MERGING FORCES

September 7, 1999
		Viacom and CBS announced a planned merger costing approximately $35 billion -- the biggest in media industry history. Following a background report, two experts discuss the merger.

June 24, 1998: Examining the possibilities of the AT&T and TCI merger May 26, 1998: The rise of corporate mergers May 11, 1998: A look at the second largest merger in history May 7, 1998: The Daimler and Chrysler merger April 13, 1998: Bank industry mergers affecting the consumer April 10, 1997: Media mergers at tele-communication industries. Browse the NewsHour's coverage of the media.     Viacom CBS Yankee Group New Yorker Magazine	JIM LEHRER: More on this now from Ken Auletta, media correspondent for the New Yorker magazine, author of the book The Highwaymen: Warriors of the Information Superhighway, and Bruce Leichtman, director of media and entertainment strategies at the Yankee Group, a telecommunications research and consulting firm. I spoke with them earlier this evening. JIM LEHRER: Ken Auletta, in simple terms, why did this deal happen? What drove it? KEN AULETTA: Well, I think what's driving a lot of these deals is the presumption that bigger is better, and that if you own every asset from the creation of the idea to the manufacturer of it, to the distribution of it to its afterlife and own it in many different formats, be it a cable format or a television broadcasting format, or a radio format, or an Internet format, you can do much better. And you can cross-promote through all these different platforms that you own. That's the presumption. It was a presumption, by the way, that drove the Disney acquisition of ABC in 1995, and it's the presumption that drives the merging of banking, of the banking industry, and the consumer -- you know -- be it the retail industry or investment banking industry. Everyone thinks that if you're larger, you build a bigger brand, you build more power, more leverage, and therefore that there are advantages that you gain.
	Is bigger better?
	JIM LEHRER: Bruce Leichtman, what would you add or subtract from that? BRUCE LEICHTMAN: Well, I don't think it's quite as simple as just bigger is better. These two companies do complement each other very well. CBS has things that Viacom does not have, and visa versa. Viacom has many things that CBS did not have -- specifically the cable assets that CBS missed the first time around. So I agree with Ken that it is a "bigger is better" scenario and in a lot of ways the bigger is better here. JIM LEHRER: Okay. Well, let's go through that specifically. Why is this good for Viacom, Bruce Leichtman? BRUCE LEICHTMAN: Well, they really complement each other very well. CBS brings to the table not only the broadcast entity but a very strong syndication arm, very strong in the radio business, in outdoor advertising. And that really very well complements the MTV Networks, Showtime, and the other movie studio and Simon & Schuster, the other assets that Viacom has as well. JIM LEHRER: Do you agree with that, Ken, Ken Auletta, that from Viacom's point of view the thing has many attractive points? KEN AULETTA: Oh, absolutely, on paper. But it's on paper. It's theoretical until it's real And it's not real until it happens. Look at ABC and Disney. I mean, theoretically that was a brilliant merger to have the Disney factory, the studios at Disney producing products for the ABC network that they would then own and control, and put on the air, and then own in syndication. That, so far, has not happened. But theoretically, it's a great idea. JIM LEHRER: Yes. Well, what about -- Ken -- what about from CBS's point of view, why would CBS be interested in this?
	Controlling syndication
	KEN AULETTA: Well, CBS has some weaknesses as well. That's what I meant by bigger and better. CBS's weakness is that they didn't have a studio, for instance. JIM LEHRER: A movie studio. KEN AULETTA: A movie studio and a television studio to produce product to put on its air. And so, unlike 20th Century Fox or the Fox Network, which had or Time Warner, which Warner Brothers has or Disney and ABC have, they didn't have that. So by merging with Viacom they gain a factory, access to a studio to produce products for both television and perhaps syndication. JIM LEHRER: And Bruce, explain to us why that is important, why a network needs to be able to make its own product, if they can. BRUCE LEICHTMAN: Well, there's only so many ways you can make money. You can advertise via transactions, via commerce, or what have you. But a broadcast network in itself, their share of the audience is diminishing. And if the audience continues to fragment with many, many more choices, you have to be much more targeted with the market that's out there and be able to repurpose your content. An example for CBS is -- JIM LEHRER: Repurpose your content. What do you mean? BRUCE LEICHTMAN: Well, an example for CBS is "Everybody Loves Raymond." That's a show that is on the CBS network that they sell advertising on. But it's also produced by CBS. And the syndication arm that sells it is CBS, and that's when they really make the money is when they sell it into syndication into the local affiliates. JIM LEHRER: Ken, that's what a lot of people don't understand, people not in the business, where the money is to be made is to be made is at the final, bottom end of these TV movie or TV series or any individual TV programs, correct? KEN AULETTA: Oh, absolutely. The real pot of gold is not in the movie business, it's not in the network business, it's in the syndication business. And if you own the stations that buy it and you own the product that you air on those stations, you make ton of money, and the government has relaxed the rules to allow the networks to do that in recent years, and that's obviously a real incentive behind this deal. JIM LEHRER: Bruce, does this look good to Wall Street?
	Wall Street's response
	BRUCE LEICHTMAN: I would say it does. Again, I think that the two companies complement each other very well and fill the holes that each other had. JIM LEHRER: And that, Ken, Wall Street's an important factor in every one of these deals, whether they're in the media business or anything else, right? KEN AULETTA: I think, Jim, if you were a bird on the wall this weekend as they negotiated, I think they talked much less about "how do we improve CBS News?" Or "how do we improve the product on the CBS network or any of the Viacom holdings?" But they talked much more about "what will this do to shareholder values and Wall Street?" And that's the way businessmen think. I mean, it's not to denigrate them. It's just to say that's the way the world works. "How do we get cost synergies? How do we get our stock price up? How do we make more money?" not necessarily "how do we produce the best product?" JIM LEHRER: Bruce, what about the rest of us, the public? What do we get out of a deal like this? BRUCE LEICHTMAN: I don't think we're going to see anything very tangible in the short run. I think what we might see a lot more of is cross-promotion between CBS and their cable networks, much the way we see with ABC and ESPN today or NBC and CNBC or MSNBC. I think that's the first tangible element we'll be able to see. A lot more of it will be behind the scenes. JIM LEHRER: Do you agree, Ken? KEN AULETTA: I think we will be sated with promotions and ads, cross-promotions and shilling for the various products. I think in terms of the product, certainly in the short run I agree, there will not be any appreciable change for the public in terms of the consuming public. In the long run, who knows? That jury is out. JIM LEHRER: What about regulatory problems on this, Ken? Do you see any? KEN AULETTA: Well, they now exceed the limit. You're only allowed to own a maximum of 35 percent of the TV stations that reach in America. With the combination of Viacom and CBS, they exceed that 35 percent. So they will either have to sell off some of those stations or get the government to waive that 35 percent rule. JIM LEHRER: Do you see that as a problem, Bruce? BRUCE LEICHTMAN: Well, that's one issue, and the other issue is the UPN Network that Viacom owns. Can they own both CBS and UPN? At this point, it looks like they cannot. So you have the issue... JIM LEHRER: Why not? Why can't they?
	Convincing the FCC
	BRUCE LEICHTMAN: As it looks from the FCC's standpoint at this point you cannot own two television networks. So that's a separate issue from the local ownership issue, which only allows you to own 35 percent market share of the U.S. JIM LEHRER: Yeah. Now, Ken, we said, introducing this, and everybody has said, this is the biggest media deal ever. Now, we've said that about the last one before and the last one before that. Is there another one coming that's even bigger than this one? Could there be one bigger than this one? KEN AULETTA: I think there is a belief -- it's the flavor of the year -- that, and in this sense, I go back to what I said initially, that bigger is better, that brand matters, that synergy matters, including cost synergies, and that you achieve those by getting bigger. And so I think all these companies are going to react and say, looking today at the Viacom-CBS announcement, a company like NBC is going to say, "God, maybe we're at a disadvantage by not owning a studio." A company like Sony is going to say, "maybe we're at a disadvantage by not having access to a network and just having a studio." But everyone, it forces everyone to reconsider where they are, this giant merger, and to say, "need we do a merger ourselves?" So the trend is to get bigger and to do more merging and to try and create a perfectly vertical corporation so that you take the risk out of capitalism. That's what they're trying to do. JIM LEHRER: You see it the same way, Bruce? BRUCE LEICHTMAN: Much the same way. I think that the key question comes down to how do you make money, and does it make sense for the company, does it add value? This is very different, I would say, than an AT&T-TCI -- or an AT&T/Media One. It's not fundamentally transforming either of these companies. There's more of a merger than a transformation. These are both traditional media companies. It's not a dot-com deal either. JIM LEHRER: Okay. Well, gentlemen, thank you both very much.