The media industry has been characterized by massive acquisitions and consolidation over the last few years. The latest megamerger is the planned combination of AT&T's (T -0.18%) WarnerMedia and Discovery Communications.

The combined entity could put more pressure on smaller media companies to join forces or sell themselves in order to compete with the scale of the big competitors.

Here are three acquisition targets for the next big media merger.

A silhouette of a person in front of dozens of screens.

Image source: Getty Images.

1. ViacomCBS

ViacomCBS (PARA -0.18%) is the result of a remerging of Viacom and CBS, which closed at the end of 2019. Still, the company is relatively small when compared to the giants in the industry.

The merged company has a renewed focus on streaming, rebranding CBS All Access as Paramount+ earlier this year and adding tons of Viacom content to the service. ViacomCBS also operates the free ad-supported streaming service Pluto TV, which has grown to be one of the largest AVOD platforms in the U.S.

With an enterprise value of $40 billion, it'll need a pretty deep-pocketed buyer to make a deal. Analysts put Comcast (CMCSA 1.66%), which owns NBCUniversal, as the frontrunner. Comcast is working to get its own ad-supported streaming service, Peacock, to take flight. It can benefit from the combined forces of its Universal movie studios with ViacomCBS' Paramount Pictures, and it can use the new intellectual property to expand Universal Studios parks.

Comcast's cable networks are mostly complementary to ViacomCBS, but regulators may take issue with one company owning two of the major broadcast stations in the U.S. (CBS and NBC).

2. MGM Holdings

MGM Holdings owns Metro-Goldwyn-Mayer studios and a few other assets, including the premium cable network/streaming service Epix. The company has been trying to sell itself for some time, with rumors of a buyout from Comcast or Apple over the last few years. More recently, it's reportedly in negotiations with Amazon (AMZN 2.08%), which has ramped up its content spending for its Prime Video streaming service over the last few years. Its asking price is said to be around $9 billion.

MGM has a lot of popular intellectual property, including the James Bond and Hobbit franchises. It's also practically a pure play for content. Its back catalog of 4,000 films would be a boon to any streaming service. What's more, it ensures a first look at further output from the studio. With the ongoing industry consolidation and rise of direct-to-consumer streaming, very few studios are willing to license their output to third-party streaming services. MGM is one of the last big studios to make licensing deals despite its sister company Epix.

3. Lions Gate Entertainment

Lions Gate Entertainment (LGF-A 6.82%) (LGF-B 6.08%) owns the Lionsgate film and television studios, as well as the Starz network and streaming service. It previously looked to sell itself back in 2018, but it's been unable to get a deal done.

About half of the company's revenue and profits come from Starz, with the other half coming from its film and television production studios. Similar to MGM, Lionsgate licenses its productions to its own premium cable network, but also considers third-party licenses. As such, a buyer could get exclusive rights to Lionsgate films and TV productions, as well as access to its production capacity.

The relative size of the company -- about $6 billion in enterprise value -- makes it easily digestible by one of its larger peers or a tech player. 

How to invest in consolidation

It may be tempting to buy shares of a media stock you think has a good likelihood of selling itself in order to capture an acquisition premium, but doing so doesn't always work out. There may be years of poor operations before a company is able to sell itself, resulting in an underperforming stock over the long run. What's more, if you invest in a company purely on speculation that it's a good takeover candidate, you stand to lose money when no acquisition materializes.

Nonetheless, if you think ViacomCBS or Lions Gate Entertainment, for example, have strong operations and could do just fine on their own, then the takeover potential is just icing on the cake.

In fact, it may be more beneficial to look at acquisitive companies that stand to benefit most from picking up assets that allow them to compete and differentiate their products. But investors should be mindful of those companies' balance sheets and what they can reasonably afford to pay for what they're getting. Otherwise, the business may end up like AT&T, with the company looking to unwind past deals.