I. Brief Introduction
Acquiring DirectTV (DT) has been considered the “missing link” of News Corporation’s legacy to be the worlds’ biggest media company. The latter firm is described to be highly diversified internationally (see attach 1). Despite of this, New Corporation (NC) Founder and Leader Rupert Murdoch saw great opportunity of the US market that made him persistent in the acquisition. It is on the verge of another negotiation called the “second chance” after the Federal Communications Commission (FCC) disapproved the merger of DT and Echo Star. In view of the first rejection of DT and defeat against preferred bidder Echo Star, the “second chance” requires rationalization to complement Murdoch’s visionary and passionate leadership with objective analysis of the situation. Presented in this consultant’s paper are analytical discussions about SWOT, key industry success factors, Porter’s five forces model and other factors relevant to NC decision. These analyses will lead the discussion to proposing strategic actions and recommendation of an action plan.
II. Assumptions
For NC, there are other investment alternatives other than DT acquisition. However, it is to be assumed that NC is heavily controlled by Murdoch and his direction and decisions are impeccable for a family-controlled firm. Thus, our SWOT analysis will measure the prospect of DT acquisition considering that Murdoch wants a presentation that will result to a conclusion to accept, reject or modify his decision. In key industry factors, it is assumed that NC has no significant infrastructures in the US generally in pay television (although it has television and cable programming stakes, these are rather segmented) particularly in the satellite sector. This makes technological, value chain suppliers, legal environment and satellite sector supremacy crucial to its success in relation to the outcome DT acquisition strategy.
In Porter’s five forces model, it is assumed that several facts will hold true in the future such as 3:1 satellite to cable subscription rate ratio, DT is very liquid compared to NC since it has GM to back it up and other facts in the case. The program access rules is viewed as very critical factor in the acquisition since it would lessen the competitiveness of satellite providers due to the fact that there are plenty of cable providers that can take away crucial program partners up to the point that there are sub-optimal programs remained for DBS sector. The demand will become sensitive as cable is able to mimic the interactive, program content and quality of its DBS counterparts at a lower price. In effect, the forecasted 2002-2007 accelerating demand for DBS and stagnant demand for cable may not just happen.
Selecting strategic options is rated based on fundamental elements of investing particularly from the shareholder’s point of view (since Murdoch is the major stakeholder). It is further assumed that even though Murdoch is very eager to have 100% ownership of DT, he has the sense of being rational which is typical for an experienced leader and manger. The rejection of some options is duly assigned because NC is assumed to be a risk-taker for a rational amount of returns and its US subsidiaries are confronted with heavy competition thus minimal returns (like book publishing).
Lastly, recommendation and action plans do not predict the outcome of the chosen strategy to prevent any inconsistencies in the post-implementation stage. It should be noted that consultancy generally provide alternatives and select the most feasible option above all. The chosen option is analyzed based on the presented literature and is strategic in nature. Operational and contingency actions from NC are necessary in the post-strategy implementation to test the effectiveness of the given strategy.
III. SWOT Analysis
The objective of this analysis is to determine if DT acquisition will bring desired results to NC (Hitt, Hoskisson & Ireland 2003). Generally, NC especially Murdoch considered the action to complete their quest towards being the world’s biggest media company. However, to obtain this, interdependence of specific advantages from acquisition should be realized while resolution to apparent problems should be planned and successfully implemented (see attach 3). This section will provide the necessary inputs to be able to evaluate both favorable and unfavorable factors specific to NC and DT including the uncontrollable factors in the external environment. By doing so, issues illustrated in attach 3 can be easily evaluated.
1. Strengths
These are factors internal to the firm that can be controlled and whose outcome can be influenced. It can be people specific or the result of organizational effort (Performing a SWOT analysis 2001). The discussion is placed within box illustrations to clearly show the implications of the strengths to DT acquisition. Strengths are derived from those NC and DT factors that reinforce advantages or mitigate apparent problems from the acquisition being prospected by NC.
According to Hitt et al (2001), market power is defined as “when a firm is able to sell its goods or services above competitive levels or when the costs of its primary and support activities are below those of competitors”. As shown in attach 1, NC has satellite business in other regions that can result to economies of scale when combined with DT resources. In the same manner, the technologies and alliances of DT (see attach 4) can upgrade those satellite businesses. Scenarios such as additional programs and product innovations that lead to higher customer satisfaction can be priced lower than expected. The mitigation of trade-offs between price leadership and differentiation strategies (Hitt et al 2001) would be possible. The ready market of the two firms also intensifies the application of these possibilities and lowering the risk of failure of launching a new product or new innovation.
For example, the first mover advantage of DT’s broadcast spectrum and orbital slots which operate as an international satellite can improve the operations of BSkyB in Europe and Star TV in Asia. The interdependence of the two firms will also result to greater programming in their markets to address the increasingly demanding customers. Since NC is completely vertical, the costs of acquiring inputs and distribution can be obtained in bulk and hence minimize the cost of production and distribution per unit compared previously (Sloman & Sutcliffe 2001). These inputs and distribution channels can be likewise outsourced to business partners of DT in the US like providers of interactive television while Best Buy, Radio Shack and the like will sell products of NC.
NC has cable programming business in the US but no satellite infrastructure. In 2002, weaker cable operators who cannot recoup the substantial cost of equipment went bankrupt. With this example, NC’s unpredictable cash-generation capability is very much vulnerable particularly constructing plants when market is already saturated with too many cable operators and few but fierce satellite firms. Further, the primary option of debt financing by Murdoch can make new product development very risky. Its 1990s history suggested that to be able to survive with billions of debts, it should be long-term and be able to acquire the better performing companies. The latter is supported by the fact that DT is the third largest pay television operators in the US and considered to be one of the most profitable pay television providers in the region from its 2001 average revenue per subscriber on a monthly basis.
The relief from establishing infrastructures, suppliers, customers and pay television industry experience will not only lead to speed-to-market but also avoid excessive competition from several cable providers. When the competition ensues, NC will most likely be driven away from the pay television industry due to inability to include the mandatory local channels because of lack of industry familiarity. On the other hand, if it aspires to compete in the satellite sector thinking that only two firms exist, it will be bugged by DT and Echo Star’s “vigorous rivalry” and their technologies, local channels and alliances. By acquiring DT, it will not only prevent the vast cable provider competition, but more importantly, it will be able to be installed in a competitive position initially.
2. Weaknesses
As exemplified in strengths section, the focus is on how DT can improve the business of NC with little emphasis on how NC and DT merger performs in the post-acquisition. This is seemingly more fitting to grasp the maximum potential of DT within NC attributes. This sub-section will lead to the right column of attach 3 which is the problems associated in acquisition. We will use box illustration and text discussion again.
Comparing attach 2 and 4, except for major acquisitions of DT to deter competition, NC relies heavily in its ability to negotiate acquisition especially to save sinking businesses. In its history, the target usually is a competitor or a business arm of a competitor. If there exist alliance or joint-ventures, these are very modest. On the other hand, DT successfully implemented strategic alliances to obtain its objective on one hand and create business relationship on the other. In effect, it can be derived that NC is more uncompromising compared to DT. Being a family-controlled corporation could be the rationale behind this. However, the business and financial flexibility attributable to DT (as it can prevent additional investment outlay by leaving the activity to a business partner) might feel threatened for its liquidity due to debt financing of NC and its reluctance to cooperative business.
Another, NC might loose its economies of scale and efficient allocation of resources in its vertical structure due to differences with DT strategy. Aside from alliances, which NC can find as “new”, DT may have resources and capabilities which complement in unique ways. Alliances and private synergies (Hitt et al 2001) with DT would necessitate the complete vertical integration of NC to adapt as an “incomplete” vertical structure. Again by looking at attach 2 and 4, the different success factors of the two firms ultimately suggest that organizational culture and leadership intentions are opposite. Investors are also active in fueling the future of DT while the family-structured NC holds exclusive concerns to their firm.
This preceding statement can be related to DT being an innovative firm because decisions are more decentralized. On the other hand, NC relies to their visionary leader and its conquest. Questions of organizational motivation from DT in the planned merger may exercise anxiety towards the new environment. Also, with DT managers is continuously confronted with acquisition clauses from NC, the evidence-supported situation where DT might prevent long-term perspective and reduce their risk-taking level compared to regular operations could deter the future expectations of NC from the acquisition (Krogh, Sinatra & Singh 1994). Back in the post-acquisition evaluation, DT might loose its innovativeness as the acquiring habit of the holding company NC could undermine this internal strength. This situation is intensified by the reduction of research and development activities in favor of the more preferred result of NC as cost-savings. With these scenarios in mind, DT management would have several reasons to ignore NC offer.
3. Opportunities
These are factors external to the firm that cannot be controlled and whose outcome is less influenced. It is basically from the influence of PESTEL factors.
Aside from DT’s difficult negotiation, legal constraints in the US are vital barrier for NC to access the US market. However, when it is able to make the acquisition successful, those constraints can be easily surmounted. It will also result to a number of cost saving outcomes primarily due to the sharing or resources between inter-regional operations and minimized delay from government intervention. As a result, gains from acquisition can be realized straightforwardly. Further, DT competencies and positioning to become the market leader in multi-channel video program distribution (MVPD) can be readily enjoyed by NC as the former already has developed the needed technology to anticipate consumer behavior over a certain period of time in the future. Several strengths identified earlier can be enhanced if these opportunities are also taken into consideration.
4. Threats
On the flip side, PESTEL threats to the success of acquisition pose challenge to NC in rethinking its final decision to acquire DT under this environment.
This threat, even alone, have many implications to the future competitiveness of DT; consequently, on the target gains of NC in pre-acquisition forecasts. This legal provision allows DT to enjoy inclusive deals together with cable providers affiliated programs. This also gives DT competitive pricing from those programs and access to top-programs from giant cable providers such as HBO, CNN and sports programs. When these advantages in favor of DT are abolished, its long-term investment in broadband internet services including the long-term competitiveness of satellite-based systems would be undermined in fulfilling the increasingly demanding consumers.
IV. Key Industry Success Factors
From this SWOT, the identification of industry factors that are critical to DT’s acquisition can be guided. This section would present the middle environment, although a more general discussion will be showed in the Five Forces section, in which firm and the general environment are connected. This is referred to as industry environment. The purpose presenting this section is to highlight industry factors that make the acquisition reasonable.
NC has the habit of acquiring profitable rivals to save its sinking business and vice versa like its pending negotiation to purchase Vivendi’s Italian pay television firm, Telepiu on the verge of its loosing subsidiary Stream. This is because such habit diverts its focus to overly acquire without investing in R&D activities. Whatever its shortcoming and ineffectiveness in the value chain, it resolves them by buying a firm that will not only provide it the “missing part”, but also will drive one competitor away from the market as Stream and Telepiu are direct competitors in the Italian market. In the same manner, the need for DT’s acquisition is intensified by the following industry factors.
1. Technological Innovation
One of the cited causes behind the 3:1 ratio of satellite to cable subscription rate is lack of digital channels. This is evidence that requires an entrant to have sufficient infrastructure and technology to survive the business of US pay television industry. With NC having zero investment in US pay television industry, pouring substantial amount to build new facilities in the country requires huge financing in which returns are exposed to high risks as it has the habit of debt financing without sure market. A concrete sample is a number of cable companies who went bankrupt in 2001 and 2002 due to substantial cost of consumer equipment.
DT is founded because of technological development that led it to develop affordable but innovative products. From this, it obtained one of the US positions for duopoly in DBS market and ranked top three in the industry. DT’s costly-to- imitate high powered spot-beam satellite intended for additional local channel coverage (DT 7S) and first mover advantage in broadcast spectrum and orbital slots are some breakthrough technologies which not only provides the general advantages of satellite service but more importantly specific additional value for subscribers that cannot be filled with either Echo Star or cable providers alike.
2. The Benefits and Costs of Backward and Forward Suppliers
The US market can be considered a saturated one in the pay television industry. Suppliers of raw materials and distribution channels may have created exclusive contracts on certain relationship agreements with present industry players. Since it is new in US environment, NC would likely miss suppliers who can provide substantial support to its value chain. If NC has been able to establish expensive and risky infrastructures, it is faced with the second task of “courting” firms in the programming and interactive TV equipment businesses. It can opt to outsource the latter from its BSkyB but transportation costs will later make it to build factories to manufacture the components of its pay television. The costs of seeking the right structure of value chain ranges from opportunity lost of valuable time to different markets of BSkyB and DT that would result to undermining the appropriate level of customer service.
DT has its established relationships including most favored nation (MFN) clauses in its alliance contracts. This proves the purchasing power of DT to compromise favorable contracts. In addition, its flexible operations and contract relationship to its suppliers like the equipment manufacturers proved to be strong as it able to remove their subsidy as the DT need arises. This pool of strategic partners are added to a list of distributors of DT’s services and equipments like Wal-Mart and Best Buy including DTs customer-oriented direct marketing through its interactive website and telemarketing.
3. Legal Environment
As suggested in the opportunities sub-section, cost savings and ease of start-up operations (peculiar to a new entrant in the industry) including sharing the leadership opportunities of DT can be obtained in the acquisition. The regulatory barriers and its subsequent requirement for local channels, in which NC is unfamiliar with, can be overtaken. However, the long-term perspective of DT in the direction of the industry might be shook by 2007 expiration of program access rules. Its competitiveness determined in figuring-out its long-term position would necessitate certain fine-tuning. It might reduce its investments in internet broadband and other technological breakthroughs due to the future impact of loosing upper hand in programming to subscribers. With cable television service able to mimic what just DBS providers can offer from improved picture quality to greater channel selection, pessimism is quite an appropriate attitude for DT.
4. Satellite Pay Television Supremacy
Aside from future success and present status of DT, satellite service provision is said to be more competitive than cable service in the long-run. The demand for the former will outdo the stagnant demand for the latter in the years 2002 to 2007 wherein 19 million will increase to 26 million for the former while 70 million will persist for the latter. Even though the legal constraint that may start in 2007 will reduce the competitiveness of DBS in programming aspect, the merger of NC and DT could settle for the lost upper hand in the industry due to NC’s BSkyB operations.
V. Porter’s Five Forces Model
To evaluate the attractiveness of pay television industry, there is a need to present the industry landscape. The evaluation will be based on rating the five forces illustrated in the following presentation.
As explained, an attractive industry is one that can provide the platform for a firm to earn above average returns from its invested capital (Hitt et al 2001). An attractive industry has high entry barriers, low bargaining power of suppliers and buyers, low threats of substitute products, and not-so-fierce rivalry among competitors. As shown by the ratings, NC would likely be able to obtain positive outcomes in its US pay television debut except mainly to high intensity of rivalry among its future competitors and partly the threat of substitute products. As observed, the industry provides two options for an entrant, that is, whether to belong to less innovative but conventional cable services or to innovation-based and value-adding satellite services.
In the cable sector, it will likely be exposed to price competition because there are several competitors that sell less differentiated products. On the other hand, the satellite sector will obtain its future success as determined by FCC forecasts with continuous innovation; hence, the duopoly sector structure will sell highly differentiated products especially against cable providers. With reference to high intensity of rivalry, predictability is crucial in order for responses to be easily prepared. In the contrary, threat of substitute products can be minimized if the sector is able to outperform and continuously improve its services that differentiate it from those substitutes. With these, it can be said that satellite sector is more attractive sector within the pay television industry.
VI. Company Analysis
NC is historically known to acquire business units among international firms to obtain advantages of skipping the process of product development, market research, capital outlay and constructing its own experience curve over time. This strategy is intensified with Murdoch’s leadership encapsulated within one goal: to becomes the world’s biggest media company. The DT planned acquisition will not make NC the number one once-in-for-all but it will surely increase its market size and technological innovation capabilities that will strengthen the campaign. With access to North American region particularly the US market, it can realize additional economies of scale and cost savings in its international operations not to mention the bound-to-number one direction of DT in the MPVD specifically and US pay television generally.
VII. Financial Analysis
Despite of near bankruptcy in the early 1990s, NC had recovered in an upbeat mode in the new millennium. Year-on-year revenue grew by 10% to US.2 billion, its shares are in better position compared to a rival Vivendi and its loss are relatively modest. This is possible primarily due its diversity. It can minimize the loss of an underperforming subsidiary by write-downs and offset those losses by its subsidiaries that are over performing. Its vertical structure situates it in the position where it can manufacture labor-intensive inputs in cheap salaried countries and bring the produced to a needing subsidiary. Backing acquisitions through debt financing, despite of relative risk of credit downgrade or insolvency, is minimized because NC is able to secure long-term debt contracts. Its family-controlled business is retained while expansion activities towards its objective are fairly attained.
VIII. Stakeholder Analysis
Since NC is less reliant to shareholder funds, potential or actual dissatisfaction to its performance by these so-called co-owners can also be responded with lesser emphasis. Lenders, on the other hand, are basically concern in the liquidity of NC and less with its future direction. As long as it profits, lenders will be able to gain the interest and principal payments. Further, with reference to DTs product and market stakeholders, the acquisition may receive criticisms to customers since it is their concern that another player will pose competitive battle to stimulate efficiency and innovation within the industry. This will result to what they preferred as lower prices and better services. Lastly, the post-acquisition stage may form cultural friction between NC and DT initially because of the gap from their acquisition and alliance/ innovation models.
IX. Portfolio Analysis
There are several integration options that NC can apply in the post-acquisition stage. It has its television, film and cable programming businesses in the US wherein these can serve as value chain support. In addition, if NC can be able to make its international resources and capabilities mobile, its satellite pay television in Australia, Europe and Asia can share competencies with DT.
X. Statement of Strategic Options
From the above discussions and evaluations, there are five strategic options for NC. First, it can acquire 100% stake of DT to obtain maximum control and benefit of the latter resources for its vertical integration purposes. Second, it can settle a merger with DT with sub-optimal control and benefit of resources. Third, it can opt to acquire a high-ranking cable provider. Fourth, it can enter the satellite sector. Lastly, it can offer acquisition or merger to Echo Star.
XI. Reasons for Rejecting Some Options
Other options that are excluded in the strategic option listing have their specific reasons why they are so. There is an option on not to invest in US and divert the funds to intensify product differentiation in other regions. This is supported by the fact the pay television market in the cable sector are competed by several providers while an alternative of DBS are under legal duopoly. Another, the BSkyB can penetrate the whole European continent as it already becomes the leader in the UK market for pay television. In addition, NC has its other satellite provider subsidiaries in other regions like Asia and its home country Australia. Its acquisition investment for DT can aid operations of these subsidiaries where NC has already established the market and infrastructures.
However, NC will deal narrowly on development of markets not creation of it undermining the prospect of economies of scale and additional market base to absorb possible investments in R&D in which NC has yet to substantially accomplish (otherwise, its habit of acquisition should long gone). Entering the pay television industry will not only improve the North American cash flow of NC but also exploit the good business environment in the country. US ranking in terms of providing sound business environment to investors like doing/ starting a business, protecting investors and enforcing contracts are among the top 10 in the world. In the contrary, paying taxes runs below the ranking at number 30 which is the highest ranking of the country in all its business indicators that means taxes are relatively less burdensome. In the demand aspect, its 291 million people belong to a high income economy (Doing Business 2006).
Another, it is also an option to alter the planned acquisition instead concentrate on its existing key US business such as book publishing which is said to offset looses in other business units of NC. In this view, intensifying the scale of this unit can multiply its capability to finance improvements to other underperforming units. However, the presence of US businesses like television, film and cable programming and their high relatedness to a very promising industry in pay television makes them supporting units to the acquisition. In addition, the vertical integration structure of NC blends with the idea of supplying some equipments or services of its units to DT. NC can also replace the significance of some suppliers and retailers resulting to cost savings in the case of post-acquisition stages.
Lastly, with high motivation to acquire but DT is either not interested or taking too long to make a decision, NC can pursue hostile takeover. This is when an acquirer does not solicit a bid to the target (Hitt et al 2001). Yes, NC can go to New York Stock Exchange and try to buy the level of shares in which it can have majority share in the firm. However, with repurchased programs of DT (Lehman Brothers 2006) on its shares and questionable owning of majority ownership through purchasing stocks, such action may not lead to a successful takeover at the near future. In addition, hostile takeovers are associated with high managerial turn-over and underperformance of the acquirer in the post-acquisition stages (Harrison, Hitt & Ireland 2001), therefore, all the acquisition costs, transaction costs and high risks involve in the process may not be well compensated by the merged firm.
XII. Recommendation
Based on table 6, acquisition and merger are two of the top strategic options in the lists. Preferring Echo Star will not only give NC sub-optimal share of the US pay television market but also it may expose itself to some behavioral frictions since they are once eying for the same firm. On the other hand, choosing to become an independent cable provider will necessitate very substantial investments for construction of infrastructures, hiring of competent personnel, advertising and establishing R&D for the technology development. In the same manner, being a DBS provider can result to the same expensive investments, and although its regional satellite businesses may help, US infrastructure would nevertheless be expensive enough.
The other three options also provide sub-optimal returns with sector entrance at a much ambiguous revenue generation capability due to absence of market familiarity. With this, the relative small investments in Echo Star are rather short-lived because its advertising and technology should be enhanced. The sector entrance, on the other hand, poses high risks with ambiguous returns in which creditors and shareholders (even Murdoch) would not prefer. The investment that was tied on such options cannot be offset by succeeding returns.
DT acquisition relative to DT merger has expensive acquisition price, with long-term above average returns, higher risks from program access rules abolishment and longer deal negotiation. On the other hand, DT merger is relatively less expensive, with average returns, lower risks from program access rules abolishment and shorter deal negotiation. For the merger, it is likely that DT will remain the controlling firm (since there are very few real 50:50 merger deals). It has definitely adverse implication on NC’s dictum of becoming the world’s biggest media company aside from more specific shortfalls such as inability to integrate completely the merged firm and get 100% benefit from its cash generation abilities and long-term success in the industry.
The strength of acquisition option is long-run above average returns while the strengths of merger are cost of industry entrance, risk of program access rules development and speed of entrance. Managerial motives in NC’s persistent acquisition offer to DT are more eminent than financial ones. These motives can increase market size, managerial prestige and reduce uncertainty in the external environment (Anand, Houghton, & Neck 2003). Such factors are convergent behind US pay television industry entrance and being the world’s biggest media company. Due to this, NC does not see the expensive acquisition price as major factor in the process. However, it should realize that its 1990s mere bankruptcy was a result of US acquisitions, primarily Twentieth Century Fox, which do not perform according to its expectations. In effect, a scientific action plan and implementation is necessary to arrive at a guided and final decision.
XIII. Action Plan and Implementation
As a consultant, it is not advisable for a final decision to be determined in an abrupt manner. The question here is how to identify the most effective and efficient alternative between the two.
* This includes increasing shareholders wealth, financial synergy through economies of scale, sharing of knowledge and skills and increased control (Anand, Houghton, & Neck 2003).
** Say, to obtain control, 100% of ownership will be paid US.8 B (fourfold bigger than Echo Star’s offer). Every 10% reduction from 100% ownership will slash 15% from the original dollar amount.
XIV. Conclusion
NC particularly Murdoch should not overly rely on managerial motives of acquisition; otherwise, bankruptcy would not forgive his company this time. The satellite sector within the US pay television industry has cited one threat, that is, program access rules would be expired in 2007. In effect, DT’s future forecasted positioning in the industry including the direction of subscriber’s demand may turn-out to be overly estimated. In addition, 100% acquisition may not be possible since the firm is growing and is confident in its future earnings. This makes merger the fastest and less risky way to US pay television market. This option can overtake weaknesses of acquisition such as integration difficulties and overly focused on acquisitions of NC since behavioral responses can be more accommodating if DT will remain the holding company. This fact cannot be undermine by NC as it is in low bargaining position and has not yet establish substantial innovation efforts. Pushing acquisition could make the cited strengths and opportunities earlier as ineffective in the post-acquisition stages since industry key factors are unable to met by the newly NC subsidiary DT because of human resource turn-over, thus, lost of human capital. Merger is also a safe way to prevent high risks of legal ambiguity in the future that has demand implications to DBS or cable subscription.
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