The Market Ticker
Commentary on The Capital Markets- Category [Market Musings]
2016-10-24 09:34 by Karl Denninger
in Market Musings , 256 references
[Comments enabled]  

So AOL, er, Time Warner is being bought by AT&T eh?

Hmmm.... I find this amusing.

I call Time Warner AOL on purpose, because the AOL/TW deal was not only one of the worst corporate deals ever made in terms of destruction of shareholder value it also almost top-ticked the market back during the Internet bubble.

The most amusing part of it is that the argument then was the same as the argument now -- Time Warner and AOL combined because it was a "better way to distribute things", including advertising.

AT&T is buying Time Warner because..... they think they are the "better way" to distribute things, including advertising.

In other words they think they can get a better deal buying a content factory rather than licensing what it produces.  This almost never is true, incidentally, because when you license you're paying only part of the development cost (since others can also license) and are not obligated to license that which is not a winner (for you) but when you own you get to eat the whole thing, including the losers.

Leaving aside the political strum and furor over this announcement the fact remains that it is an admission from AT&T that it has no more growth available to it organically and in fact is staring down a contracting existing business.  That's the only reason to do a deal like this, given the above facts.

Time Warner, of course, has no reason not to take a deal at more than its value; nobody ever does.  At 18x earnings the company is "fully" valued today (I'd argue it's materially overvalued at 18x and nearly 3x book, particularly given that the firm has 1x revenue in outstanding debt!) but we're quibbling now to a large degree at the market; this isn't someone like Netflix or Amazon with 100+ P/Es.

Look, folks, at the end of the day mobile content distribution is always going to suck.  Tiny screens (5" maximum, roughly) will always blow compared against 60" HDTVs and wireless transmission will always lose in both performance and cost-per-megabit delivered against wires (or fibers) -- that's a physics thing.

So what do I think of this deal? It's desperation, in short - and for those who say they don't ring a bell at the top......

They just did.

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