M&A Happens

Well now we know where the investment dollars are going in broadcasting. Clear Channel, and probably Tribune (and possibly one or more of the other broadcasting behemoths by the time you read this) are setting the pace. Controlling investors are taking companies private in combination with buyout funds, or else selling out to other forms of private equity. Old Media is leaving the public market and going private.

Clear Channel was valued at about 10 times EBITDA when it announced its buyout offer, which was below many peers after a run-up in media stocks beginning in late summer. Causes of that run-up seem to be a combination of political spending (now over) an uptick in theatrical attendance and strong growth for billboards, and some share buybacks at other companies. Since these are all either temporary phenomena or have nothing to do with TV, those peers are likely to start to look overvalued. Watch for a private equity buyout wave to wash over the industry.

What this says about broadcasting:

  • Stations are where food conglomerates were in the 1980s, where airlines have been for a long time and where car manufacturers currently are. Where many trade publishing companies are (including the one putting out this magazine). They are at an endgame for the strategies that have built the business, and can now best be shaken up and reformed while financially out of public scrutiny.
  • The shakeups that have happened to these other mature industries are now going to happen to broadcasting. Predictive behavior includes asset sales, layoffs, outsourcing, a grinding-down of wages, bare-bones product and a giant profit a few years later when the private investor exits.
  • New technology investment is not usually part of such a shakeup. That’s part of what “bare-bones product” is about. (Think of being grateful these days for pretzels while you squeeze into that tight and dirty seat on an old airplane. Sure, you can get a lovely flying experience if you pay for it, but most of us can’t afford to. Most of us can still afford Netflix and HBO, however; thus commercial-supported primetime is the equivalent of that dirty, cheap little coach seat.) Of course, there are forward-looking media companies that are making technology investments: News Corp. with MySpace, Sony’s Playstation-centric strategies, NBC Universal with iVillage, even Clear Channel’s outdoor division is building digital billboards as rapidly as it can...to name but a few. But almost all of these investments are rather far from the station business. The part of the media company that investors believe justifies tech spending will be, in many cases, where the existing public company focuses its efforts; meanwhile, it is increasingly likely to spin off mature assets like TV stations. For example, News Corp. seems at this writing to be in the process of trading away DirecTV, while doubling down Internet bets.
  • What this private equity recapitalization does NOT say about broadcasting is that the industry is failing. It does not mean our new technologies are lousy or our new ventures are doomed. Rather, there is a great wave of money washing through private equity these days, so that those in control of potential restructuring candidates would probably be foolish not to get some of it. But once they take that money, they also must get with its program.

How, therefore, should technology leaders in broadcasting companies comport themselves? Some axioms may come in handy.

You can fight for more budget for all those worthy projects, but don’t be surprised when the budget goes down instead of up. Even when investments have easily demonstrable returns, they are not likely to be approved when the business as a whole is being valued not for growth, but for the generation of cash.

On the other hand, wrapping the new-tech spending idea into a business plan for a divisional spin-off may be the ticket to some investment. Got a new media idea that might seem just as likely a piece of a Google or MySpace or IBM as of a station group? Pitch the new development as aimed towards spinning off or selling off a bunch of overcompensated labor to one of these new media enemies and you may well get it funded.

We’ve seen this happen with many privatizing and downsizing companies in other fields. In fact, it has happened to a number of divisions of the older and shrinking tech suppliers to broadcasting, including 3M, Kodak, Silicon Graphics, IBM and Philips just to pick on a few. Some of those spin-off/sell-offs still supply us with great product.

Outsourcing is a potentially explosive part of this trend. Just a couple of years ago, the BBC outsourced its studio operations to Siemens, and the former BBC Technology group, now part of Siemens, began trolling for outsourcing business from broadcasters in the United States (among other places).

At the time, this column and several other repositories of punditry informed the Anglo-German venture in polite terms that it was nuts to think American broadcasters would outsource production or technology resources. All of us naysayers were right. There was no business to be had here. And yet now there may well be scads of business to be had.

Now the U.S. may be much more fertile ground for broadcast technology outsourcing than any other world region. We the pooh-poohers were right in 2004 because we knew broadcasters viewed their tech capabilities as competitive advantages, and because we also knew broadcasters were loathe to do anything that might upset the regulatory applecart before getting their new frequencies for digital broadcasting. And laying off local workers in favor of internationally outsourced others—whether in Britain or Bangladesh—is a sure way for a broadcaster to create challenges to its airwave licenses and political opposition to its claim on free digital frequencies.

But nowadays those digital licenses are looking fairly secure. If the outsourcing is to a U.S. company, rather than a tech center in Bangalore, and also involves financing that allows the broadcaster to claim that now it has more resources to put into public-service programming, then the big issue of production capacity as a competitive advantage is also likely to fade away.

After all, competing newspapers share newsrooms in several cities. The first big BBC Technology-like deal in which a U.S. broadcaster farms out its tech operations to an IBM or Verizon or Hewlett-Packard or Technicolor or Ascent Media will likely start a flood of similar deals.

Lots of friends at Technicolor and IBM and Ascent tell me you’ll like working for them. Until they go downsizing again.

If you’re a broadcast veteran, you’ve been through this drill before. Twenty years ago at CBS, they called it “Tisching,” in honor of budget-slashing owner Lawrence Tisch. When people lost their jobs, they were said to have been Tisched. When Tisch gave up his job at CBS to sell the company to Westinghouse nine years after he bought it, he is said to have personally made $2 billion of the overall $5 billion sales price.

Unfair? CBS had a great growth era after Tisch sold it and, five years later, Viacom bought it. And everyone forgot what Tisching was like, except those who had been Tisched. That’s show business.

Neal Weinstock is editor-in-chief of Weinstock Media Analysis and can be reached through www.weinstockmedia.com.