May 21, 2021
Undoubtedly, you are far better than telecom giants AT&T and Verizon at the critical life skill of dodging bullets.
In life and investing, you’ve likely narrowly dodged, by luck or smarts, making what would have been a bad decision (marrying the wrong person, taking a bad job, buying a terrible stock).
You’ve probably also taken a metaphorical bullet – when you made what turned out to be a bad decision (resulting in a lousy marriage, crummy boss, or losing stock position).
But you survived the bullet and its eventual extraction (ugly divorce, getting fired, or taking an 80% loss).
Maybe it wasn’t pretty. But – pat yourself on the back – it was indisputably a lot less ugly than the rain of bullets that would-be media moguls AT&T and Verizon have put their shareholders through.
AT&T’s Exit Wounds
As CNBC explained on Monday, AT&T is extracting a bullet, as the company announced…
… a deal to combine its content unit WarnerMedia with Discovery, paving the way for one of Hollywood’s biggest studios to compete with media giants Netflix and Disney… Under the agreement, AT&T will unwind its $85 billion acquisition of Time Warner, which closed just under three years ago and form a new media company with Discovery [home to reality TV networks TLC, Animal Planet, HGTV and others]. The deal would create a new business, separate from AT&T…
Those who haven’t kept up with the former “Ma Bell” (as the telephone system was often colloquially referred to) might be surprised that she’s turned into a bit of a minx… The rocking-chair stock – that your grandparents held in certificate form in a safe-deposit box at City Bank downtown – donned a racy red leather skirt and fishnet stockings and hit the town.
But now, after taking a few bullets, she’s going back to the porch rocker to (shareholders fervently hope) focus more on just helping people reach out and touch someone.
Three years ago, AT&T acquired CNN, HBO, and Warner Bros. in a deal championed by then-chief strategy officer, and current CEO, John Stankey. It was a stillborn, poorly conceived, and misguided purchase in the first place – AT&T, meet bullet – that financial commentator Jim Cramer (admittedly with the benefit of armchair hindsight, but he wasn’t alone) called “one of the dumbest mergers in recent history.”
The size of AT&T’s exit wound on the Time Warner (later renamed WarnerMedia) acquisition is difficult to figure out. AT&T shareholders will own 71% of the new company… and AT&T will receive $43 billion in the deal to offset some of its nearly $180 billion debt load (AT&T and Verizon are two of the business world’s largest non-financial company borrowers). The Financial Times estimates that the new company – which will be catapulted into the Netflix universe of streaming, at least by some metrics – could be valued as highly as $150 billion.
Tellingly, AT&T shares fell nearly 3% following the announcement of the deal, suggesting that investors weren’t thrilled. And, worse – signaling just how many credit cards the fast-living, coke-snorting version of Ma Bell had maxed out – buried in the hubbub was that AT&T is taking an axe (or a gun, maybe) to its dividend, which will likely be cut by half.
That will be a blow to Gramps and Gramma, who aren’t making much income from CDs these days. “You can call it a cut, or you can call it a resizing of the business,” Stankey disingenuously commented on the downsized dividend.
Prior to becoming CEO, Stankey was the company’s go-to mergers and acquisitions executive – where he made a practice of not dodging bullets, in his effort to gussy up Ma Bell.
In addition to championing the Time Warner deal, he spearheaded the company’s 2015 $67-billion purchase of cable provider DirectTV. If buying a cable company in the midst of the cord-cutting revolution and the surge of streaming-content providers like Netflix sounds like charging into a burning building wearing a gasoline-soaked suit of cotton balls… well, trust your instincts.
And sure enough, five years later, AT&T sold the stake… at around one-third its purchase price. That’s a howitzer-sized exit wound, even for a company that generated $172 billion in revenue last year. (Amazingly, Stankey was promoted to the corner office anyway… See below about “dumb and dumber”…)
The company Discovery might ring a bell… not as the brains behind vapid TV shows like Say Yes to the Dress and 100 Day Dream Home, but because it was the bomb that recently blasted a $10 billion hole in the balance sheets of a handful of banks.
In late March, a string of sneaky, highly leveraged bets on a handful of stocks made by family office/hedge fund Archegos Capital Management spectacularly blew up (I wrote about this here).
And one of the objects of desire of financial-criminal-turned-regulators’-nightmare Bill Hwang, the head of Archegos, was the shares of none other than Discovery.
From the start of 2021 to their peak on March 19 – just before the Archegos (Greek for “one who leads the way”)-inspired meltdown – shares of Discovery (class A, ticker DISCA) rose 156%, from just over $30 at the end of December, to nearly $78 per share. (By comparison, the S&P 500 Index was up 4.2%… and a media and entertainment subindex was up around 10% over the same period.)
On March 16, the Financial Times – blissfully unaware that the real reason behind the appreciation in Discovery shares was Bill Hwang’s creative financial engineering rather than the appeal of Scrap Kings and Diana: Tragedy or Treason? – contemplated the strange resurgence of a few boring old-media companies…
ViacomCBS [another Hwang stock] and Discovery, decades-old television companies dismissed by some investors as too slow and small in the online streaming era, have staged a spectacular rally over the past year.
… neither ViacomCBS nor Discovery are reinventing the wheel… Discovery is leaning into niches that have long thrived on traditional television, such as home improvement and reality shows.
Three days later, that rally reversed, courtesy of Mr. Hwang. And last Friday (May 14), Discovery shares closed at $35.65 per share, before briefly jumping to $39.30 per share on the news of the AT&T deal. Following a lousy week in markets – and investors having a second look at the supposed new streaming prince that’s being cobbled together by a reality TV producer and AT&T castoffs – the shares have fallen back to $32 per share.
The man who made twenty-three 1,000% recommendations just unveiled his #1 stock live on camera right here.
The Bullet That Verizon Didn’t Dodge
AT&T isn’t the only big telecom company bleeding media assets this month…
In early May, Verizon – the telecoms’ Pepsi to AT&T’s Coke – sold 90% of media brands AOL (which it purchased in 2015 for $4.4 billion) and Yahoo (Verizon paid $4.5 billion for the one-time Internet darling in 2017) for $5 billion.
Verizon had rebranded its media assets as Oath (potentially rivaling the 2002 rebranding of PriceWaterhouseCoopers’ consulting arm as “Monday” as one of the worst corporate names ever). Long ago – before Facebook and Google were as ubiquitous as air – Yahoo dominated Internet search and marketing… But today, it’s a Smurf next to King Kong and Godzilla.
In its latest reboot, Yahoo – as part of Verizon Media – said in late March that it would shift gears to focus on selling subscriptions to its products through a rebranded subscription portfolio called “Yahoo Plus.” Among the offerings would be Yahoo Finance Plus (formerly called Finance Premium… I use Yahoo Finance all the time and don’t ever recall seeing this) – which would offer Plus Lite for retail investors, and Plus Essentials for traders.
The confusing slate of offerings didn’t bode well – particularly with branding that sounded more suited to off-the-rack big-people clothing than Internet subscriptions.
And six weeks later – notwithstanding a statement from the “head of consumer” at Verizon Media that “Yahoo is the future of our consumer-facing brand” – Verizon extracted the Yahoo bullet.
Fortunately for Verizon and its shareholders, the Yahoo/AOL digression was little more than a financial flesh wound in the context of Verizon’s $24 billion free cash flow last year.
But we can’t blame Verizon’s executives for their failure… Sometimes these things happen. Who could possibly have imagined that one of America’s biggest telecoms providers would bobble some aged Internet media assets?
Surely no one could have guessed. Oh, except that the New York Times did, in September 2016… as a columnist wrote then upon the acquisition of the scraps of Yahoo by Verizon…
I just don’t get the industrial logic behind Verizon Communications’… foray into the digital media “space,” especially because the way it has chosen to compete in it is by buying… two companies [including AOL] that have seen much better days… is [Verizon] flailing in unknown waters in a misguided quest to get into the business of providing digital advertising?
That’s exactly what it was doing. Yahoo’s way of making money – Internet advertising, which it dominated before Facebook and Google were even glints in the Internet’s eye – was the shiny object that Verizon wanted for its menagerie collection.
The new owners of the broken toy that is Yahoo is Apollo Global Management, an alternative investment manager. It’s rebranding Verizon Media – which maintained the Yahoo brand – to… Yahoo, which the Financial Times called “the most retro rebranding of the year.” (When Yahoo was founded in 1994 – cue the bored-and-brilliant-Stanford-students-in-their-garage meme – the name was actually an acronym for Yet Another Hierarchical Officious Oracle… and not a reference to a shout of joy/terror (as in, Yahoo, who waxed my skis?!) or that smelly guy chewing with his mouth open (What a yahoo, he must be a Stanford student).
And back in 2008, none other than Microsoft dodged a bullet when Yahoo (oh-so foolishly) rejected a $44.6 billion acquisition offer, when Microsoft was trying to do what Verizon tried later… As Reuters explained in February 2008…
Yahoo would give Microsoft dominance in Web banner ads used by corporate brand advertisers. It also attracts more than 500 million people monthly to sites devoted to news, finance and sports, and Yahoo Mail is the No. 1 consumer email service…
Dominance in web banner ads – a business model that was in the midst of a historically spectacular crash-and-burn – would have been about as useful as cornering the market on horse-drawn buggies in 1907, the year before the first Model T rolled off the factory floor.
Microsoft’s bid represented a frighteningly generous 62% premium to Yahoo’s share price.
But the deal didn’t happen (bullet dodged by Microsoft). Even with the icing-on-top bid, Yahoo was valued at only a quarter of what it had been at the height of the dot-com bubble in 2000. Presumably, Yahoo and its shareholders imagined that the share price might return to that level – a great, and expensive, lesson in “anchoring bias.”
The reason for the purchases by AT&T and Verizon could be draped in strategy-consulting doublespeak of vertical integration (the company that operates the network that lets me watch cat videos on my phone should also create content because… why?… or: that company should sell online ads because… why?).
AT&T offloading its media assets “represents another failed moment in the long history of corporate outsiders trying to remake the entertainment business,” the New York Times wrote this week.
It’s no excuse, but AT&T and Verizon are far from alone in their quest to sexify themselves by lathering themselves up with Hollywood (or tech) body oil.
For example, in 1986, General Electric – back when it was one of the world’s most respected industrial corporations, rather than a poster child of financial legerdemain and strategic overreach gone wrong – acquired NBC. That it was an awkward fit for a jet engine and light bulb maker was “… something I always thought about,” the company’s CEO said upon the sale of a controlling stake in NBC in 2009.
Another possible reason for why AT&T and Verizon do the corporate equivalent of hosting a big beach bonfire, using 1 million dollar bills as kindling? They’re just big, stupid companies that can’t stop from stumbling over their own clown shoes.
The former CEO of T-Mobile, the other big U.S. mobile provider, often insulted the company’s larger rivals by calling them “Dumb and Dumber.” In July 2017 – in one of the finest examples of corporate trolling (before trolling was a thing) that you’ll ever read – he crowned Verizon as the “Dumber Champion” and declared that T-Mobile’s “research” found that Verizon was the “Dumber” of the two.
Verizon (2020 net income: $17.8 billion) and AT&T (2020 revenue: $173 billion) are enormous, highly profitable, cash-rich companies. They’re tech-world utilities, like the power company… After making the not-insignificant capital expenditures to create their network, they charge for using the network. That’s a low-growth, high-cash-flow business.
The sale by both companies of non-core assets will free up cash for AT&T and Verizon to focus on their main business. And they need it, as they paid $27.4 billion and $52.9 billion, respectively, at a recent auction for 5G spectrum. That’s the radio frequency that – one day – will offer mobile connectivity around 10 times faster than 4G (which is what you probably have on your phone if you’re in the U.S.).
But why did Verizon and AT&T look for bullets anyway? They’d do well to do one thing… and do it well. And stop taking bullets along the way.
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