Abstract
Convergence vs. de-convergence paradigms
Convergence has radically reshaped the communications landscape over the past two decades. Global communications corporations dealing with both media (e.g. Viacom, Time Warner, and Vivendi) and telecommunications (e.g. AT&T, and Bell Canada Enterprise: BCE) have actively pursued convergence in order to control the whole media sector, from the production to the distribution of content through digital operating systems. Because of synergy effects, economies of scale, and the production and distribution of diverse cultural products, corporations not only in new media industries, dealing with the internet, mobile, and cable, but also old media and telecommunications industries, including newspaper, telephony, and network broadcasting have sought convergence.
Convergence in communication has diverse meanings. Henry Jenkins (2006: 2–3) points out that communication convergence can be categorized in three major areas: the flow of content across multiple media platforms, the cooperation between multiple media industries, and the migratory behavior of media audiences who will go almost anywhere in search of the kinds of entertainment experience they want. Wirtz (2001) also views media convergence from three perspectives: consolidation through industry alliances and mergers; the combination of technology and network platforms; and integration between services and markets. These are not mutually exclusive due to the close relationship between media structure and content, and as it is commonly agreed convergence cannot be achieved without the integration of production between the old and new media (Jin, 2009). The prime goal of corporations is to grow profitably, and they believe this growth can be achieved through convergence, referring to the integration of communication corporations across the same type of businesses (horizontal integration) and across different industries (vertical integration), driven by the rapid development of new technologies and changing communication policies.
There are two major drivers for the boom in convergence: new technology and neoliberal communication policy. Convergence is especially challenging for many traditional forms of media which attempt to step into the new media sector, because media convergence has been fuelled by pervasive digital technologies (Huang and Heider, 2008; Schiller, 2007). The transactions of communication firms have also been expedited by the employment of neoliberal communication policies. The privatization of public broadcasting and telecommunications, and the liberalization of domestic markets have blurred the distinction between the old and the new media, and media companies have become multi-media firms through mergers and acquisitions (M&As) in the midst of neoliberal reform (McPhail, 2006). Deregulation and, in particular, the loosening of regulations regarding cross-ownership among communication industries, have become highly significant in expanding business areas beyond the traditional core business areas in many communication companies (Thussu, 2006).
However, media convergence, which has swiftly grown in the midst of neoliberal policies and digitization, has failed to produce synergy effects on a large scale. Global communications giants headquartered in the U.S., U.K., France, and Canada have sold parts of their companies and split off and/or spun off their firms rather than pursuing consolidation. While M&As among communications companies have been the major trend in the neoliberal era, spin-offs and split-offs are now gaining momentum in the communications market (Jin, 2009).
As Manuel Castells already pointed out (2001: 188–90):
the business experiments on media convergence carried on since the early 1990s have ended in failure. Most of the forms of convergence did not make money. Indeed, traditional media companies are not generating any profits from their Internet ventures. And the prospects are unlikely to change in the near future.
With two major cases of mergers failing – AOL Time Warner and Vivendi Universal – Albarran and Gormly (2004) argue that convergence has given way to divergence or de-merger. Peltier (2004: 271) also points out: “it became obvious that the attempt to build media giants undoubtedly failed, because many media firms after M&As did not improve economic performance measured by profit margins.” De-convergence – when communication companies which become huge media companies through consolidation sell parts of the company, split off and/or spin off parts of their companies in order to improve their profits and revenues, as well as their public images – has rapidly replaced convergence in the communication industries in the midst of large-scale failures of M&As in the 21st century.
This commentary looks at the history and practice of convergence by examining M&As in the communications sector between 1990 and 2008. It then analyzes why many mega-media deals have failed instead of achieving promised synergies by investigating 103 mega-M&As that occurred between 1998 and 2007. It discusses why and how communications companies have pursued de-convergence by employing split-off and spin-off strategies as their business models after and/or with the failure of the mergers. The primary focus of the commentary is the contexualization of the changing corporate business trend through a historical analysis of the rise and fall of media convergence, and thereafter de-convergence. Finally, it articulates whether de-convergence could become a solid new trend replacing convergence in the early 21st century.
Is convergence an old paradigm in the communication market
The changing nature of convergence in the communication industries can be understood through the rise and fall of mega-deals. According to Mergers and Acquisitions, between 1999 and 2008 among the top 100 deals of each year, including commercial banks and oil companies, there were a total of 103 communication deals, valued at $1326 billion (Figure 1). As a reflection of the rapid growth of M&As immediately after the two aforementioned historical events (the 1996 Telecommunications Act and the 1997 WTO agreement), the number of deals soared in the late 1990s. In 1998, there were 14 communications deals among the top 100 deals of the year ($112.3 billion), and there were 20 cases, valued at $302 billion, in 2000. Mega-deals in the communication industries numbered 13 and the total transaction price was $258 billion in 2001; however, the total number of deals of communication corporations significantly decreased to six cases in 2003 and three in 2007.
Mega-communication M&As among the top 100 deals each year
More specifically, in the late 1990s and early 21st century, there were several mega-deals in the communication sector. In 1998, the transaction between WorldCom and MCI Communication ranked fourth among the top 100 deals of the year. In 1999, three telecommunications deals made the top 10, including the deal between SBC Communications and Ameritech Corporation. Of course, the biggest deal in the communication industry was the transaction between America Online and Time Warner. With a transaction price of $164.7 billion, this deal ranked first among the top 100 deals in 2001. The deal between AOL and Time Warner is important because it is a symbol of the future of media corporations. Many communication firms have followed what AOL Time Warner did to enjoy potential synergies. As in the case of AOL Time Warner, many communication conglomerates believe they can secure the outlet of their content, including television programs and films, through vertical and horizontal integration as well as international alliance (Jin, 2008: 370).
However, the numbers and values of mega-communication deals have, all of sudden, dropped, and this situation will not change in the near future, partly due to the current economic recession. In fact, there have been no significant mega-deals in recent years other than the transaction between AT&T and BellSouth, which happened in 2006 ($72.7 billion). Media convergence as a form of M&A has lost its grip. While we have until recently been living in a burst of what passes under the name of convergence, we have now started to witness the emerging of de-convergence (Watkins, 2008).
A few political-economic reasons could be factors for the decrease in the number of M&As in the communications industries: the terrorist attacks on the U.S. in 2001; the economic recession starting in the early 21st century; and market saturation because too many deals occurred at once, immediately after the passing of the Telecommunications Act of 1996. Most of all, with liberalization and privatization, communication corporations have rapidly increased their investment in businesses; however, due to over-competition and over-capacity, they have experienced a fall in profits, which has resulted in a significant decrease in convergence (Jin, 2005; Schiller, 2003). Communications companies rapidly jumped into the deal market through corporate convergence; however, with a few exceptions, most communications companies could not find the expected synergies. What they have experienced instead are plummeting stock prices, falling revenues and profits, and deteriorating corporate images with convergence, and they have begun to reconsider convergence – which, for the last two decades, has been the golden rule dominating the communication industries.
Failures of M&As in the communication industries
It is not uncommon to hear that many M&As are not successful. According to data supplied by Thomson Financial, some 56,000 deals with a value of $6.4 trillion were announced between 1995 and 2000 (Adams, 2002), yet fewer than one-half of those mergers survived. Historically, fewer than one-half of mergers have survived, going right back to the inception of the merger process (Albarran and Gormly, 2004). However, there is no data available for the communication industries. Therefore, one cannot understand why and how communication corporations have changed their corporate strategies, from convergence to de-convergence.
In order to empirically examine the current trend of de-convergence, this paper analyzes “The top 100 deals of the year” in Mergers and Acquisitions, which is the dealmakers’ trade journal, between 1999 and 2008 (so the deals occurred between 1998 and 2007). It examines major communication M&As within the top 100 deals of each year, and analyzes whether they have achieved synergies or whether they have failed. Between 1998 and 2007, there were 103 communication M&As within the top 100 deals of each year; however, I select 83 M&As completed between 1998 and 2003, since it normally takes several years to confirm the results of convergence between corporations. A merger failure is defined in three ways: (1) communication corporations become bankrupt within a few years of the merger; (2) communication firms split off and/or spin off acquired companies due to decreasing stock values and revenues; and (3) acquirer companies are sold to other communication corporations due to lagging performances after the merger. Although there are other factors, including internal corruption and accounting scandals, these elements are related to financial failure, because they happened in the midst of M&As or right after the mergers, so these are the three major causes of the failure of mergers.
Against this backdrop, 57 transactions out of 83 failed, which means about 68.7% of the mega-transactions in the communication industries have not achieved their desired end, which is synergy effects (Table 1). This result shows that merger failure in the communication sector is much higher than for all M&As mentioned in previous studies (about 50% as in Adams, 2002), and it proves that M&As in the communications industries are much more vulnerable in the M&A market. As the results of the mergers explain, the majority of new companies after M&As have not achieved synergies and their financial concerns increased.
Major failed media corporations after M&As occurred, between 1998 and 2003
Source: “The top 100 deals of each year”, Mergers and Acquisitions (1999–2003).
Among failed M&As, 19 mega-deals have bankrupted or closed down companies (22.9%), which means about one in five mega-deals experienced the worst failure. From telecommunications corporations, such as WorldCom, Teleglobe, MCI, and Global Crossing, to broadcasting and newspaper firms, including Tribune Co. – the second largest newspaper publisher in the U.S., which acquired Times Miller in 2000, several businesses have filed for Chapter 11 bankruptcy protection. It is hard times for most newspaper companies due to loss of daily circulation and declining advertising revenue. However, Tribune Co. has 8 major daily newspapers and 23 television stations, so one can say that Tribune’s aim to become a converged media giant, encompassing newspaper and broadcasting sectors, has failed (Ahrens, 2008). Yahoo – an online giant – also acquired GeoCities (a web portal company) in 1999, Yahoo’s second-biggest acquisition after Broadcast.com Inc.; however, it announced that it would close GeoCities in 2009 mainly because of Yahoo’s financial difficulties (Vascellaro, 2009).
More specifically, in 1998, 14 mega-deals occurred; however, as many as 12 of these had failed within a few years of their mergers (Table 1). Among these, WorldCom, Northern Telecom (later Nortel in Canada), and Teleglobe (Canada) filed for bankruptcy protection in the U.S. and Canada in the early 21st century. In March 2009, Charter Communications, the United States’ third largest cable company – headed by Microsoft co-founder, Paul Allen – also filed for Chapter 11 bankruptcy protection. When it filed, the cable company said “it sought bankruptcy protection primarily because of the debt ($21.7 billion) it had accrued over years of expansions and acquisitions, not any operational issues” (de la Merced, 2009).
In 1999, 14 out of 20 communication deals among the top 100 of the year also experienced failure. Global Crossing went bankrupt, while GTE Corp., after the merger with Ameritech Corp., was sold to Bell Atlantic Corp. in 2000, which has turned into Verizon Communication. The story goes on. In 2002, there were 13 mega-deals, including the merger between Qwest Communication International and US West ($56 billion), Bell Atlantic and GTE ($53.4 billion), and Viacom and CBS (39.4 billion). Among these, 12 mergers failed, including the Viacom–CBS merger, the product of which was separated into two different companies starting in 2005. As is well chronicled, in September 1999, Viacom bought CBS, which was one of the largest network broadcasting companies. The merger brought together the extensive motion picture and television production, cable network, video retailing, television station, and publishing assets of Viacom Inc. with the television network, radio station, and cable programming holdings of CBS Inc., to create the worlds’ second largest media conglomerate (Waterman, 2000). However, Viacom started to separate CBS beginning in 2005, only a few years after the merger.
Above all, in 2001, the communication industries witnessed the largest of their transactions between AOL and Time Warner, valued at $164.7 billion. The same year, there were 13 mega-deals; however, 9 of these failed, including AOL Time Warner, which has been separating itself into four different independent corporations. AOL and Time Warner appeared to be a perfect match, linking a major content provider with the distribution power of the world’s leading internet service provider. Because the two companies were established leaders in their respective markets, there seemed little doubt the merger would be successful (Albarran and Gormly, 2004).
As such, many mega-communication corporations have been busy acquiring other media and telecommunications firms for synergies; however, the majority of communication corporations have failed to reach their goals. Neoliberal communication policies and the advancement of new technology have expedited the wave of convergence; however, the result is not so rosy for many communication firms. Communication corporations have reported their failures one after the other, primarily caused by reckless mergers and acquisitions, and this situation will not improve in the midst of the contemporary economic recession.
The failure of M&As in the communication industries happens globally. For example, Vivendi Universal Entertainment, a French conglomerate, acquired several communication companies, including Houghton Mifflin in 2001 and USA Networks and EchoStar Communications in 2002, but it was sold to GE in 2004 and has become part of NBC Universal since 2005. To pare down its billions in debt, Vivendi Universal had to sell almost all of its entertainment divisions to NBC (Ahrens, 2004). BCE in Canada had also pursued media convergence to create a multi-media giant. However, as will be discussed in detail, BCE has had to separate itself into several small companies.
Regardless of the failure of the majority of M&As, there have been new transactions, including between Walt Disney and Pixar (2006), between News Corp. and Dow Johns & Co. (owner of the Wall Street Journal, 2007), and the merger between Google and YouTube (2006), which demonstrate that media convergence is still a powerful paradigm. However, it is true that many major M&As have ended in failure, and the companies involved in them have now sought de-convergence as a new business strategy for survival in the market, which was unexpected. So the next question becomes whether convergence, as a form of M&A, will give way to de-convergence. Some investors already believe that mega-mergers are out (Jubak, 2002). The skepticism following the failures of the mergers of several major corporations, including AOL Time Warner, Vivendi, Viacom-CBS, AT&T, and BCE, leaves many investors and media professionals searching for a model that appears sound and, most importantly, profitable (Albarran and Gormly, 2004).
De-convergence: is it a new business model?
In the midst of the failure of the mergers, several major communication companies have pursued de-convergence in order to regain profits, revenues, and shareholders’ confidence. The de-convergence model has appeared in several ways – sales of profit-losing companies, and/or spin-off/split-off for instance, but in many cases they are not mutually exclusive. In fact, several major media corporations have rapidly changed their strategies, from convergence to de-convergence. Although some of them are still interested in vertical and horizontal integration, many of them are seeking de-convergence. This new wave for mega-media corporations is very significant because their changing roles have immediately influenced the second-tier media corporations and small businesses to follow these mega-corporations.
Different companies have diverse reasons for de-convergence. While the driving forces behind media convergence are often similar, the factors leading some to slim down are not as commonly shared (Finn and Johnson, 2005). To begin with, in 2005 Viacom-CBS separated the company into two independent media companies: one focusing on new media, the other on traditional media. This meant that a high-growth entity that retains the Viacom name was established (and it owns mainly cable and film sectors, including MTV, BET, and Paramount Pictures), while CBS owns the slower-growth parts of the business that includes television and radio broadcasting, as well as publishing and outdoor advertising (Sherman, 2006). When Viacom broke up the company, the major reason was to maximize profits, as was the case for the merger. In other words, Viacom primarily considered economic aspects of de-convergence, instead of diversity and media democracy (Waterman, 2000: 532). The break-up is a matter of pure economics: share prices are languishing and the media conglomerate is a concept that might have had its day. Sumner Redstone, CEO of Viacom, broke up the media company on the grounds that two separate companies could be worth more than the combined entity (Sherman, 2006). While introducing the new business model, he stated:
convergence, the bigger-is-better concept that dominated the industry for most of the past 10 years, is falling apart. As some of you know, divorce [de-convergence] is sometimes better than marriage [convergence]. (Maich, 2005: 33)
Thus Redstone was marking the beginning of the age of de-convergence – a new direction that repudiates much of what had gone before and that his audience was already grudgingly accepting (Maich, 2005).
The failure of AOL Time Warner has shocked the communication market, especially because AOL Time Warner has been a prominent practitioner of corporate synergy. AOL Time Warner was expected to generate $40 billion in revenues and $11 billion in cash flow in its first year (Yang and Lowry, 2001); however, the new entity never met this expectation. Instead, AOL Time Warner has experienced significantly falling stock prices: the stock-market value of the media enterprise dropped by more than $100 billion between its merger and mid-2006, so the company has been separating into four smaller media corporations. Time Warner first sold its music company in 2004, and it quit the book industry in 2006. Time Warner (AOL was dropped from a company’s name in 2003 in a symbolic admission that the mega-merger might have been one of history’s biggest corporate mistakes: Times, 2003) also plans to sell Time Inc., publisher of magazines such as Sports Illustrated, Time and People (Karnitschnig, 2006). Time Warner spun off Time Warner Cable, which provides cable TV and broadband internet access, in 2008. Jeffrey Bewkes, CEO of Time Warner bluntly dismissed the notion of “corporate synergy” embraced by his predecessors. Bewkes says, “cooperation between divisions should be encouraged, but no division should subsidize another, so the company is selling unprofitable businesses” (Karnitschnig, 2006). Time Warner finally spun off AOL as a separate company by the end of 2009. The separation of AOL is crucial, because the spin off emphasizes a shift from seeking size and scale – two attributes that were in vogue 10 years ago – to a focus on being nimble and innovative (AP, 2009).
In the telecommunications sector, two major cases, both AT&T and BCE, are worth investigating due to their major roles in North America. AT&T, the largest telecommunications company in the U.S., has structurally changed its ownership and corporate governance. AT&T has been a convergence behemoth in the deal market. Between 1998 and 2007, AT&T had acquired or had been acquired at least once each year. However, AT&T has had to employ several different de-convergence strategies since the early 21st century as part of its restructuring process. AT&T overhauled the company because the total revenue of the company dropped 10.4%, from $42.1 billion in 2001 to $38.8 billion in 2002 (AT&T, 2002). That is only the first signal of the de-convergence strategy in use by AT&T. Due to declines in long-distance voice revenue as a result of over-competition in the midst of liberalization and privatization, AT&T had no choice but to divide the company into two sectors: old telephone services and new telecommunications services, including broadband (Jin, 2005).
In particular, when the company witnessed the rapid decline in investment towards AT&T after the merger, it started to massively pursue a de-convergence model in order to regain profits through this time of restructuring. AT&T believed that it would be able to take back corporate profit through the disjuncture of new media sectors, including mobile, internet, and broadband from domestic and international telephony businesses. In October 2001, AT&T therefore completed its split from Liberty Media Corporation as an independent company, emphasizing new media (cable, including Discovery Channel). The company also spun off AT&T Broadband to AT&T shareowners in November 2002. The convergence behemoth had finally become a victim of M&As. In 2005, the old AT&T Corp. was acquired by SBC Communications, although SBC has decided to turn its name into AT&T Inc. (Belson, 2005). AT&T is not alone in turning its back on the mantra that big is beautiful, because several other telecommunications companies have followed what AT&T has done.
BCE, a Canadian telecommunications giant, has shown a more dramatic structural change. When Jean Monty took over the job of CEO in 1998, he clearly pursued a convergence model, attempting to combine both content creation and distribution within BCE, and taking greater advantage of the emerging internet market. Monty believed that, in order to survive in a changing technological landscape, BCE had to have control over content. Shortly after the AOL Time Warner merger, BCE acquired the CTV television network, the country’s second largest network after CBC, a move intended to give it more programming to carry into battle against cable television and internet services (Pritchard, 2000a). In 2001 BCE also acquired The Globe and Mail, the Toronto-based national newspaper to form Bell Globemedia. BCE’s move reflects the broader scramble under way by telephone, internet and cable TV companies to offer content in packages of telecommunications services to consumers. In the same year, BCE took a big step toward its goal of expanding globally with a $6.7 billion stock deal to buy 77% of Teleglobe (Pritchard, 2000b). BCE had quickly developed a mania for convergence. However, the acquisition was a disaster as BCE lost billions of dollars financing Teleglobe (CBC News, 2002). Instead of increasing profits, BCE has experienced serious financial setbacks and the value of stocks plummeted. Therefore, BCE made no secret of the fact that the company sees no reason for the phone and internet company to own traditional media assets (Maich, 2005). BCE dramatically reduced its share of Bell Globemedia (now CTVglobemedia Inc.) from 68.5% to 20% by selling its shares to new shareholders in December 2005 (BCE, 2005).
These de-convergence models are the largest examples of a growing number of companies spinning off units that are not central to their businesses. The de-convergence trend is on the verge of being in full swing in the communication sector. The trend toward voluntary media deconsolidation is no longer just an exception, but it is a full-fledged paradigm in the communication industries (Jin, 2009). Facing a threatening crisis, several communications corporations have sought de-convergence, which has resulted in focusing on a few profitable and core businesses.
Conclusions
The communication industries have shown a shifting trend, from the wave of convergence to de-convergence as a form of deconsolidation of the communication sector. Over the past two decades it is well recognized that convergence has become a dominant paradigm in the communication industries in the midst of neoliberal reform. However, the results of mega-communication M&As are quite disappointing from an acquirers’ shareholders perspective. Unlike its promise, the majority of M&As did not achieve synergies and many of the companies involved went bankrupt. An examination of M&As of 83 mega-deals completed between 1998 and 2003 proves that measured synergies were overstated. M&As in the communication industries, driven by digitalization and neoliberal reform, have been unsuccessful as more than 68% of companies involved in mega-communication deals subsequently went bankrupt or were deconsolidated.
While experiencing the gloomy aspects of M&As, many communication corporations have pursued the de-convergence strategy, mainly through split-off and/or spin-off strategies. In the 21st century, the media paradigm driven by both neoliberal communication policies and digital technologies has partly lost its power due because of over-competition and over-capacity – created by neoliberal communication policies – and the communication sector has tried to find a new business model. The de-convergence strategy has been a business model many communication companies have had to take up. Several mega-communication conglomerates have pursued a new business strategy in order to regain revenues and profits. De-convergence is a new business model emphasizing core-business instead of pursuing synergies through the integration of old and new media sectors.
In sum, the fall in convergence does not mean that the dominant paradigm is dead or will soon die, because many media companies still seek consolidation. Although it is not conclusive, what we are witnessing is that de-convergence is rapidly becoming another core business trend, competing with convergence strategies. Media convergence as a form of M&A is still strong, but de-convergence will continue. Media convergence is an ongoing process; however, de-convergence as a rapidly emerging new media model will greatly change the communication market and the ownership structure. While the current article primarily provides information on the new trend of de-convergence in the media sector, further research might be needed to access the implications/meaning of the rise of de-convergence.