Jonah Peretti, founder of BuzzFeed, had floated the idea of a mega-merger of publishers last year. He mused that if Vice, Vox Media, Group Nine and Refinery joined hands to create a bigger media group, they would have better bargaining power with the duopoly.
“If BuzzFeed and five of the other biggest companies were combined into a bigger digital media company, you would probably be able to get paid more money,” Peretti told the New York Times.
Cut to the present and his words seem prophetic, for in recent months, GateHouse merged with Gannett, Vox Media acquired New York Magazine, Vice Media bought Refinery29, Future Plc is buying TI Media, and The Telegraph is up for sale.
“A key change from previous years”
Publishers, big and small, are turning to mergers and acquisitions for growth. According to the latest mediafutures survey, 30% of the UK’s leading media companies have been involved in some kind of recent M&A activity. And 50% are expecting to buy or sell over the next two years.
A key change from previous years is the growing importance of merger and acquisition activity. Whereas, M&A used to be thought of as the domain of mega, international media conglomerates, it is now being seen by many smaller companies as a valid route to growth.Jim Bilton, Managing Director, Wessenden Marketing which conducts the mediafutures survey
The survey, now in its 10th year, covers consumer magazines, B2B, news media and customer media. 112 companies participated this year. They range from traditional publishers to 100% digital pure plays, and from the major industry giants, to smaller, independent businesses.
There are currently five broad types of trade M&A activities taking place in the media business, according to the survey. These are:
- Consolidation: Building scale economies or closing down the competition.
- Targeted gap-filling: Creating an operational base in a new area of activity, or acquiring missing expertise & skills (e.g. video studios, data analysis companies, live event operations).
- Refocusing: Clearing the decks to concentrate on fewer “narrow and deep” verticals.
- Opportunistic buys & swaps: A more tactical streamlining of “long tails” in publisher brand portfolios.
- Arm’s length: A financial investment in its own right in a completely new area, which may never be integrated into the core media business.
“Cultural issues are always the most crucial to get right”
However, M&A is not a cure-all, it has led to bigger successes, as well as failures. In recent times, some companies like The Financial Times, have benefitted from the move, while some like Verizon, had to face considerable loss.
The FT was acquired by Japanese media group Nikkei in 2015. It was an unexpected deal which The Economist called a “surprising purchase” reflecting, by-and-large, the industry-wide opinion at that time.
The publisher has moved from strength to strength since then. It recorded a strong financial performance last year, with operating revenues totalling £383M, and operating profits of £25M. Earlier this year, it reached the 1M subscribers milestone, which was a goal for 2020. “Revenues and profits have continued to rise since the FT was acquired by Nikkei in 2015,” noted the official announcement.
Verizon, on the other hand, failed with its acquisition of AOL and Yahoo. When it purchased AOL in 2015, and Yahoo the following year, many observers questioned why America’s largest phone company would want to buy two internet dinosaurs. Two years later they were proven correct when the $9B media bet became virtually worthless, according to the FT. This disaster could have been avoided with sufficient due diligence.
According to the mediafutures survey, “one obvious reason given (for M&A failures) is that the due diligence was simply not thorough enough and skeletons started to fall out of cupboards pretty quickly.”
Another major reason for M&A failures according to the majority of publishing executives in the survey, is a mismatch of cultures. A media company CEO commented, “It always takes longer to embed and integrate acquisitions than you think – cultural issues are always the most crucial to get right. We need to focus much harder on this aspect in the future.”
“Comes down to people and priorities”
A prime example of cultural incompatibility leading to M&A failure is exemplified in the infamous $165B merger of AOL and Time Warner in 2001. Initially it was lauded as a revolutionary partnership between an online giant and publisher. Advisers and analysts saw the deal as the best of both worlds, combining print with electronic.
Unfortunately, it went on to become a historical disaster that continues to make it to the “worst M&As of all time” lists. When AOL and Time Warner parted company in December 2009, the tie-up had destroyed almost $200B of shareholder wealth, in less than a decade.
Although the dot-com crash, which happened soon after the merger, also played a role, cultural incompatibility is seen as the primary culprit behind its failure.
Steve Case, Founding CEO of AOL, and lead architect of the deal, still believes that they had the assets to make it work. He told Business Insider over an interview last year that while the dot-com crash was devastating for internet companies, a bigger problem was the culture clash between the two companies. Essentially, AOL’s side found Time Warner to be too old fashioned, and Time Warner’s side found AOL to be a threat to their businesses.
“It really came down to trust, and kind of there was not a common vision that the team embraced and was aligned around. I had seen the success of AOL really was having that clear vision, and having a team that was kind of very aligned on, and passionate about it,” said Case.
Having a good idea is important, but being able to execute the idea is even more important, and that comes down to people and priorities, and we were unable with the combined AOL Time Warner company to get that side of it right.Steve Case, Founding CEO of AOL
“Culturally, they would do it the same way”
The FT-Nikkei merger, in contrast, has been helped by the continued support of the parent company. FT CEO John Ridding acknowledged that in the announcement to mark the 1M subscribers achievement. “We have reached this record by developing a winning strategy, shared and supported by our owners Nikkei, who themselves now count more than 650,000 digital subscribers,” he said.
Ken Doctor, President at Newsonomics, writes in his NiemanLab column, “Word from inside the FT newsroom is one of satisfaction. Editorial integrity has been maintained. The new owners, replacing a struggling Pearson, have demonstrated a willingness to make targeted new investments in the newsroom and in product development.”
Ridding told Doctor, “Basically, these [Nikkei] guys all come from a journalistic background, and they really believe in the value and importance of quality journalism, in reader revenues and transformation. So in a sense, culturally, they would do it the same way.”
In other words, both companies are aligned, which facilitates compatibility.
“Changing the landscape quickly, and in unexpected ways”
Bilton comments, “What is clear from this year’s mediafutures survey is that, mixed in with all the other disruptive forces at work in the media business, M&A is changing the landscape quickly and in unexpected ways.
“Whatever position an individual company may take, the simple reality is that a few key deals can completely reshape our industry. And that is what we are witnessing at the moment.”
Frederick Miller, Director at Deloitte Consulting LLP, however, underscores the need for publishers to tread very carefully when considering M&As, “Uniting the distinct corporate cultures within a newly formed entity in the aftermath of a merger or acquisition is critical to achieving the transaction’s strategic and financial goals. Yet blending cultures often poses far more challenges than many companies anticipate. Organizations with clashing cultures frequently find it difficult to make decisions and operate effectively as a whole, which may hamper their ability to realize economies of scale and other benefits from the transaction.
“Due to the urgency that often surrounds M&A transactions, companies rarely have time to assess culture and diagnose potential issues during due diligence. And since culture issues seldom stop proposed transactions, it becomes the responsibility of operating leaders, including CIOs, to prevent culture from undermining desired transaction goals. Instituting a rigorous program to address culture integration—with clearly stated objectives and a link to measurable business results—can help thwart clashes that may undermine the value of a deal.”