Disney’s (NYSE:DIS) acquisition of 21st Century Fox closed on Mar. 19 at 9 p.m. Disney stock dropped the next day, and the one after that as investors chose ambivalence over irrational exuberance.
CEO Bob Iger was more subdued about Disney’s $71 billion acquisition that makes it one of the biggest content creators on the planet.
“I wish I could tell you that the hardest part is behind us; that closing the deal was the finish line, rather than just the next milestone,” Iger said in an email welcoming Fox employees into Disney. “What lies ahead is the challenging work of uniting our businesses to create a dynamic, global entertainment company with the content, the platforms, and the reach to deliver industry-defining experiences … for generations to come.”
The merits of this deal have been debated for more than a year.
Now that the die is cast, the owners of Disney stock are cautiously optimistic about the company’s future. However, Iger is right. There are a lot of moves to be made — including laying off 3,000 people, most of them at 21st Century Fox — before labeling the acquisition a success.
Realistically, we won’t know for three to five years if Iger’s final act was a winning one. So, if you own DIS stock, you’ll have to be very patient.
I’d forget about the nitty-gritty of what has to be done and focus on all the good things that are already happening at Disney.
Because if you focus on the deal, you’ll soon realize that most big acquisitions fail to deliver the big score. The cost synergies imagined — in this case, $2 billion or more by 2021 — either fail to materialize, or they set off a series of unintended consequences that make the merged entity weaker rather than stronger.
Here Are the Facts
While it’s not a new stat, it’s one that hasn’t changed much in the past six years.
MoneyWatch contributor Margaret Heffernan, an entrepreneur, CEO, and author, wrote a piece in April 2012 that discussed why mergers fail. She noted that mergers fail anywhere between 50% and 85% of the time, with most failing to deliver any value for shareholders.
That’s not to suggest that Disney’s gambit won’t succeed. It’s just that it’s got a very steep hill to climb before the celebrations can truly begin.
If you want to read an excellent article about why acquisitions don’t work, read Paul McCaffrey’s February 28 piece for the CFA Institute. It drills down into all the major flaws of the rationale for acquisition, using esteemed economics professor Aswath Damodaran as a significant source.
“In two thirds of all mergers, what they find is the mergers fail that very simple capital budgeting question with synergy incorporated in the returns,” Damodaran said. “And here’s the most final and most damning evidence that mergers don’t work: Do you know half of all mergers are reversed within 10 years of the merger? The company that did the acquisition phase finally shows up and says, ‘Didn’t work.’”
If you are holding Disney stock because you think this acquisition will add value to it, I’d sell DIS immediately. Despite Iger’s best hopes, no evidence suggests the merger will be a home run.
However, if you believe that some of the company’s initiatives in the works for a long time, such as Disney+, will be good for the company, that’s a more rational basis for owning Disney stock.
The Bottom Line on Disney Stock
Last September, I wrote an article that argued DIS was much more than just its soon-to-be-launched streaming service.
Don’t get me wrong, I see Disney+ and ESPN+ as difference-makers for the company, but I also believe that its old divisions like Parks and Resorts play a crucial role in Disney’s overall business.
Parks and Resorts delivers consistent revenue and earnings growth every year, without fail. While it’s true that the movie business has blockbusters, it also has colossal failures that cost the company millions, even billions.
Moving forward, Bob Iger has a massive job in front of him. The odds of him succeeding are probably 50/50. That said, if anyone can do it, he’d be near or at the top of my list.
Do I think Disney stock is worth owning? I do.
However, I think Disney stock is worth owning, regardless of whether the 21st Century Fox acquisition delivers all the promised benefits and synergies.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.