stayed away from that side of the business world. They know how to manage things with a certain degree of predictability as well or better than anybody. But it’s not obvious that those are the management skills required” for this merger.
According to Kimberly, Vivendi may have come up short in the deal because it was forced to abandon what he believes could have been a successful strategy to combine media content and distribution. “The principal driver here is the financial crisis that Vivendi encountered under Messier, and I still believe that Messier’s strategy was not necessarily way off base. There were issues of timing and the way in which he financed [acquisitions] which caught up with him, but the strategy – which was bold – was not conceptually off base.”
Kimberly says he does not see any reason why the deal won’t be completed.
Harold Vogel, an independent media analyst, suggests the acquisition would give NBC a better footing against the world’s other major media conglomerates. “It’s the last of the networks to hook up with a movie studio so everybody is now in the same competitive frame. That means the new entity will have a power and a breadth that can compete head-to-head with everyone from AOL-Time Warner to News Corporation to Disney,” says Vogel, author of Entertainment Industry Economics and a guest lecturer at Wharton.
Universal studios will provide NBC with a source of in-house programming, he adds, noting that the two companies already have a long history, with many of NBC’s hit shows of the past produced by MCA, Universal’s predecessor. “This is more about television than it is about movies.”
The deal is also a win for Vivendi, which Vogel predicts will benefit from GE’s diversity through its 20% stake. “It’s the only opportunity Vivendi really has to join up with a blue chip partner and save on capital costs.”
Wharton marketing professor Patricia Williams is also high on the deal, suggesting that the proposed combination will bring added strength in generating advertising revenue to both businesses.
According to Williams, advertisers increasingly are seeking out nontraditional ways to promote their goods such as product placements in movies. If the Vivendi deal goes through, NBC could then offer advertisers broad product-placement deals for both television and movies.
“It opens up a stable of entertainment alternatives that weren’t there before with NBC. There is a continuing emphasis on integrated marketing communication across a wide variety of vehicles. This puts NBC in a place to leverage those assets. You can bundle an ad on Friends and a product placement in a forthcoming Universal film. It gives them the opportunity to do all of those things in one big deal, which is an important thing in the marketplace that they don’t want to miss.”
Despite GE’s background as a supplier to heavy industry, she adds, managers there are not so stodgy that they won’t be able to connect with the hip Hollywood community. “My sense is that while they are very systems-oriented those systems are pretty flexible. They have managed NBC pretty well. They are walking that line pretty effectively. They can respond to the creative community and keep their hands off, but there are still [good business] practices they can put in place even in this creative environment.”
NBC was the last suitor standing, pulling in ahead of second-place finisher Edgar Bronfman, Jr., heir to the Seagram fortune, whose family had sold Universal’s assets to Vivendi three years ago. Bronfman, who led a consortium including Cablevision in the bidding, remains vice-chairman of Vivendi.
According to David Joyce, an independent analyst with Guzman & Co., Bronfman’s bid fell short because of its complexity. “I think there were some moving pieces. And from the Vivendi Universal perspective there was a question as to the strength of management.”
The early favorite had been Liberty Mutual, the Denver cable company. But during the bidding process it made several other acquisitions, including the purchase of home-shopping network QVC, Joyce says, adding that “Liberty Media is going to win anyway because they’re a large shareholder in Vivendi.”
Bronfman, however, may attempt to take on Universal’s music division. Vivendi pulled that business out of the bidding early on when it became clear that troubles in the music industry were dragging down the entire price for Universal, Joyce adds. “I think Bronfman may be a bidder for this business in the future, but I would not expect anything to happen for another year or so.”
Universal’s music division, with a 30% market share, is the leader in an industry that is deeply troubled, largely because of product piracy, adds Fader. “A lot of people are saying that NBC wanted to avoid the music business because it’s an industry that is shriveling and it’s hard to make money. But Universal has been much more progressive about dealing with the industry problems than any other player.”
After the GE deal was announced, Universal said it would slash prices on CDs by about a third.
“If anyone is worth buying in that industry it’s Universal,” Fader suggests. “I believe there is a tremendous upside for music assets even though right now it’s hard to imagine an industry in worse shape.”
If the NBC-Universal deal is completed, most of the major media players will be married off, making this the last big merger for some time, Joyce predicts. “That’s why we saw a lot of the entertainment majors sniffing pretty seriously around these assets. It’s not anticipated that anything else significant is going to happen for awhile.”
He speculates that cable company Comcast, which also considered the Universal deal at one point, might be interested in Disney, which lacks direct distribution beyond its ABC network. Disney executives, however, have complained that weakness at its ABC unit is due, in part, to using unsuccessful shows developed in-house by the parent firm.
Metro-Goldwyn-Meyer, which remains a freestanding studio, is another interesting company to watch, says Joyce. MGM also looked into Universal, but then its controlling shareholder, Kirk Kerkorian, made a tender offer for more shares indicating he may be interested in selling or taking the company private.
As for Vivendi, Kimberly says the rise and fall of Messier had stirred passions in France, especially because Messier had tried to make the company less French by moving its headquarters to New York and switching its working language to English. “Needless to say that upset a lot of French people,” many of whom “viewed the fall of the house of Messier as just desserts. Others were embarrassed by it. They felt this was a blight on the capabilities of French industry and management.”
Now, the furor is dying down. “There are still some stories in the press and those will continue until the dance with GE is concluded,” Kimberly adds. “But basically it’s fading from the popular concern.”