Tuesday, May 12, 2015
Verizon and the Mixed Prospects of Vertical Integration
Verizon will invest $4.4 billion to acquire AOL; see http://www.nytimes.com/2015/05/13/business/dealbook/verizon-to-buy-aol-for-4-4-billion.html?emc=edit_na_20150512.
At first blush, this makes plenty of sense: Verizon has lots of retrained earnings and the ability to borrow billions; the company does not want to rely solely on wireless; and moving up the vertical food chain into content helps the company diversify and augment its home grown content.
Okay so far, but we should not forget the billions lost in value when Time Warner, another content distribution carrier, tried to extract the value in AOL. So what’s different this time? Bear in mind that a few years after divestiture from AT&T, Verizon experimented with self-generated content and failed miserably.
On the other hand, Comcast has successfully integrated content distribution with content generation. The company acquired NBC-Universal and has ownership interests in many cable programming networks.
Is there a way to predict a company’s prospects for a vertically integrating acquisition?
I can think of two factors: the willingness of the acquiring company to encourage management of the acquired company to stay and more broadly whether the acquiring company can broaden its perspective. Verizon need to expand its telephony (Bellhead) management skills to include content and alternative distribution channel management (Cablehead/Nethead). Telephone company management skills will not suffice.
You can teach an old dog new tricks, but Verizon would be wise to bring in several new breeds.