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article imageOp-Ed: Murdoch drops Time Warner bid, experts screw up again

By Paul Wallis     Aug 5, 2014 in Business
New York - So far from increasing his offer for Time Warner as many experts predicted, Rupert Murdoch has simply taken his offer off the table. Fox shares soared, while Time Warner stocks dropped 14 percent.
Murdoch, the billionaire chairman of Fox, said he’s backing down after Time Warner’s board refused to engage in talks and Fox’s stock price declined 11 percent since the offer became public. Fox instead authorized a $6 billion repurchase of its Class A shares.
“Time Warner management and its board refused to engage with us to explore an offer which was highly compelling,” Murdoch, 83, said in a statement today. “Additionally, the reaction in our share price since our proposal was made undervalues our stock and makes the transaction unattractive to Fox shareholders.”
Amazing what you can do when you have a few spare billion to throw around. There is also a cultural dimension to this situation which is a true indication of how far apart the two parties are at the moment. One of the sticking points of the offer was the fact that Time Warner shareholders would have received nonvoting stock.
Murdoch has a very well organised share structure which gives him and the Murdoch family control of the company. To expect him to dismantle the structure is to put it mildly, naïve, or more bluntly, bizarre. The Time Warner offer was very much a business deal. Gaining Time Warner would have created multiple new avenues for Fox distribution, and would have been a highly productive exercise for Fox, had it worked.
That said, the idea of rewriting the control of Fox simply to suit the sensitivities of Time Warner wasn’t even theoretically on the table when the offer was made. Somehow, the financial media made a judgement by extension that offering voting shares would be a natural next offer.
Market expertise blows it again
It wasn’t. The theory of an ever-rising offer, supposedly up to $100 per share, for shares which were wallowing down around $62 last month, doesn’t even stack up on conventional share valuations, let alone market dynamics. The market pushed Time Warner over the offer price reflexively, not as a considered valuation.
(A point for market experts — on what basis is Time Warner worth $100 per share? Previous market performance was nowhere near that, and unless asset values have miraculously gone up by 50 percent on the June low, $100 is not even vaguely credible as a benchmark price.)
These shares went up by nearly a third, purely on the basis of the offer. There was no other reason for the Time Warner shares to rise. Speculation in the stock market, particularly at this level, is not necessarily a great idea for anybody. Those who bought Time Warner shares at the top of the range have already lost money, and the paper value of Time Warner holdings has already deteriorated.
In the past, this theory of a higher second offer was good practice. Since 2008, however, the market is much more sensitive and much more neurotic. Share prices move fast, both ways. While Time Warner may have had multiple reasons for refusing to consider the bid, the effect of knocking back the bid on the share price was never in doubt.
Murdoch was under no compulsion to increase his offer. He made an offer which was significantly above the Time Warner share price at the time, which would have been valued on the basis of hard numbers. The cash-scrip offer was easy to value and manage. To instantly assume that he was going to increase that offer, which was $23 above the bottom price of Time Warner shares in June, in fact a 30 percent premium, really calls into question the judgement of market experts.
Nobody makes an offer on that scale, and then revises it to suit the whims of the target. Adding another 15 percent to an offer which was already 30 percent over market price is a truly strange way of doing business. Big media isn’t necessarily a buyers’ market, but it’s also not necessarily a sellers’ market, either.
It is also naive to assume that Murdoch didn’t factor in the results of a negative response. If, down the track he makes another offer, he will be more credible as a buyer. Time Warner might have done itself a few more favors by adding some value in its response, not simply relying on projected growth as a pricing mechanism.
Bloomberg again:
Time Warner, led by Chief Executive Officer Jeff Bewkes, rejected Murdoch’s June offer of $85 a share in cash and stock as too low and said the media company’s growth plan will create more value than any proposal Fox “is in a position to offer.” As its shares tumbled, Fox determined that it couldn’t bump the bid high enough to interest Time Warner’s board and management, according to people familiar with the matter who asked not to be named because the talks were private.
Fox was unable to convince investors in either company that Murdoch would remain disciplined in its bidding, said the people.
“Disciplined?” Some might think making an offer and sticking to it was in fact pretty disciplined. Mindlessly increasing the offer, in contrast, would have been very “undisciplined.” The word is practically meaningless, particularly in context with unspecified growth valuations over an unspecified period of time.
It will be worth watching the next chapter in this saga. Time Warner has made a commitment to adding value, and the parameters for valuation will be the share price. To meet its own parameters for valuation, Time Warner now has to up value the stock price to $100 per share.
This is a case of telling the market a story, and then expecting the market to believe it. That’s usually not a good idea.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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