I was always a fan of synergy. Still am, in fact. But my confidence in the theory has taken a hit with all the recent talk of Viacom
What's going on? We all remember when synergy was all the rage. It's a simple matter, really: A company owns assets that can symbiotically feed off one another and add value to the overall profit structure in a perpetual cycle. Viacom owns MTV; it also owns Paramount Pictures. When Paramount produces a film, MTV goes into hyperdrive marketing it. Makes sense to me.
Apparently, it doesn't to a lot of other folks. Corporations can be just as annoying as Wall Street, where intellectual myopia often runs rampant, fueled by a belief that the short term is the only term that will ever come to pass. What else can explain Sumner Redstone's belief that dividing Viacom might be appropriate? Running a complicated set of businesses shouldn't be driven by a what's-hot-what's-not mentality; I agree that Wall Street hasn't been in the mood for media conglomerates the last several years, but that shouldn't mean that the paradigm of synergy should be abandoned. Take a look at this chart, and you'll have no choice but to agree that the going has been rough: Time Warner
The situation becomes more complex because, whether I believe in synergy or not, the reality is that these companies have had serious issues to deal with. Disney obviously has been highly challenged in growing earnings, and not all of it can be blamed on slow economies. Acquiring ABC has indeed presented problems for Michael Eisner and company because the network has proved harder than expected to run; indeed, this asset has been a volatile element over the years and has yielded complaints of the dreaded "diworsification" syndrome. Time Warner -- well, do I need to even go into that? The original Time Warner entity was purchased by, in hindsight, arguably overvalued America Online currency, and a lot of people -- including me -- blessed the deal as a grand synergistic endeavor. We all know what happened: AOL eventually gave up the growth ghost and, like ABC, became a chronic drag at times.
Here's the takeaway for investors: When looking to get into big-cap media concerns, focus on free cash flow and not the promise of synergy, or the lack thereof. Put another way, don't just buy Time Warner stock simply on the speculation that the company may divest itself of some assets. Once again, I still like synergy, but only if its potential can be fully realized and completely unfettered by whatever is keeping it down right now. I go for the hypothesis that all the strong egos running each separate division hinder harmonious management of the overall corporate politic.
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Fool contributor Steven Mallas owns shares of Disney.