A recent report hints at a merger between media empire Time Warner Inc (NYSE:TWX) and CBS Corporation (NYSE:CBS). In truth, such a deal makes sense–combining a content giant like Time Warner Inc (NYSE:TWX) with a distribution specialist like CBS Corporation (NYSE:CBS) is a natural fit. If consummated, it would also be a sign of the changing global media landscape.
The fact is that technology is changing the way Americans – and the rest of the world – consume television-style entertainment. Streaming media is becoming a significant distribution channel and ad-supported shows are finding it more challenging to demand top dollar. This is leading to more original programming, either starting online or finding a market outside of broadcast television. If the Time Warner Inc (NYSE:TWX) and CBS Corporation (NYSE:CBS) merger actually comes about, it shouldn’t surprise anyone.
It’s scary out here!
Nothing is scarier to the markets than when an established industry – one that makes a lot of money – suddenly finds itself on shifting sands. It tends to frighten off investment dollars because those dollars were looking for a solid and predictable return. The change in television is causing this phenomenon right now. CBS Corporation (NYSE:CBS), for instance, is seeing an EPS ($2.48) at the lower end of its sector. Ditto its net profit margin (11.85%). While it’s not a terrible stock, it’s not one of the best in the television industry. There’s still a lot to like about it, there’s just more to like about its competition.
Time Warner Inc (NYSE:TWX), on the other hand, has shown stronger growth – 63.25% in share growth over 12 months – as well as a higher EPS. However, its net margin is lower than the industry average at 10.50%. The two companies could truly benefit from each other. With Time Warner Inc (NYSE:TWX) producing content – and already producing shows in partnership with CBS Corporation (NYSE:CBS) – and CBS handling distribution, there’s a chance for growth here.
This is one of the few times where an investor can actually take advantage of synergy. It’s more than a buzzword thrown around by consultants. In this case it means that both firms can come together in a marriage of equals to create greater profit – and therefore share growth – than either could do alone.
It’s not like this is the first time this has happened
Some archrivals of both Time Warner Inc (NYSE:TWX) and CBS Corporation (NYSE:CBS) have been involved with this sort of merger, both in the distant and not so distant past. So it’s not like CBS and Time Warner would be breaking new ground here.
Most recently, Comcast Corporation (NASDAQ:CMCSA) and NBC Universal came together in a combination that combined delivery and content development. That merger has seen a few bumps, but nothing that’s not going to be overcome. Comcast Corporation (NASDAQ:CMCSA) is still suffering from lower earnings with an EPS of $2.28, and its P/E of 17.77 is in the middle of the pack. Going forward, the combination of content and distribution – which CBS Corporation (NYSE:CBS) and Time Warner Inc (NYSE:TWX) may be hoping to profit from – is already at work here for Comcast Corporation (NASDAQ:CMCSA). The learning curve is mostly past for these two and things should be picking up soon.
The granddaddy of these plays, however, is The Walt Disney Company (NYSE:DIS). The Walt Disney Company (NYSE:DIS) bought ABC – along with ESPN and a bunch of other properties – in 1996 and has since combined its broadcast arm with top content makers such as Pixar, Marvel and now LucasFilm to create a media behemoth that will be hard for anyone to challenge. Now that the company is committed to streaming with Netflix, Inc. (NASDAQ:NFLX) beginning in 2016, it’s also lining up a new media vision. Share price appreciation of 45.36% over the last 12 months and EPS of $3.09 – higher than almost all of its competitors – along with a 14.60% net margin demonstrate the benefits of combining distribution and content.
Moving forward
It’s not that the idea of CBS and Time Warner merging is locked in stone, it’s just that it makes sense. Both companies are at a competitive disadvantage right now and seem to make sense for each other. Whether their respective boards can acknowledge that fact and work towards a marriage is something only time can tell. For us investors, it might be productive to pick up some shares of both companies prior to any serious discussions getting underway. Even talks would boost both share prices, allowing for some quick profits to be made. If they agree on a deal, there’ll be more.
The article Time Warner and CBS: Could They Combine to Create a Titan? originally appeared on Fool.com and is written by Nate Wooley.
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