Hold the phone. Or at least, hold on to the phone. Sell everything else.
That’s essentially what AT&T told investors last month in announcing the spinoff of its WarnerMedia division, which will merge with Discovery, owner of HGTV, TLC, Eurosport and other networks. This new global media company will be called Warner Bros. Discovery, with the tag line “The stuff that dreams are made of.”
Bad dreams, in AT&T’s case. In announcing the deal, AT&T’s chief executive officer, John Stankey, declared himself “capital allocator in chief” and decided he had better uses for AT&T’s cash than HBO Max, “Godzilla vs. Kong,” N.B.A. games or CNN. This is a curious designation from a guy who was part of the executive team that allocated more than $85 billion to buy WarnerMedia three years ago, on the belief that pairing distribution with content was a compelling strategic plan.
AT&T now becomes a “pure play”: a telecommunications company as it was in 1984, when the Justice Department broke up its predecessor. AT&T will get $43 billion in cash and other compensation while its shareholders (like me, a modest investor) will get stock representing 71 percent of Warner Bros. Discovery when the deal closes, which is expected to be in 2022. Investors disconnected, sending AT&T’s stock down more than 10 percent. At a recent stock price of around $29, more than $20 billion in value has been erased since the deal was announced.
We’ve seen this diversify-then-divest movie before. It’s the “Four Weddings and a Funeral” of corporate America, without any uplifting ending. C.E.O.s take the capital generated by their successful businesses and then buy others that they can’t manage, or are poor fits in the first place. The rationale is that they are adding scale, growth, adjacencies or serving what they discern to be customer needs. “We’ve known for decades that there’s a diversification discount,” says Rohan Williamson, chair of international business at the McDonough School of Business at Georgetown University. So do C.E.O.s, to little apparent effect. “That’s the way managers think. In their minds, it’s ‘this time it will be different.’”
Losing bets are inevitable in the casino of capitalism. “The creation always looks good, but the destruction isn’t pretty, yet it’s a very much required thing,” says James Schrager, an expert on strategy at the University of Chicago Booth School of Business. What’s not required is doing it over and over, and for the same reason. Where so many bosses go wrong, says Mr. Schrager, is straying from their expertise. AT&T is a company that runs on technology that bought a business that runs on imagination. “The best executives become unbelievable experts in their fields,” he says. “You can’t be massively knowledgeable about 20 different industries.”
The fallacy has its roots in the conglomerate era of the 1960s, when companies such as ITT, then AT&T’s international counterpart, and Ling-Temco-Vought believed they could run hundreds of disparate companies out of a single headquarters. Turns out, the complexity eventually exceeded portfolio managers’ ability to plan, allocate capital or understand different sets of customers.
By the 1980s, new acquisition blimps such as Beatrice floated over the economy until they, too, became overweight. Tobacco companies wasted money buying lower-margin businesses like food, brewing and home building. Remember General Electric? It was the exception to the diversification rule — until it was undone during the Great Recession and its aftermath by poor allocation bets in everything from finance to gas turbines.
Mr. Stankey and Discovery’s chief executive officer, David Zaslav, who will run Warner Bros. Discovery, said their respective boards of directors had unanimously approved the deal. Of course they approved. Although boards have independent directors, very few will stand in the way of such “transformational” deals, and a familiar assortment of investment bankers, advisers and lawyers are there to back them.
Indeed, any deal tied to the Warner name seems to shred money. Time Inc. overpaid to win Warner Communications in a battle with Paramount Communications in 1989, using the very same distribution-plus-content logic that AT&T would later use. The combined Time Warner then recombined with AOL in 2000, another transformational transaction that vaporized more than $160 billion in value before being undone. The recast Time-Warner then bought cable TV companies — distribution pipes for content — which were later spun out. Likewise, AT&T first overpaid ($67 billion) for DirecTV in 2015 to buy more pipes, then again for WarnerMedia ($85.4 billion) to collect more content for its pipes. At every turn, capital went down the pipe.
Investors aren’t the only ones who bear the losses. WarnerMedia shed some 2,000 jobs after AT&T reorganized the company following the acquisition. Discovery executives have also identified $3 billion in potential “synergies” between Warner, whose strength is scripted programming, and Discovery, which specializes in unscripted. How do you think that story is going to turn out?
Despite their horrible record, it’s difficult to prevent corporate bosses from obliterating massive amounts of capital. Antitrust law is designed to protect competition, not competitors who make ill-advised decisions. So the price of mistakes gets exponentially higher as the biggest corporations, pressed for growth, keep making bigger bets. AT&T will get back to what it knows best, the telco business. It’ll have to invest more in its 5G network, pay down debt and better compete with more-focused rivals like T-Mobile and Verizon.
The message to other corporate giants is that large acquisitions that don’t add real long-term value are merely expensive Tinseltown ornaments. Assume this message is unlikely to resonate with today’s C.E.O.s, says Professor Williamson: “There’s no hope that this will be the last one.”.
Bill Saporito is an editor at large for Inc. magazine.
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