Wall Street Plays Defense
It may have been Labor Day weekend, but some highly paid laborers were working around the clock. Bankers, lawyers, strategy types spent the last weekend of the summer putting the finishing touches on three big deals in the vast telecommunications/media complex: Verizon acquired the chunk of Verizon Wireless that it didn’t already own from Vodafone for $130 billion; Microsoft bought Nokia’s handset business for about $7 billion. And Time Warner Cable and CBS settled their long-running dispute.
Deals, mergers, acquisitions are often covered like contact sports—men powered by adrenaline, urged on by bankers and cheerleaders, hunting for trophies and big scores. But in each of these cases, the moves were defensive and wimpy, aimed at preserving eroding positions and not getting hurt. Welcome to the age of the defensive deal.
Let’s take each one in turn.
First, the largest. Verizon, the big phone company, owns most of Verizon Wireless, the giant mobile phone company. Vodafone, the European phone giant, owns 45 percent of Verizon Wireless. On Monday, Verizon said it would pay $130 billion to purchase Vodafone’s stake in Verizon Wireless. Whee! It’s officially the most boring big-business deal in history. (This is the third-largest buyout ever.) There was nothing financially innovative about the transaction, as was the case with the RJR-Nabisco deal of the late 1980s, which was memorialized in Barbarians at the Gate. And it wasn’t an audacious, out-of-the-box strategic move that united companies in disparate fields, like the giant AOL-Time Warner deal of 2000, which was memorialized in volumes like Stealing Time and Fools Rush In. It’s a safe bet nobody will write a book or a movie about the Verizon-Vodafone deal. A phone company that owns most of a phone company is buying the rest of that phone company from a different phone company. The merged entity won’t offer a fundamentally different set of services to customers or present a different profile to investors.
So why do it? The move is an acknowledgment that the landline business is largely dead and the mobile phone has saturated the world. There are really very few markets left to crack. It is expensive to maintain and build the type of networks that customers expect. And it’s difficult to raise prices. So if you’re not going to get higher earnings from new business or fatter margins, the only way to keep investors happy is to pay a fat dividend and continually buy back shares. To do that, you need cash. By buying out Vodafone and taking full control of Verizon Wireless, Verizon will get full access to the profits that Verizon Wireless continues to crank out.
Next, Microsoft said it would buy Nokia’s handset business and its patents for about $7 billion. Steve Ballmer described the deal as “a bold step into the future.” I’d describe it somewhat differently: struggling, once-dominant tech giant based in geographic area with Scandinavian-like gloomy weather buys struggling, once-dominant tech giant based in geographic area with actually Scandinavian gloomy weather. For this is actually a pretty lame move by a lame duck. Ballmer announced last month that he’ll be leaving the company after 13 years at the helm.
For most of the past two decades, Microsoft has continually missed the next big thing—the Internet, search, smartphones, tablets. Yes, the company continues to mint money on its core software products. But technology investors like growth and innovation. And Ballmer hasn’t delivered. Even though the company has engaged in the defensive maneuvers of instituting a dividend and buying back shares, the stock hasn’t budged much. For its part, Nokia has suffered something like a meltdown. The firm once dominated the mobile phone market the way Microsoft dominated the operating systems market. Nokia became so large that it effectively was the Finnish economy. But the same forces that laid Blackberry low have contributed to a (sorry) Helsinking feeling at Nokia. The era of the smartphone has not been kind to Nokia. The company’s stock, which stood at about $40 at the beginning of 2008, fell to as low as $1.70 in July.
So why would Microsoft buy? Again, defense. This is a small deal for Microsoft: $7 billion represents about 3 percent of the software giant’s market capitalization. And Microsoft can’t have a lot of confidence that it can be a force in the highly competitive hardware market. Some analysts have suggested that Microsoft bought the handset business because Nokia was about to stop using Microsoft software on its phones and start using Google’s Android. And because Nokia is pretty much the only handset maker that uses Windows software on its phones, that would be an embarrassing loss. Under this scenario, the company spent $7 billion to ensure that a customer with a very small market share (just 3 percent of the world’s smartphone business) would keep using its product.
There’s another slightly defensive theory at work: Microsoft is using this deal as a way of acquiring its next CEO. Stephen Elop, the president and chief executive officer of Nokia, is himself a former top Microsoft executive. As part of the deal, he’s going to rejoin Microsoft, run the company’s device business, and report directly to Ballmer.
Finally, as my colleague Lloyd Grove reported, Time Warner Cable and CBS settled their long-running dispute over retransmission fees (how much Time Warner Cable pays for the privilege of sending CBS signals to its subscribers). Although terms of the settlement weren’t disclosed, you don’t have to be a cryptologist to figure out what went down. Essentially, the consensus is that Time Warner Cable gave in. “The final agreements with Time Warner Cable deliver to us all the value and terms that we sought in these discussions,” CBS CEO Les Moonves noted in a memo. “CBS is the winner,” analyst Craig Moffett told Reuters. “Content owners always win these negotiations, it’s just a matter of how much they won.” Basically, Time Warner Cable agreed to funnel more cash to CBS.
Why is Time Warner Cable playing defense? It, like Microsoft and Verizon, fears it has reached a peak. Its core business is eroding. Over the last five quarters, it has lost 748,000 cable subscribers, about 6 percent of its total, as people realize they can gain access to “television” through a variety of alternate means. Like Verizon, it has an expensive network to maintain and plenty of debt, but is having a tough time finding new revenue sources. The businesses that were supposed to compensate for the decline of cable—voice and data—aren’t doing particularly well. And like Microsoft, it finds itself in the position of an unloved monopolistic brand that people eschew when they are presented with alternatives.
Many critics find large corporations and their investment bankers to be offensive. This trio of deals proves they’re defensive.