Merger Mania: Cheap Media Stocks Make Combinations More Attractive

Media stocks are cheap, so some big players in the industry are saying “Let’s make a deal.”

This week's flurry of potential media mergers includes such heavyweights as News Corp., Dow Jones, Reuters and Thomson. Analysts say that the main driver behind the proposed combinations is that media stocks are relatively cheap, making companies ripe for picking.

“Media is currently the hot sector,” says Edward Atorino, media analyst at Benchmark. “A lot of media stocks are under pressure due to slow growth, but I think there are still some positive characteristics.”

The growth of so-called new media, particularly the Internet, also is forcing companies to re-examine their growth strategies. It’s no longer possible to be just a newspaper, TV or Internet company, and smart owners are seeking to build a presence across what the industry calls “all media platforms.”

News Corp.’s $5 billion bid for Dow Jones , for example, would give Rupert Murdoch the Wall Street Journal and instant credibility for the business-news channel he is planning to launch later this year to compete with CNBC.

Languishing Stock

Dow Jones’s stock also has languished for years, making it attractive to a potential buyer. Though the controlling Bancroft family has so far turned down the huge premium Murdoch is offering, that could change if the bid is increased--which some investors are speculating could happen.

Two other potential media deals surfaced on Friday.

British news agency Reuters confirmed it has received a preliminary takeover bid, which media reports said was from Canada's Thomson. Both companies declined to comment on a possible deal.

Thomson, Reuters and industry leader Bloomberg all compete aggressively in what is known as the "terminal" market, for the data terminals on desks at the world's major banks and brokerages. A combination between Reuters and Thomson would narrowly edge out Bloomberg, according to recent rankings from Inside Market Data Reference.

Also, Microsoft was said to be reviving efforts buy Yahoo, though reports later Friday indicated that a joint venture between the two was more likely.

Microsoft has already spent big bucks in an unsuccessful effort to develop an Internet strategy to compete with Google. The search engine giant now poses a direct threat to Yahoo’s business model. Any deal would combine Microsoft’s technological strength with Yahoo’s media reach.

“If the deal is completed, an epic battle for Internet preeminence between Microsoft and Google would ensue,” says Ryan Jacob, portfolio manager at the Jacob Internet Fund.

Other Deals

Any tie-up that results from these this week's talks will add to an already active period for media deals.

McClatchy Newspapers snapped up Knight-Ridder, dumping titles that didn’t fit its profile or offered poor growth prospects.

Real estate tycoon Sam Zell bought Tribune, giving him 11 newspapers, 23 TV stations and a key Internet presence.

Bruce Toll, the CEO of luxury homebuilder Toll Brothers , bought the Philadelphia Inquirer and Philadelphia Daily News.

In 2005, Merrill Lynch identified drugs, diversified telecom and media as “CPR” industries because each had “tremendous turnaround potential.”

“Media was perhaps the most controversial of the three industries because the consensus at the end of 2005 was that Google was going to destroy the traditional media business,” Richard Bernstein, an analyst at Merrill Lynch, said in a research report.

“We have no particular opinion with respect to Google’s business model, but we suggested that investors’ expected returns for the ‘old media’ companies were too pessimistic," Bernstein said. "We thought the old media companies would respond to the new technology threats by restructuring and/or consolidating.”