At the risk of discussing the obvious, I'm going to post the stuff that has gone through my head about this deal. For the moment, I'm completely ignoring the price of the stock.
1) Prior to the announcement, Gemstar had a strong lock on IPG technology that will bring advertising and e-commerce revenue with it. After the announcement, the lock is bigger and stronger. It's so strong that I think Henry's comment that the company has to be respectful of the power houses was his subtle way of telling the investment community and the Feds that there really is plenty of competition in the industry, that the deal will be allowed.
2) Prior to the announcement, in my opinion there was hesitance on the part of MSOs to do deals because they didn't know who they were ultimately dealing with. Now they know. The industry will grow faster now.
3) Prior to the announcement, the strength of brand names was in the partners Gemstar was doing business with. After the announcement, we've still got all of those brand-name partners who can now advertise "TV Guide Inside." This is a combination of brand power on the world-wide consumer level that is tremendous, and frankly, impossible for me to assign an economic value.
4) Prior to the nerger, Gemstar's ability to compete is not as strong as its ability to compete after the merger.
My point is that for those who thought Gemstar's fundamentals were strong prior to the announcement, they are stronger now. That begs the only remaining question: What about the price of the stock?
I haven't looked at the stuff in detail, but it's obvious that TV Guide doesn't have the monster net margins that Gemstar has. The result, of course, is that the new entity's net margins will not be as strong as the Gem's. Without going into other similar issues related to the balance sheet and the income statement, we can easily see that TV Guide hasn't been able to leverage its assets as well as Gemstar.
But the real point is that TV Guide and Gemstar previously have been trying to leverage their assets in competition with each other whereas now they will try to leverage those assets as a combined entity. Will the value of the leveraged assets in combination be greater than when separate? That is the key question that only time will yield the answer.
How can the assets be better leveraged? Some will probably be sold so the cash can be put to better use. The combination of Gemstar's technology and IPR with TV Guide's brand name has GOT to be more valuable together than as separate competitors. I don't know enough about media assets to know which assets will be better off combined than when operating separately, but I think Malone and Murdoch have a good idea of that. Both of them (or their officers) have already signed agreements requiring them to vote for the merger, so I have to believe they think these assets are better off operating together than separately.
Speaking of leveraging assets, I think a HUGE point has not yet been mentioned in the folder. Some think Henry paid too much to own 100% of the revenues that would be TV Guide's when he could have instead settled for maybe half those revenues without having to pay upfront for them. That reasoning fails to point out that Henry has been mmuch more successful in negotiating the share of e-commerce and advertising revenue sharing than TV Guide has. In round numbers, Gemstar has been getting 80% of the revenue when in similarly structured deals it's my understanding that TV Guide has been getting only 20% or 25%. If Henry can improve those deals, he essentially bought the right to quadruple the e-commerce revenues.
Now the price of the stock.
I probably won't be able to study the details of this new entity sufficiently until I get on a plane to Italy this weekend. And I might decide to take a real vacation and leave all that stuff home. That's because it really doesn't matter hugely what I come to believe about the stock price, barring any ridiculously irrational valuation akin to the Internut valuations when they were about twice their current levels. I feel that way because the fundamentals of the company's ability to dominate IPGs remains intact, actually stronger, and that tomorrow or the next day there could be yet a new announcement that might over the short term make the stock price seem more or less attractive.
It's just my approach, but I wouldn't sell a single share of my stock right now. On the other hand, not having an understanding of the new entity to the extent that I think I understand Gemstar, I also wouldn't commit to a purchase of any additional shares. At least not at this price. :)
The best way I can summarize my reaction to the news is that I've said for quite awhile that a settlement with TV Guide would be tantamount to Qualcomm's settlement with Ericsson. I believe that every bit as much today as when I first wrote it. The companies that have been holding off to negotiate e-commerce and revenue deals until the suit was settled can now get on with business.
--Mike Buckley |
