Cacophony at Warner and EMI

Music is all about hooks and timing. Now if only Warner Music Group (NYSE: WMG  ) and EMI could run up the white flag long enough to figure out who should do the hooking. The two prerecorded music giants have been volleying buyout offers back and forth since last month. Normally, that's just a matter of bids going one way and rejections going in the opposite direction. But not here. Not now. These two companies are so cocksure that they can't seem to agree as to who should swallow who.

That's a problem. It all started when EMI made an unsolicited offer to acquire Warner in May that was quickly shot down. Each company has made a pair of offers to buy the other, and it's a ridiculous bidding war. With major shareholders preferring cash over stock as the legal tender of choice, it underscores each company's claim that there are synergies to be found in a corporate combination.

There used to be five major labels until Sony (NYSE SNE) teamed up with BMG to form Sony BMG in 2003. If Warner and EMI can get past their differences, we may be looking at just three major labels. Vivendi's (NYSE: V  ) Universal is the other key player.

I was bullish on Warner back in October based on the company's healthy attitude toward embracing digital distribution and cashing in on the Internet instead of fearing it the way many of its larger peers have. The stock has gone on to climb roughly 50% higher since then. The higher valuation and this pointless spitting contest with EMI have me pausing for a moment, but I still think that the combination makes perfect sense. It's just that all of this posturing is going to end with the more conceited of the two companies overpaying for the other.

We're at a point in time in which digital distribution poses both opportunity and challenges for the music industry. There's high-margin loot at the end of the digitally delivered rainbow, but the leveling effect of the Internet -- indie bands are being broken on MySpace and Internet radio -- threatens the relevance of the major labels.

There's too much at stake here. There's too much to lose. Quit the bickering and get the deal done at a fair price, even if it means upsetting cash-hungry fat cats and rolling with the more logical stock combination. This duet will work once Warner and EMI finish their diva acts.

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Longtime Fool contributor Rick Munarriz once had his band signed to Sony's Columbia Records label. It didn't exactly pan out. The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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