No Mercy / No Malice: The Worst Acquisition in History, Again

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1:26Scott Galloway:I'm Scott Galloway, and this is No Mercy, No Malice. When is a deal a bad deal before it's even consummated? When one of the companies is Warner Brothers. The worst acquisition in history, again, as read by George Hahn.

1:53George Hahn:After six months and eight failed bids, the Ellisons made the Warner Brothers Discovery Board an offer they couldn't refuse. The potential Netflix acquisition would have been akin to fusing LVMH and Walmart, HBO's prestige TV and Warner's iconic IP, plus Netflix's scale. Paramount Skydance buying WBD is the fusion of a dog and a car bumper traveling 80 miles an hour Spoiler alert, it's not going to end well The story of Warner Brothers is a recurring masterclass in ego-cosplaying corporate synergy The company has undergone seven sales, mergers, or structural separations since 1967 The script remains the same.

2:44George Hahn:A new CEO decides Warner Brothers is the missing piece of their legacy, only to find they've partnered with a high-maintenance spouse who, after several years, leaves with half of everything the acquiring company used to own. In 1989, Time, Inc. and Warner Communications announced a merger of equals that would create Time Warner, the world's largest media company to date. Things did not go as planned. First, Paramount's hostile takeover attempt, past his prologue, scuttled the proposed stock swap and bid up the price. A year later, the deal closed at a$14 billion valuation, 13 times EBITDA. To finance it, Time Warner took on$1.1 billion in annual interest payments to service$10.8 billion in debt.

3:40George Hahn:To avoid bankruptcy, Time Warner initiated Project Glass, a good bank, bad bank structure that put the company's crown jewels, HBO, the film and television studios, and the cable assets, under a subsidiary, enabling it to receive cash infusions from outside investors. Meanwhile, the merger became a case study in clashing corporate cultures. The Time Warner merger would provide a blueprint for future M &A disasters. Exhibit A, the ultimate destruction of shareholder value, AOL's$167 billion merger with Time Warner. This time, the culture clash was between a legacy media company and an Internet startup.

4:26George Hahn:The bigger issue, however, was that$167 billion valuation premised on dot-com era hallucinations. AOL's market cap was nearly double Time Warner's, while Time Warner had five times the revenue. As the dot-com bubble began to deflate, news broke that AOL had been propping up its growth narrative by fraudulently inflating its advertising revenue. In the end, AOL Time Warner never came close to justifying a multiple of 25 times to 30 times EBITDA. And within a year of securing regulatory approval, the company took a historic$99 billion write-down. By 2003, Time Warner dropped AOL from its name, and in 2009, it spun off the unit.

5:23George Hahn:AOL's value at the spin was$3 billion, a shadow of the$167 billion assigned just 10 years before. But wait, there's more. In 2018, the synergy delusion struck again. This time, AT &T acquired Time Warner for$85 billion, creating WarnerMedia on the theory that its dumb pipes were the chocolate to Warner's peanut butter, i.e., great content. But WarnerMedia struggled to make streaming profitable. Its theatrical business was devastated by the pandemic, and once again, there was a culture clash. The bigger challenge, however, was a 2.9 times debt-to-EBITDA ratio, which trapped the telco in a pincer between dividend payments, a utility company's raison d 'être, and servicing the interest on$180 billion in debt.

6:26George Hahn:Ultimately, AT &T spun Warner, combining it with Discovery in a deal that netted the telco$43 billion. A 50 % haircut. The WBD sequel combined all the elements of the worst acquisition in history franchise. Another culture clash, this time between Discovery's unscripted empire and Warner's premium sensibilities. a wannabe mogul overpaying so he could cosplay as Robert Evans, Ask Claude, and a five times debt-to-EBITDA ratio. The good news? The sequel had a short runtime. CEO David Zaslov's Slash Costs engineered a good bank, bad bank structure to spin WBD's declining linear assets and ultimately orchestrated a bidding war that restored shareholder value.

7:19George Hahn:As an operator, Zaz is Ed Wood. See the worst branding decision in history, deprecating HBO. But as an investment banker, he's Steven Spielberg. What do you get a Nepo baby who already has Paramount? A. Warner Brothers According to one study that tracked 3 ,250 wealthy families over two decades, 90 % lose their fortune by the third generation. Prediction? Larry Ellison's great-grandchildren will never forgive him for providing a personal guarantee so David could go to the Oscars. While the deal is priced at a multiple of 8 times to 12 times EBITDA, the E is anchored to a linear TV ecosystem that's unraveling faster than regulators can approve the deal.

8:17George Hahn:WBD plus Paramount equals two times the linear headache Wall Street is being asked to pay a premium For a story whose ending everyone already knows And if valuation is the rock Leverage is the hard place Last year, the two companies generated a combined operating profit Of$11 billion Before depreciation and amortization The Paramount-WBD combo is two drowning men clinging to each other, hoping the combined weight of their$79 billion in debt will somehow act as a flotation device. It won't, which is why Paramount's debt was downgraded to junk status after the Ellisons won the WBD bidding war. With his new toy having a leverage ratio north of 6x, David Ellison has promised$6 billion in synergies within three years.

9:19George Hahn:Netflix CEO Ted Sarandos put the figure closer to$16 billion after examining WBD's books. Synergies is Latin for layoffs. Additional synergies could be found by consolidating HBO Max with Paramount Plus into a Frankenstreamer no one asked for, merging CNN with CBS News, and going Cleopatra, i.e. selling one or both studio lots to real estate developers. See Fox selling 300 acres of its back lot to create Century City.

9:58George Hahn:In Star Wars, when Grand Moff Tarkin tests the Death Star by destroying Alderaan, a pained Obi-Wan Kenobi says, I felt a great disturbance in the force, as if millions of voices suddenly cried out in terror and were suddenly silenced. Big tech is the Death Star, and Hollywood's creative community is Alderaan. After acquiring Paramount, the Ellisons laid off 2 ,000 employees, 10 % of the workforce. After acquiring WBD, David Ellison attempted to quell layoff fears among Warner employees, insisting the majority of cost-cutting would come from non-labor sources. Nobody believes that. It's going to be difficult to cut billions in snacks.

10:51George Hahn:While it's not yet fully operational, but armed with a TikTok laser, the Ellisons are fixing their AI Death Star sites on Hollywood. For a sneak preview of coming attractions, see the credits of the Fantastic Four First Steps. The Marvel movie employed 3 ,000-plus cast and crew members, more people than work at Lyft or Reddit. The Ellisons don't care if Hollywood is ready for AI. They believe AI is ready for Hollywood. Paramount WBD is ground zero. Amazon, Apple, Netflix, and YouTube won't be collateral damage. They'll be the beneficiaries. The Ellison's blow-up Alderaan, big tech inherits the empire.

11:42George Hahn:After walking away from the WBD deal, Netflix's stock popped 14%, partially reversing a 20 % to 30 % drop in the share price since the deal was first proposed. As a parting gift, Netflix pocketed a$2.8 billion breakup fee, equivalent to 15 % of its annual content budget. During the bidding war, Hollywood cast Netflix as the White Knight and the Ellisons as the villains. Remarkable, given Hollywood's 2023 work stoppage was called the Netflix strike. When I was pitching a television show, the money was better at Netflix, but everyone wanted to work for HBO, which punches above its weight in cultural relevance.

12:30George Hahn:The Ellisons won't just burn HBO's goodwill. They'll napalm it with a cocktail of AI slop and arrogance garnished with fascist flourishes. In Hollywood, reputation is currency, and the Ellisons are broke. But perhaps Netflix's biggest win is that it may have thrown the competition into stasis. Despite using their relationship with President Trump as a cudgel, the Ellisons must still clear EU regulatory hurdles, as well as potential litigation from state attorneys general. They'll likely get approval as antitrust enforcers no longer break up behemoths, they just delay their agenda. Nevertheless, history demonstrates that any deal to acquire Warner Brothers has a remarkably short shelf life.

13:24George Hahn:Ted Sarandos was on the verge of a transformative acquisition, and still is, but it's not WBD. A decent test of value is to benchmark similar assets. By walking from the deal, Ted and company saved$121 billion, and their equity value has increased$60 billion since putting the WBD spliff down. Add the$3 billion breakup fee, and you have an effective$184 billion opportunity cost for WBD. So, what could you get for$184 billion? A. The Mouse, Walt Disney Company,$179 billion. A side-by-side comparison illuminates just how talented an auctioneer David Zaslav is and suggests the Centerview bankers who talked Ellison into paying this price have a second career as psychedelic doulas.

14:30George Hahn:Let's shine a light on the unexploded IED that is WBD. For the same price, Wall Street would have you believe that WBD was the value play. It isn't. It's a value trap. Disney generated$21 billion in operating income last year on$91 billion in revenue. WBD registered$11 billion in operating income on$42 billion in revenue. And half of that came from a dying linear TV business that's shedding subscribers. But the real gap isn't in the financials. It's in the moats. Disney has theme parks that print$8 billion in operating income annually with 60-plus percent incremental margins. WBD has CNN and TBS reruns.

15:28George Hahn:Disney owns the IP that dominates global culture. Marvel, Star Wars, Pixar, ESPN. WBD owns HBO, great, and a back catalog that hasn't produced a billion-dollar franchise in a decade. Disney's parks business alone, just the parks, is worth more than WBD's entire enterprise value. You're buying a recession-resistant pricing power machine with Disney. With WBD, you're buying a melting ice cube of linear TV assets wrapped in$40 billion of debt trading at five times leverage. One of these companies will be worth$300 billion in 10 years. The other will be sold for parts to Netflix. The second generation of wealth ensures that the third generation isn't.

16:30George Hahn:Sherry Redstone, Edgar Bronfman Jr., and now David Ellison. I've been having a lot of conversations with cable news anchors who are seeing their pay fall off a cliff. My advice is always the same. Seize the means of production, i.e. start a podcast, launch a substack, etc. We've transitioned from a fossil fuel-based economy into an attention economy, full stop. If you command attention, revenue follows. The Ellisons will do to CNN what they're already doing to CBS News. At CNN,$3 million a year anchors are a cost center on a bloated P &L. On YouTube or Substack, they're platforms with 90 % margins.

17:21George Hahn:The smart money isn't betting on the logo on the building. It's betting on the X-Wing fighter, the individual talent with the firepower to knock out the Death Star before it can recharge and hit its next target. I know, I'm getting carried away with the Star Wars stuff. Whatever, my bantha, i.e., newsletter. There are only two ways to make money in the media business, bundling and unbundling. We're in a bundling phase. The question isn't what the Ellisons will do with Paramount and WBD, but who will acquire those assets at fire sale prices when their AI synergy narrative can no longer provide cloud cover for their pair of over-leveraged legacy media companies.

18:10George Hahn:My prediction? We'll see this movie again, starring Netflix, Apple, and Amazon as bargain hunters with delusions of grandeur that involve paying a failed CEO hundreds of millions for the right to fire hundreds of thousands of their employees. In Star Wars, the good guys blow up the Death Star. In Hollywood, you just wait for it to collapse under its own debt load. Same ending, lower production budget.

18:45George Hahn:Life is so rich.

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