Background Information
Comcast and NBCU
Comcast Corporation is a leading company in the entertainment, information and communication industry. The company is located at One Comcast Center in Philadelphia. Since 1963, its major business has been management and operations of cable systems.
This covers cable connections namely provision of video, voice and internet services to domestic customers and business establishments in Columbia and 39 countries (Bake 2). Other services are Cable complex, broadcast television, Screen entertainment, funfairs as well as Comcast Spectator.
Ideally, Comcast Spectator subsidiary companies are Ovations Food Services, a food service establishment for sports and concerts. Philadelphia Flyers, Wells Fargo Centre a versatile arena in Philadelphia, and Global Spectrum that deals in facilities administration.
Some of Comcast’s achievements in 2011 include; a rise in merged earnings to $55.8 billion, consolidated working returns of 34.3% rose to $10.7 billion. A closure of NBCU Universal deal saw Comcast Corporations reap revenue of $14.5 billion and operating income of $1.4 billion. Its clientele vary from cable subscribers, internet clients to digital voice clients.
Conversely, NBC Universal, a global leading media and leisure company is involved in the growth, creation and promotion of entertainment, reports and information universally. NBC Universal is the holder and controller of various television networks, a company involved in motion picture.
It is also involved in television productions and controls media stations along with a universally known theme park. It was initiated in May 2004 after General Electric merged with Vivendi Universal Entertainment. NBC Universal is based in Rockefeller Plaza in New York. Its predecessor is Music Corporation of America. NBCU’S hosts such shows as The Tonight Show, Saturday Night Live and Sunday Night Football (Saari 7).
Merger
In January 2011, Comcast merged with NBC Universal and attained 51 percent of General Electric’s NBC Universal. Upon merger, the two formed NBC Universal LLC dealing in such assets as wire channels, theme parks and a movie studio. The transaction was not really a merger but an acquisition as General Electric would remain a minority in the shareholding.
This means that Comcast controlled the venture and would buy General Electric’s interests in the next eight years. Upon merger, the new body will have a board of five members, three from Comcast and two from General Electricals. The merger set out to start a new airing method known as TV Everywhere. This means that the customers would gain access to the media via internet by substantiating their traditional cable subscription (Bake 2).
Benefits of the merger
Since it was a vertical merger, it would harm competition either by exclusionary or collusion. Exclusionary would involve the foreclosure of an unallied downstream rival from accessing the joint venture’s upstream product and foreclosure of an unallied upstream rival from accessing the joint venture’s upstream product. Here the term foreclosure referring to strategies to raise prices and total exclusion.
Comcast would harm its rivals by blocking its rivals from accessing its video programming, withholding the access temporarily and increasing programming price in order to raise the competitors’ costs. The merger claimed to enhance innovation prospects by reducing the cost of synchronizing content development with the development of new media distribution forms.
From any market merger and acquisition that is viable, like that formed between Comcast and NBCU, it is perceived that it lowers the operations outlays or save costs emerging from the exclusion of double relegation of cost of programming. Increase in economies of scale also led to a reduction in costs.
The type of merger formed between Comcast and NBCU
Based on the market definition, it is apparent that the NBC Universal and Comcast merger combined the transactions of these two business entities. In the merger, the programming assets of Comcast namely its cable network interests such as versus, the Golf Channel and the regional sport networks were combined with those that NBCU held. The NBCU market assets included cable networks like the USA Network, Bravo, CNBC and MSNBC besides the universal film library studios and the NBC broadcast network.
The joint business venture that was formed between these two entities was under the control of Comcast (Bake 2). Thus, it made the merger transaction between NBCU and Comcast to be termed as vertical integration. This is because the major content provider was NBCU whereas the operation of Comcast happened mainly downstream in that content distribution.
Within the United States geographical milieu, Comcast is perceived as a global leader in the MVPD that is Multichannel Video Programming Distributor.
In fact, nationwide, nearly a quarter of the total MVPD subscribers in addition to over forty percent of the subscribers originating from seven out of the ten biggest metropolitan regions are Comcast clients. Comcast is equally the leading provider of broadband internet access in the United States areas (Bake 4). This clearly justifies why the transaction between NBCU and Comcast is considered as vertical merger.
Merger motives as stated by companies
Companies usually merge to gain several benefits. Amongst them are to gain access to a wider base of clients, reduce market competitions, increase their market shares, diversify their services and products , reduce overhead costs as well as to accelerate long-term business plans. These ideally included the motives that were stated by NBCU and Comcast.
Critical analysis of the stated merger motives
Often, firms would merge to craft a more efficient corporation and reduce the business operation costs. However, the merger between Comcast and NBCU does not necessarily reveal real cost synergies allied to this kind of joint venture. For instance, Comcast quoted that 99.9% employees who work for NBCU undertake business which hardly overlap with the businesses that Comcast pursue.
This implies that, since NBCU controlled a larger segment of the video content distribution, Comcast saw that it could derive some value from merging with NBCU (Saari 12). Conversely, NBCU was motivated by the fact that the largest broadband network and the largest paid television network in the US are owned by Comcast. This merger may enable these corporations to gain a wider video content distribution market share in the United States.
In reality, Comcast is the US king of internet business and TV business contents. The company also controls most its privately owned contents like few cable TV channels and local sports channels. Hence, the motive that solely drives Comcast to merge with NBCU is to control a lot more of the video contents and other cable channels distributions. In turn, the Comcast will be able to increase its profits and add on to its on-demand contents.
Merger Motives
From the market valuations of firms, it is true that based on merger motive number one, firms with low market values are actually undervalued. The answer is yes because the market value of any firm at a given period basically reflects on its market worth as depicted by the amount of assets such a firm possesses. If the balance sheet assets are valued low, then the firm is undervalued and vice versa.
On the other hand, it emanates that from the stipulated merger motives, the company management usually derive some mutual benefits from the merger.
In fact, company’s management usually sees that mergers generate several benefits. Amongst them are to gain access to a wider base of clients, reduce market competitions, increase the company’s market shares, diversify their services and products , reduce overhead costs as well as to accelerate long-term business plans. These included the motives that were stated by the management of NBCU and Comcast.
Market impact
Despite the derived benefits, the merger was anticipated to generate some negative market impacts. Basically, a merger between NBCU and Comcast received numerous antagonisms related to exclusionary and collusive. First, it was alleged that in case two rival firms such as NBCU and Comcast merge to collectively act be it through express or tacit collusion, chances are that they might raise products prices by reducing outputs.
Secondly, the merger between these two business entities may harm the level of market competitions on the non-priced dimensions such innovation and quality. The vertical merger may encourage the exclusionary conduct which may harm rivalry via the creation of coerced or involuntary monopoly or cartel (Bake 5).
Given that vertical mergers can facilitate collusion or exclusion that in turn harms competition, chances are that unaffiliated upstream rivals could face foreclosure from the access to the incorporated downstream firms businesses.
Through this merger, the market rivals to Comcast video distribution are bound to be foreclosed from accessing the joint venture video programming. It is also apparent that the level of video programming competitions would be harmed since the rival programming networks would be denied access to the customers affiliated to Comcast video distribution.
Works Cited
Bake, Jonathan 2011, Comcast/NBCU: The FCC Provides a Roadmap for Vertical Merger Analysis. Web.
Saari, Riikka, 2007, Management Motives for Companies Mergers and Acquisitions: A Research Proposal to be presented at Accounting Tutorial Turku School of Economics. Web.