This combination of physics and fear is behind the monster deals rocking banking and entertainment: the $10 billion merger of Chemical Bank and Chase Manhattan to form the biggest bank in the United States, and Time Warner’s $8 billion bid for Turner Broadcasting to create the world’s biggest media company.
The difference between the deals is that combining Chemical and Chase makes financial sense. Distasteful. but sensible. The new big bank will save $1.5 billion a year by putting 12,000 employees on the street and dosing scores of offices. That’s why Wall Street bid up both stocks after the deal was announced. In a nasty example of capitalism at its most raw, the top folks of both banks will doubtless remain employed or get rich buyouts, but thousands of tellers will bite the dust as the banks close 100 of their combined branches. Another tidbit: despite firing thousands of serfs to save money, the new bank will offer to keep all 36 of Chase and Chemical’s outside directors. That would produce a 41-person board that will have to rent auditoriums in which to hold meetings to fire more tellers in the name of shareholder value. What does an outside director cost? By my count, at least $100,000 a year. Three dozen of them is an obscene luxury.
Slash and sell: To be fair, Chase chairman Thomas Labrecque and Chemical chairman Walter Shipley figure that if they didn’t combine, they both would have been taken over and massive firings would have taken place anyway. As giant deals show almost every week, almost no bank is too big to be bought. Chase, of course, had already been targeted by Mutual Shares’ Michael Price, whose funds bought a 6.1 percent stake earlier this year. Because commercial banking is at best a stagnant business, the only sure way to satisfy the Prices of the world is to slash costs by firing people, or to sell out. Better yet, do both.
By contrast, the Time Warner-Turner deal, which could well fall apart, makes no economic sense. Time Warner, which owns about 18 percent of Turner, is offering about $8 billion of stock for the rest. Include Time Warner’s stake and the debt it would take over, and the deal values Turner at around $12 billion. That’s an enormous 16 times cash flow, a far higher multiple than Disney is paying for Capital Cities/ABC. What’s more, the deal seems to turn over effective control of Time Warner to Turner’s two biggest shareholders: Ted Turner and John Malone of Tele-Communications Inc.
Turner and TCI would own about 20 percent of the combined company, with Turner and possibly Malone going on the board. Turner is no fan of Time Warner chairman Gerald Levin, who has stopped Terrible Ted from buying a broadcast network. And you can be sure that Malone would be a dominant force at Time Warner because of his skills and his closeness to Turner.
GE footsteps? Has Levin lost his mind? Nope. He’s just trapped. Until recently, he was trying to sell Time Warner’s Turner stake to reduce Time Warner’s excessive debt. Turner was trying to buy CBS or a piece of NBC. Why did Levin become a buyer and Turner a seller? In a world in which Disney can buy ABC to almost universal huzzahs, I think that Levin began feeling the hot breath of Jack Welch,’ chairman of General Electric, which owns NBC. Time Warner would be a juicy morsel for GE, which could pay for it out of petty cash. Levin is vulnerable because Time Warner is in disarray, its stock is depressed and his plans to goose it haven’t worked. So Levin made Turner an offer he couldn’t refuse. Better the devils he knows-Ted Turner and John Malone – than GE.
And so it goes. Big bank deals create even bigger deals like Chemical-Chase. Combining Disney and ABC creates Time Warner-Turner. Deals beget deals beget deals. Financial markets start sensibly, then go to excess. The key question: has the chain reaction gotten out of control, and is the financial meltdown starting? Stay tuned.
