annals of communications
The New Yorker - July 25, 1994
network for sale
In the wake of Barry Diller's failed bid for CBS, who will own the network isn't clear, but some truths about mergers in the new electronic media are.
The contest for the control of CBS and QVC resembles a game of musical chairs: after each round, there are more participants than there are seats. On July 12th, it appeared that Barry Diller had lost his seat as the prospective chief executive officer of CBS and might soon leave as the C.E.O. of QVC. Now, even though the game is far from over for CBS and QVC, and other bidders may com-pete for a seat--the nation's largest cable operator, John Malone, of Tele-Communications, Inc., says he is prepared to back a new Diller bid for either CBS or QVC--there are lessons to be learned from what has gone on in the past month.
Lesson 1: Though there is a lot of talk about "convergence," companies will not join forces if their interests don't converge. Diller's two principal partners in the QVC home-shopping network were two cable giants--Malone's Tele-Communications, Inc., and Ralph and Brian Roberts's Comcast. Malone gave his approval when Diller proposed that QVC merge with CBS; the Robertses objected. They owned a cable wire, but, unlike Malone, who has a stake in about thirty cable-programming networks, they did not own any programming to fill that wire. They wanted Diller to be their cable's programmer, and felt that their ownership of QVC stock--they held nearly sixteen per cent of it--guaranteed Comcast an important seat in the game. But, because government rules prevent a cable-system owner from having a seat on a broadcast network's board, Comcast would have been left without a seat if the merger with CBS had gone through. "From a regulatory standpoint, it wouldn't work," a close Diller adviser says of the Robertses' aim. The government rules also provide that a cable company can own no more than 4.9 per cent of a network. "They wanted a controlling position. What they wanted was anywhere from twenty to twenty-five per cent ownership. There was no way they could accomplish that."
A Comcast adviser puts another spin on the matter, saying that Diller's interests diverged from those of Comcast. "It was Barry's interests that converged with CBS's," he says. "Comcast's interests were steady. It wanted to get into programming. It's why Comcast recruited Diller--to create programming. But Comcast would not have had a voice in programming at CBS." Comcast felt proprietary about QVC, since Ralph Roberts was present at its creation, in 1986. Last Tuesday, therefore, Comcast acted on its perceived interests and made a two-billion-two-hundred-thousand-dollar bid to take over QVC, effectively sabotaging the merger of QVC and CBS. Early this year, a similar divergence of interests led to the end of the merger between Malone's cable company and Bell Atlantic. Diller recognizes that companies can and do have divergent interests. "What no one can understand--especially the media, which wants drama--is the perfect legitimacy of how our interests diverged," he says. "And it happened without rancor on either side." Brian Roberts concurs: "It's been a very difficult issue for both Barry and ourselves. There were legitimate issues on both sides."
Lesson 2: Merger partners must feel that they are treated equally and respectfully. Not only did Diller and Malone override the wishes of Comcast but the merger that Diller embarked on would have diluted the ownership role of all three of his QVC partners. Malone, however, was willing to be a relatively passive partner, believing that as long as the investment was a solid one, and as long as he had a piece of everything, he could protect his interests; the Robertses, with no major programming interests outside QVC, felt shortchanged. This feeling may have been strengthened by Diller's occasional brusqueness. Diller is a strong manager, unafraid to assert himself. A longtime friend, referring to the period when Diller worked for Martin Davis, the former chairman and C.E.O. of Paramount, says, "His contract with Martin Davis said he didn't have to talk to Davis. Rather than embrace people, he sometimes does the opposite."
Brian Roberts, thirty-five, who is the president of Comcast, seemed content to operate in the shadow of Malone and Diller. He was deeply distressed when Malone agreed to merge with Bell Atlantic, but kept quiet. He was content to play an important behind-the-scenes role in Diller's futile 1993 effort to acquire Paramount. But last week he chose to make a statement: he would seek to take over QVC. Brian Roberts is well liked, and is respected for his intelligence. Now he may be feared as well.
Lesson 3: The financially nimble Laurence Tisch, the chairman of CBS, could be left without a seat when the music stops. He may be in a predicament identical to the one in which he placed his predecessor, Thomas Wyman, back in 1986, when he circumscribed Wyman's ability either to lead CBS or to sell it. "He's had a 'For Sale' sign out for a long time," a Tisch financial adviser says. Yet the only offer came from Diller. When Comcast launched its surprise move to buy QVC, on July 12th, Tisch immediately declared the Diller merger dead. The next morning, to shore up CBS's stock price--and to earn a profit of about two hundred million dollars--Tisch announced that he would use the one billion one hundred million dollars in cash that CBS had on hand to buy back twenty-two per cent of its stock, at three hundred and twenty-five dollars a share. It was a tactically smart short-term maneuver, as was Tisch's sale of CBS's stake in various companies--records, magazines, books, and cable-sports networks--which helped amass that pile of cash. But in the long term this maneuver hobbles CBS's flexibility. At a time when the network business is volatile, Tisch has no cable or other business ventures to pick up the slack. He has one weapon, not several. And that weapon is being blunted by restless affiliates and employees, who know that Tisch, at seventy-one, wants to leave CBS, and whose ties to the network have weakened because many of them believe that Tisch has been a caretaker who has taken care of himself. Tisch has a brilliant record as a financier, but as a buyer, not a seller. And, following the failure of the Diller merger, it is not clear who might buy CBS. "I don't think there's a buyer," one prominent player says. Noting that throughout the past year everyone knew that Tisch was willing to sell, this player adds, "No one came forward. The QVC deal was open for almost two weeks before Wednesday's CBS board meeting. If ever there was an opportune time to come forward, it was then. No one sniffed at it."
Lesson 4: Lesson 3 may prove not to be valid. "There are lots of buyers," John Malone says of Tisch and CBS. "He can sell. If he picked up the phone and called Michael Eisner, of Disney, and asked if he was interested, he'd have a deal. If he called Ted Turner, Ted would be on the next plane. If Larry said to Barry, 'Buy my stake in CBS and make the equivalent offer to my shareholders,' Barry would do it. Larry is in the catbird seat."
Lesson 5: Barry Diller, like Tisch, could be left without a seat. Diller has made it clear that he does not wish to be an employee, and for that reason associates say he will leave QVC if Comcast or some other bidder wins control. Although Diller's net worth will increase by at least seventy-five million dollars, he does not have enough capital to become the principal owner of a major communications company, which is what he wants to do. As was true in 1992, when he left Fox to look for something else, he is long on talent and ambition and short on big dollars. Diller seeks to trade his unique managerial and programming prowess for capital. To get a major seat, he must rely on partners like John Malone, who are willing to invest in him. "No problem," says a Diller ad-viser. "With Barry Diller owning his fair share, we could raise anywhere from four to six billion dollars in a blink. One commercial banker told me yesterday that they'd put up two billion for anything he wants."
Lesson 6: Watch John Malone. In a long telephone interview from his plane as it headed toward an annual Sun Valley, Idaho, retreat for business executives Malone said, "We are not happy selling our stake in QVC on the basis of the proposal made by Comcast." He said that T.C.I. did not want to cash out, and would prefer to remain a partner in the venture. If necessary, he said, he would consider backing a Diller bid to buy Comcast's interest in QVC. "We would love to invest in a deal where Barry Diller has a broader platform," he said. "We'd love to be an equity holder in such an institution."
Could that institution be CBS?
"If Larry Tisch is willing, sure," he replied. "If Larry still wants Barry, and Barry still wants Larry, the money can be found." As for the government rule stipulating that a cable company's investment in a network must be under five per cent, Malone declared there were potential ways around it. "If CBS wants cable assets rather than money, they can be found," he said. "I think we can do it in such a way that government would be happy. I think the world of Barry, and of CBS. I'd love to see CBS be cable-friendly." Malone said that he and Diller, who was also headed for Sun Valley, planned to get together soon after they arrived last Thursday evening.
Lesson 7: The pivotal role will prove to be played by the government rather than by John Malone. Everyone, Malone included, has to await pending government legislation that will suspend certain rules and impose others: until that happens, no cable operator can own five per cent or more of a network. And, since Malone already owns a controlling interest in the Home Shopping Network Doudoune Moncler, it is unlikely that he would risk stirring up antitrust regulators by outbidding Comcast for QVC. By the same token, a Baby Bell or a long-distance telephone company that petitions the government to enter the cable-TV business presumably doesn't wish to provoke the fury of the federal government by bidding for CBS. Federal financial-interest and syndication regulations are not scheduled to be lifted until the fall of 1995, and until they are they effectively limit a joint ownership of networks and studios. And federal law sets limits on the ownership of broadcast stations by noncitizens, so a Japanese-owned company like Sony can't enter the picture. "Everything is frozen now pending the legislation in Congress," Malone says.
Lesson 8: Those who wish to merge should do it quickly. "If we had held the board meetings of CBS and QVC the week before, I wonder whether Comcast would have made a bid," a Diller adviser says, bemoaning the two weeks that passed between the announcement of the proposed merger and the meeting of the boards. It probably wouldn't have, according to a Comcast adviser. "If they had signed a week earlier, we never would have made the bid," he says.
Lesson 9: Beware of generalizations. "Every time something like this comes along, people draw sweeping conclusions," says the Lazard Freres invest-ment banker Felix Rohatyn, who represents Comcast. "They did when Tele-Communications and Bell Atlantic announced their merger last year. They said every phone company would buy a cable company. Except for the very recent U.S. West acquisition, it didn't happen." Barry Diller is wounded, not dead. The Diller-Comcast partnership may end, but other players will jockey for their seat.
Lesson 10: Too much attention is being paid to these fitful maneuvers. "Over the last few weeks, besides being involved with Comcast, we were involved in the merger of Burlington Northern and the Santa Fe to create the biggest railroad in the United States," Rohatyn observes. "That's probably more meaningful in terms of over-all economic impact than any of these media transactions. Yet it got five per cent of the ink. It's amazing to me. It's show biz."
Lesson 11: Despite all the talk of how technology will increase convergence, or of how content matters more than technology, because people watch programs, people matter at least as much as either technology or programming. Industries are not inanimate objects. Businesses are not just balance sheets. The chemistry and the culture and the personalities of the people who are to merge matter more, not less, than the numbers or the so-called business synergies. (c)