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Why the Stock Market Is Focused on the Newest Megamerger

By Dan Caplinger - May 17, 2021 at 12:31PM

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The pace of strategic combinations is picking up momentum.

The stock market wasn't able to sustain its upward momentum from before the weekend, with major market benchmarks moving lower on Monday morning. Investors remain concerned about inflationary pressures and their potential to upset the delicate balance that has led to such impressive bull market returns over the past year. As of 11:45 a.m. EDT today, the Dow Jones Industrial Average (^DJI -0.50%) was down 173 points to 34,208. The S&P 500 (^GSPC -0.72%) had slid 23 points to 4,151, and the Nasdaq Composite (^IXIC -1.25%) had fallen 100 points to 13,330.

All eyes on Wall Street were on the latest megamerger, this time affecting the media industry. AT&T (T -0.81%) and Discovery (DISCA) (DISCK) made a huge announcement that could ripple across not only the rest of their respective industries but also the entire stock market environment. As the market continues to churn forward, more companies will likely consider moves like the one Discovery and AT&T made.

What AT&T and Discovery are doing together

AT&T and Discovery have agreed to combine some of their assets to create a single stand-alone company that will become a leader in the global entertainment industry. The structure of the transaction is complex but has potentially positive ramifications for everyone involved.

Two people in suits shaking hands.

Image source: Getty Images.

Specifically, AT&T will contribute its WarnerMedia division of premium entertainment, sports, and news assets to the new combined company. In exchange, AT&T itself will receive a combination of cash and debt securities, in addition to having WarnerMedia retain some of AT&T's existing debt as it joins the new company. That adds up to about $43 billion in value for AT&T.

Meanwhile, AT&T shareholders will receive stock in the new entity. When you add up all shareholders' interests, current AT&T investors will end up owning a total of 71% of the stock of the new company. Current Discovery shareholders will own the remaining 29%.

The benefits the two companies expect include:

  • Scaling up to create huge film and content libraries, with a larger group of visionary content creators and strong corporate leadership teams.
  • Taking strengths in different areas and building them into a more cohesive unit that will allow the combined company to move forward more quickly with efforts to enter the video streaming market more competitively.
  • An estimated $3 billion in annual cost synergies.

WarnerMedia brings well-known properties like HBO, CNN, DC Comics, and Warner Bros. to complement Discovery's Animal Planet, the Food Network, HGTV, and namesake Discovery Channel. Combined, the two will be a global force that other players in streaming video will have to learn to fight effectively.

Expect more combinations

Investors shouldn't be surprised to see companies looking to join forces. As the global economy emerges from the pandemic, demand for a wide array of goods and services is ramping up quickly. Even sizable companies in leadership positions within key industries are finding themselves stretched to meet that demand while remaining in strong competitive positions.

We've already seen many deals in other industries follow this model. Tilray (TLRY -3.45%) combined with Aphria to become a massive player in the marijuana stock market. Railroad company Kansas City Southern (KSU) has found itself the target of not one but two of its North American railroad peers, as Canadian National Railway (CNI -0.34%) and Canadian Pacific Railway (CP 0.45%) vie for supremacy with rival bids.

AT&T-Discovery is a big deal, but it won't be the last. Investors can try to anticipate where the next deals are likely to emerge and act accordingly.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Discovery (C shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
$18.42 (-0.81%) $0.15
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$33,980.32 (-0.50%) $-171.69
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,274.04 (-0.72%) $-31.16
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$12,938.12 (-1.25%) $-164.43
Kansas City Southern Stock Quote
Kansas City Southern
Canadian Pacific Railway Stock Quote
Canadian Pacific Railway
$82.60 (0.45%) $0.37
Canadian National Railway Company Stock Quote
Canadian National Railway Company
$128.04 (-0.34%) $0.43
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
Tilray Stock Quote
$4.05 (-3.45%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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