Instant reaction on Wall Street said that Rupert Murdoch will be back for another go at buying Time Warner when tempers and share prices cool. Really? That script seems very unlikely.
First, 21st Century Fox was in danger of squashing its own share price if had tried to improve its plainly inadequate $80bn bid. Second, Warner boss Jeff Bewkes had said he viewed non-voting shares in Fox as an unacceptable second-class currency; in effect, he was asking Murdoch to surrender family control of Fox, which was always going to be a deal-killer for the 83-year-old titan.
On the first score, Murdoch’s problem was that his reputation as an empire-builder who is not afraid of overpaying (exhibit A: Dow Jones) went before him. Share prices ran away from him on day one. Warner’s stock immediately shot above the level of Fox’s $80bn bid as the market guessed whether the serious offer would be $95bn or $100bn.
Naturally, Fox’s share price wobbled in anticipation. But then it kept falling. From $35.50 before the news of the adventure broke last month, Fox’s stock had slipped to $31.50 before Tuesday’s abandonment. That 11% tumble put Murdoch in the traditional bind facing all bidders offering part-payment in their own shares: the higher the bidding goes, the more cash the target shareholders will want.
The traditional escape from such a squeeze is to whet shareholders’ appetites by talking about cost savings. But here they were just $1bn – tiny in the context of the size of the deal. The strategic benefits were arguably superior since there is a plausible argument that content-led media companies should bulk up to protect their pricing power against merger-obsessed US cable companies. But the cable threat is hardly grave. Fox’s shares had still managed to improve 60% since the demerger of the newspaper assets after the hacking scandal.
As for Warner, its stock was on a roll. As Bewkes pointed out, the total shareholder return was 150% since 2008 amid the separation of the cable assets, AOL and Time Inc. The spin-offs had made Warner itself smaller, and thus an easier prey in theory, but the need for salvation in the arms of Murdoch was never obvious.
Bewkes’ real curve-ball was to question the value of the non-voting Fox ‘A’ shares being offered alongside the cash component. Quite right too. To British eyes, it is baffling that US investors tolerate unfair voting arrangements which too often go hand-in-hand with bad boardroom governance.
In the case of Fox/Warner, the Murdoch clan would have emerged with 40% of the votes but just 9% of the economic interest. That would have been taking to extremes the belief that a swashbuckling boss, with a free hand, gets the best results. Fox/Warner would, in effect, have been a new company. All non-Murdoch shareholders would surely have wanted the power to sack the boss – or his children – if things went wrong.
It is (just about) conceivable that the stars could come into alignment to revive the deal. Warner’s go-it-alone strategy would have to be seen to fail; Fox’s shares would have to outperform; and the market would have to be happy to endorse Fox’s unfair voting arrangements with James or Lachlan at the helm. It’s hard to imagine all three happening. If Murdoch wants one last big deal, he may have to pay cash – that means smaller targets than Time Warner.