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Of Mega Mergers and Edifice Complexes
05/27/2010 3:57 pm EST
Three weeks ago, on the day the “flash crash” drove the Dow Jones Industrial Average down 1,000 points within minutes, a juicy bit of real estate gossip appeared in The Wall Street Journal.
Brian Roberts, the chairman and chief executive officer of Comcast (Nasdaq: CMCSA), is buying a condominium in an elite apartment building that has become a “virtual dormitory for the very rich and famous,” as The Journal put it. The estimated price: $7 million—$12.9 million.
This real estate deal follows another big purchase: In December, Comcast announced that it’s acquiring a 51% stake in NBC Universal from General Electric (NYSE: GE). Comcast will contribute cable networks worth $7.3 billion to the new joint venture and would pay GE $6.5 billion in cash for USA Network, Bravo, CNBC, MSNBC, Telemundo, other cable networks, and the struggling broadcast network and film studios of NBC Universal. The deal is under regulatory scrutiny and is expected to close by year end.
This seemed almost too good to be true: a big merger—especially a big media merger—followed by the acquisition of a trophy property by a CEO. Both events can signal periods of underperformance by the company’s stock, according to some academic studies.
Now, I have no idea whether this merger will work or if Comcast’s stock will underperform the market. The deal may well turn out to be less bad than some media mergers from hell we’ve seen.
But the two events remind investors how many things they need to watch if they own individual stocks, which is why that can be so dicey.
First, the real estate. Roberts is buying into a building that has quickly become one of Manhattan’s most elite addresses. 15 Central Park West, designed by famed architect Robert A.M. Stern, opened in 2007 near the southwest corner of Central Park.
Its architecture and amenities have drawn business notables like former Citigroup (NYSE: C) chairman and CEO Sanford Weill, who purchased a $42-million penthouse. Goldman Sachs Group’s (NYSE: GSG) chairman and CEO Lloyd Blankfein owns a condo in the building, as do other executives of that tarnished firm. (A Goldman fund was an investor in the property.) Hedge fund managers live there, too.
As do some celebrities, like Sting and Denzel Washington. New York Yankees third baseman Alex Rodriguez reportedly rented an apartment there. It’s a hop, skip, and jump away from Madonna’s digs on CPW, but of course that fling is so over.
15 CPW is also a short limo ride to midtown, where NBC’s headquarters are located, and just steps from two of New York’s top eateries, Jean Georges and Per Se, where Mr. Roberts would presumably get a prime table.
There are some fine restaurants in Philadelphia, where Comcast’s headquarters occupy a 58-story skyscraper, the city’s tallest. But this is a big step up from hoagies and cheese steaks.
OK, I’m having some fun at Mr. Roberts’ expense. He’s the CEO of the nation’s biggest cable operator and a very wealthy man—Forbes valued his net worth at $625 million in 2003, and he owns 7.4 million shares of Comcast’s stock. So, he can afford to live wherever he wants to.
And why shouldn’t he? Image is still king in the New York old-media world, where schmoozing rules the roost. As head of NBC, he’ll have to play that game, too. An otherwise critical profile in Wired magazine last year painted Roberts as low key, for a media mogul.
Problem is, some solid academic research shows that purchases of expensive homes by CEOs often don’t end well for shareholders.|pagebreak|
The 2007 study by Crocker Liu of Arizona State University and David Yermack of New York University, titled “Where Are the Shareholders’ Mansions?,” concluded that “future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates.”
The two academics also found “a significantly negative stock performance following the acquisition of very large homes by company CEOs.”
Professor Yermack’s conclusion: "If [a CEO] buys a big mansion, sell the stock."
Comcast wouldn’t comment on Mr. Roberts’ apartment purchase. A spokesperson pointed out that a $7,000 investment in Comcast’s stock at its 1972 initial public offering would be worth $2.45 million as of May 26th, while the same investment in the Standard & Poor’s 500 would be worth about $150,000. That’s a 16.7% annual return for Comcast, vs. 8.4% for the S&P.
But what have you done for us lately? Since 2000, the stock has underperformed media peers Disney (NYSE: DIS), News Corp. (NYSE: NWS.A), and Viacom (NYSE: VIA), as well as the S&P (see chart). Only Time Warner (NYSE: TWX) trailed Comcast’s performance.
Incidentally, nine of the 25 CEOs in the two professors’ studies who bought a big house “attempted major corporate acquisitions in the two years following their personal acquisitions of very large real estate.”
“The purchase of a home exhibits psychology not unlike the purchase of a company,” says Robert F. Bruner, dean of the Darden School of Business at the University of Virginia and author of the 2005 book Deals From Hell.
Which brings us to NBC. Comcast has been shopping for cable and broadcast properties—remember its failed 2004 hostile takeover of Disney? But the NBC deal has a lot going for it: a motivated seller; a reasonable price of around ten times earnings before interest, taxes, depreciation, and amortization (EBITDA); an all-cash deal; no reliance on theoretical “synergies” between the two companies, and some complex mechanisms that could limit Comcast’s costs for the rest of NBC when it’s obligated to buy that stake from GE in the future.
“Although the uneven history of large media deals leaves us circumspect, we believe this is a fairly priced and well-structured acquisition of assets that Comcast understands,” wrote Gabelli & Co. analyst Christopher J. Marangi in a December report. “Comcast appears to be acting opportunistically at a time when GE is in transition.”
That’s putting it mildly: NBC’s broadcast network has been an albatross for struggling GE, and the recent late-night brouhaha over Jay Leno and Conan O’Brien was a public relations fiasco.
But it’s the cable properties that will make or break this deal. “We feel strongly that content and distribution go well together, and at the end of the day serve the customer well,” a Comcast spokesperson says.
Maybe so, but the history of media mergers hasn’t been encouraging. The catastrophic 2000 AOL-Time Warner merger may have been the single worst deal of all time, with immense loss of corporate and shareholder value.
Professor Bruner points out that the Comcast-NBC deal is occurring at an early stage in the M&A cycle, before euphoria heats up valuations. But he warns: “The big danger in buying into the entertainment industry is the failure to manage the integration.”
Again, I don’t know how this is going to work out—or whether Comcast, whose executives (including Roberts) have been big contributors to Democrats, will clear regulatory hurdles.
But with all the problems investors face these days—the European debt crisis, Wall Street’s market manipulations, dark pools, and flash crashes—do they really need to worry about CEOs’ home purchases and sudden big mergers of companies whose shares they own?
Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.
Full disclosure: My wife owns a small number of Comcast shares, and she doesn’t plan to sell them. I own some shares of News Corp.
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