Reviews | AT&T has gone back to basics by cutting WarnerMedia in bulk
Losing bets are inevitable in the casino of capitalism. “Creation always looks good, but destruction isn’t pretty, but it’s a very necessary thing,” says James Schrager, a strategy expert at the University of Chicago’s Booth School of Business. What is not necessary is to do it over and over again, and for the same reason. Where so many bosses go wrong, says Schrager, is straying from their expertise. AT&T is a business that runs on technology that bought a business that runs on the imagination. “The best executives become incredible experts in their field,” he says. “You can’t have in-depth knowledge of 20 different industries. “
The fallacy has its roots in the conglomerate era of the 1960s, when companies such as ITT, then AT & T’s international counterpart, and Ling-Temco-Vought believed they could run hundreds of disparate businesses from within one seat. As it turns out, the complexity ultimately outstripped the ability of portfolio managers to plan, allocate capital, or understand different sets of clients.
In the 1980s, new acquisition airships such as Beatrice floated on the economy until they too became overweight. Tobacco companies have wasted money buying low-margin businesses like food, brewing, and house building. Do you remember General Electric? It was the exception to the rule of diversification – until it was overruled during the Great Recession and its aftermath by bad allocation bets in everything from finance to gas turbines.
Mr. Stankey and Discovery CEO David Zaslav, who will lead Warner Bros. Discovery, said their respective boards of directors unanimously approved the deal. Of course, they approved. Although boards of directors have independent directors, very few will object to such “transformational” transactions, and a familiar assortment of investment bankers, advisers and lawyers are there to support them.
Indeed, any deal related to the Warner name seems to shred money. Time Inc. overpaid to win Warner Communications in a battle with Paramount Communications in 1989, using the same plus-content distribution logic that AT&T would use later. The combined Time Warner then recombined with AOL in 2000, another transformational deal that vaporized over $ 160 billion in value before being rolled back. The Time-Warner overhaul then bought cable TV companies – content distribution channels – which were then created. Likewise, AT&T first overpaid ($ 67 billion) for DirecTV in 2015 to buy more pipes, and then again for WarnerMedia ($ 85.4 billion) to collect more content for its pipes. At every turn, capital was going down the pipe.