Thursday, September 10, 2009

Overpriced Strategic Investments

by Jonathan A. Knee, Bruce C. Greenwald and Ava Seave

Time Warner announced in May that it plans to spin off its AOL division by year end. The new AOL's value will likely be barely 1 percent of the market price of the inflated stock that Time Warner accepted in the original $175 billion merger almost a decade ago—despite the inclusion of numerous subsequent expensive add-on acquisitions. While extreme, the Time Warner–AOL combination was no aberration. The deal represents less than half the financial damage done during an unprecedented era of excess in the media business. Since 2000, the largest media conglomerates have collectively written down more than $200 billion in assets, a record that would make even Citigroup blush. These write-downs reflect a broad-based legacy of value destruction from relentlessly overpriced acquisitions, "strategic" investments, and contracts for content and talent.
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Understanding the fundamental flaws of these four tenets of conventional media wisdom—growth, globalization, content, and convergence—is essential to saving media shareholders of the future from the anemic returns of their predecessors.
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Myth No. 1: Growth Is Good
Myth No. 2: The Gospel of Going Global
Myth No. 3: Content Is King
Myth No. 4: The Cult of Convergence

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