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Media Deal Roulette: Buy, Merge, or Fail Miserably

Even as the dam is about to burst on pent up demand for media deals, the nagging question remains: can buyers improve the field's checkered track record at integrating and monetizing media acquisitions to get a healthy return on investment?

Not likely.

Radically changing technology, economics, and business models make it as challenging to manage traditional and digital media companies as it is to accurately gauge asset values. It's still media deal roulette.

The challenge that resulted in $200 billion in lost value in the AOL-Time Warner merger remains: all the cost-cutting, culture thrashing, and name-changing aside, profitable outcomes are not guaranteed. Making a digital leap of faith, even for Internet companies, doesn't make success any easier.

That's partly why Microsoft settled for a search advertising alliance with Yahoo rather than the outright acquisition once discussed, while continuing to organically grow non-software businesses such as Bing. It's also why Yahoo doesn't snag AOL.

The remains of failed or struggling deals are everywhere. Two years after buying it for $850 million, AOL says it will shut down Bebo if there are no takers. Google is only now beginning to see some advertising upside from Web video giant YouTube, which it acquired for $1.6 billion in 2006. It will be years, if ever, before real estate investor Sam Zell recovers from his $8.5 billion acquisition of Tribune Co. in 2007. News Corp. is still trying to figure out social networking five years after it paid $580 million for (and then neglected) MySpace. And the list goes on.

Still, speculation rages about high profile transactions involving TiVo, DirecTV, Washington Post, RadioShack, GameStop and Pandora, just to name a few. By comparison, most television stations are waiting to do deals next year, when they can set valuations based on vastly improved 2010 advertising revenue.

For now, much of the digital deal buzz is around hyper-local players such as online seller Groupon and social reviewer Yelp, and how Yahoo's need to expand its horizons with investments in Zynga and FourSquare, which it is rumored to be eyeing for $100 million.

As always, it will come down to price in a fast-changing digital marketplace.

While many buyers and sellers remain far apart on valuations, plentiful cheap financing and properties are fueling necessary, less risky media consolidation and restructuring, some of it supported by recent deregulation.

For the most part traditional and new media companies are selectively grabbing up specialized Internet startups to enhance their digital operations and participate in the industry's only double-digit growth. The competition for social gaming sites, triggered by Electronic Arts' $400 million acquisition of Playfish in December, already has boosted multiples to 10-times 2010 earnings.

Venture capitalists and private equity are exiting long-held investments to put money to work elsewhere. Distress sales such as MGM, with $3.7 billion in debt and more than 4,000 storied film titles, underscore the difficulty of valuing traditional content in the digital age. Bids have fallen short of the $2 billion sought by creditors. Lionsgate Entertainment, an MGM bidder, has been fending off shareholder Carl Icahn, who raised his unsolicited offer to $7 per share.

On the flip side, as the IPO market revives, Brightcove, Facebook, eBay's Skype, LinkedIn, Glam Media, Demand Media and other thriving media players are expected to cash in on an improving market. Facebook's recent private market value is nearing $12 billion.

Measured deal-making helped to boost total first quarter M&A by 29 percent from last year's bottom, to about $520 billion, according to Thompson Reuters.

Strategic buyers and digital interactive media drove more than three-fourths of the $8.2 billion, in first quarter deals in domestic media, entertainment and technology, according to investment banker Jordan Edmiston Group.

The three largest interactive deals were Apple's $275 million acquisition of Quattro Wireless, which provides a mobile ad network foundation for its new iAd operation; Monster's $225 million acquisition of HotJobs from Yahoo; and Dentsu's $330 million acquisition of digital agency Innovation Interactive from ABS Capital Partners.

Such seemingly level-headed deals will not always prevail with more than $1 trillion in cash is sitting on US corporate balance sheets and even more on the private equity and investor side lines. Google today said it will continue to tap its $26 billion in cash to make smaller strategic acquisitions. Big tech players such as Cisco and Akamai could enter the media fray pursuing streaming video player Brightcove.

As media M&A frenzy builds, it's useful to recall the 2008 warning by financial journalist James Surowiecki, "corporate marriages rarely end in bliss." He cited a KPMG study of 700 mergers that found only 17 percent created real value and more than half destroyed it. And as the media industry has repeatedly demonstrated, the bigger they are, the harder they fall... or fail.