Comcast and Time Warner Merger: Strategic Value Analysis

Introduction: Consolidation in the Cable Industry

In the last several years, cable companies have been experiencing tremendous amounts of consolidation. New competitors entering the marketplace frequently use bundling strategies to sell a variety of services — telephone, Internet, and HD TV — intensifying rivalry across the sector. In response, Comcast has been aggressively acquiring assets to improve its competitive position (Standard and Poor's).

The proposed merger with Time Warner was designed to enable Comcast to consolidate market share and become more competitive (Baker). To fully understand why Comcast has been taking this approach requires examining the deal itself alongside the firm's strategic intentions and past transactions. Together, these elements highlight the basic strategy Comcast is utilizing to adapt to changes inside the marketplace (Standard and Poor's).

Do Mergers and Acquisitions Create Value?

The authors of The Curse of the Mogul argue that mergers and acquisitions (M&A) do not create value. Is this the full story when it comes to Comcast's intentions? The answer is yes and no.

There are times when mergers and acquisitions do not create any meaningful value. A clear example is the AOL–Time Warner merger. At the time, the deal was considered advantageous because it gave Time Warner access to a large ISP with an enormous customer base. The problem was that both companies had completely different corporate cultures, and integrating them proved very difficult. To make matters worse, AOL began losing customers to broadband providers and had no way of counteracting what was occurring. The result was that Time Warner eventually sold AOL for considerably less than it had paid (Standard and Poor's; Knee; Klein).

However, there are other situations in which M&A deals provide significant benefits to shareholders. Certain acquisitions give management the flexibility to leverage new technology and an expanded customer base to enhance dominance within a sector. Comcast has used this approach to increase its market share since the mid-1990s. Some of the most successful acquisitions include QVC, Media One, MGM, Susquehanna Communications, Adelphia, and NBC Universal. Over the years, these deals transformed the company from just another cable provider into a firm controlling a broad range of entertainment properties, increasing both its dominance and revenues. In these cases, mergers have been shown to create value for both the acquired and parent companies, enabling Comcast to evolve with changes inside the marketplace (Standard and Poor's).

Comcast's M&A Legacy and Strategy

The insights from Knee (2009) do not tell the full story when it comes to Comcast. The authors take a subjective view of why mergers fail. In practice, Comcast has traditionally focused on acquisitions that can support long-term growth. The firm has not always succeeded — the attempted acquisition of Disney is the classic example. Comcast sought to acquire Disney, but the company's shareholders opposed the deal. Rather than attempt to integrate two organizations in a hostile environment, Comcast's management simply walked away (Knee).

This episode illustrates an important principle: mergers must be used as a vehicle for bringing together firms that can genuinely complement each other. Comcast's acquisition strategy is built around identifying assets that will enhance its competitive position; anything that does not meet that standard is not pursued (Knee; Plunkett).

Comcast has a legacy of engaging in large, game-changing M&A deals, most notably the purchase of NBC Universal. The Time Warner Cable acquisition, however, raised the question of whether this deal was qualitatively different from those that came before it — and if so, why.