The Murdoch Strategy: Why He Wants Time Warner

Murdoch has put Time Warner in play. Will his efforts lead to a bid too good to refuse?

Jul 22, 2014 at 9:11AM
Krm

Source: News Corp

In the media world, Rupert Murdoch has an unwavering capacity for surprise moves. You rarely hear much from Murdoch until he is ready for you to hear it. On July 16, the entire industry sat up and heard exactly what Rupert had to say. Murdoch offered a takeover bid of $80 billion to acquire Time Warner (NYSE:TWX). Although initially rejected, the markets reacted quickly, with spikes in shares of both Time Warner and News Corp (NASDAQ:NWS | NASDAQ:NWSA). Murdoch has put Time Warner in play.

Changing the playing field
Murdoch does not care with whom he must deal to get things done. He likes to change the playing field to benefit the growth of his empire. This includes crossing the political divide to sit down to dinner with Valerie Jarrett just to help push immigration reform.  He will also exploit weakness. "Beat 'em, buy 'em, sell 'em," as Shepard Smith described it on-air on Fox News when first reporting the bid. 

"Beat 'em"
The ongoing ratings weakness of CNN does not help Time Warner. While Fox News Channel has "beat 'em" with top ratings for total viewers for 146 consecutive months (that's 12+ years), prime time ratings for CNN are on a consistent downward slope. In a Q1 2013 to Q1 2014 comparison, favorite Anderson Cooper is down 47%, Erin Burnett is down 39% and Piers Morgan exited the 9pm slot after plunging 46%. 

Timewarner

Source: Time Warner

"Buy 'em"
In business, everything is for sale at the right price.  Murdoch is banking on Time Warner to entertain the right bid as a fiduciary responsibility to its stakeholders. Unlikely media mergers have happened before; MSN and NBC in the '90s and Time Warner in 1989 are but two examples of mergers that many viewed as unlikely at the time. Now, two new unlikely mergers are on the horizon thanks to Murdoch – 21st Century Fox merging with Time Warner and CBS joining forces with CNN.

"Sell 'em"
Murdoch has already announced that he would spin off CNN to avoid any monopoly regulatory issues to get the Time Warner deal done. In doing so, Murdoch has made a shrewd strategic maneuver. He not only has made a possible merger more palatable for Time Warner executives, but he has also summoned the vultures to circle over CNN. This puts added pressure on one of the main competitors of his FOX News unit, regardless of the outcome. The networks have long understood the advertising power of having an added 24/7 cable arm. NBC has it with MSNBC. Now, CBS seems eager to join, as Leslie Moonves of CBS announced his interest in acquiring CNN if a merger happens. What would CNN cost Moonves? Recent reports place the network's value at about $10 billion.

Lachlan

Source: AP

What is Rupert really up to?
Murdoch did not build his media empire without a keen sense of strategy. The media industry is in the midst of change and upheaval during the ushering in of media convergence. Traditional outlets face continuing headwinds as more access and distribution points emerge. The very ability to control those new connection points yields power, and Murdoch knows it. In the face of changing technologies or regulatory landscapes, firms must innovate, diversify, or die. As anyone knows about Murdoch, he has no plans to allow his empire to die anytime soon. With successions plans involving sons James and Lachlan announced earlier this year, Murdoch is making the moves necessary to ensure his legacy.

Distribution control
The media landscape is changing. New alliances and distribution channels are being formed. Control is the key and Murdoch has proven time and again that he will provoke the changes that benefit positive growth of his empire. In a 2009 Vanity Fair profile by Michael Wolff, Murdoch's view is revealed. "Media only really works as a good business if it achieves significant control of the market – through pricing, through exclusive sports arrangements, through controlling distribution (he has spent 20 years trying to monopolize satellite distribution around the world)." With the Time Warner deal, Murdoch acquires control of a much broader range of content while gaining greater negotiating power to offset the growing power distributor networks. As a bonus, he gets to pillage CNN and spin it off.

No pain, no gain

Jeffreybewkestimewarnerceo

Source: Time Warner

Murdoch will undertake great pains to go after what he wants. His print unit endured the recent phone scandals in Europe and his Fox News unit has held ratings supremacy over competitors with no signs of yielding the top spot. The same Vanity Fair article referenced earlier describes Murdoch's strategy of pain:

"What he is always doing is demonstrating a level of strength and will and resolve against which the other guys, the weaker guys, cower. He can take more pain than anybody else...he will endure the short- or medium-term pain necessary to build a profitable business." 

Thanks to Murdoch, we are now watching the clock to see how long Time Warner CEO Jeffrey Bewkes can continue to both endure the pain of CNN ratings and the pressures from stakeholders to accept an offer too good to refuse.

Fool contributor Gavin P. Smith has no position in any stocks mentioned. Follow: Gavin P. Smith on Twitter or Gavin P. Smith on LinkedIn . The Motley Fool has no position in any of the stocks mentioned.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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