Comcast's hostile move to buy Disney is the type of adventurous
offer that takes investors' breaths away — along with their money.
Since making an unsolicited, $48 billion bid for the Disney empire
last week, Comcast has lost roughly $9.3 billion in market value.
The odds against pulling off a successful mega-deal are well known:
More than 70% of the big-bang mergers performed since 1995 failed
to create significant shareholder value, according to our
Yet there is a better way. Executives should make a big deal
about doing a lot of little deals. We have taken a close look at
the so-called "deal paradox" — why so many deals seem to fail, and
yet company executives and boards keep doing them. Our research
examined 1,700 public companies and their deal history from 1986 to
2001, and separates the acquisition winners from the losers.
It turns out that frequent acquirers that build skills and
experience through a host of small deals come out on top. By
turning their back on Comcast-type moves and applying themselves
instead to building capabilities to identify and execute small
deals, the slow and steady tortoises earn twice the returns of the
By contrast, the Comcast-Disney hook-up has several classic
traits found in deals that end up destroying meaningful amounts of
shareholder value: It is a massive deal (depending on how you
establish value, Disney is worth about $60 billion, including
long-term debt); it is a merger of equals (Disney shareholders
would end up with 42% of the combined company); it is hostile
(Disney CEO Michael Eisner and the Disney board have already told
Comcast no way); and it represents a new line of business for
Comcast (Comcast is a cable company and Disney is a whole bunch of
things, but not a cable company). It also has dubious strategic
merit: Comcast CEO Brian Roberts spoke to analysts about restoring
growth to the theme-park and animation businesses, activities far
afield from Comcast's core cable franchise.
Companies that create significant shareholder value through
deals make a different set of choices:
— They make it a point to do lots of deals. In our study of all
publicly traded companies from 1986-2001, we found that the more
deals a company made, the more value it delivered to shareholders.
These companies are serial acquirers, doing deals in a systematic
fashion, year in and year out.
— They do little deals. The average deal size for the winners
in our study was 10% of the acquiring firm's market cap. Most of
these deals were so small that they were rarely disclosed other
than in SEC filings.
— They do friendly deals. Our interviews with the CEOs of the
deal winners pointed out how long and involved the courtship
process can be. Many of the acquired companies were private,
requiring the buyer to convince the seller of the merits of the
— They stay close to the core business. Our work repeatedly
pointed to the value of reinforcing a company's core business as
opposed to moving into far-flung adjacencies. When the winners we
analyzed moved beyond their core, they still built on fundamental
strengths in their business. Our studies found that deals motivated
by increasing the scale of an existing business outperformed those
undertaken to expand scope by a considerable margin.
— The strategy is easy to understand. When a CEO has to explain
why a deal makes sense, it usually doesn't. All companies have a
fundamental basis of competition on which their success is rooted.
Deals that strengthen that basis of competition make sense; those
that open up a new competitive basis usually don't.
Comcast's bid for Disney is all the more surprising because it
departs sharply from the process that made the company an industry
leader. Comcast was built through a series of acquisitions of
small, then progressively larger, cable operators. From 1986
through the AT&T Broadband acquisition in 2002, the company
methodically built up its core cable company, becoming in our
research a top-tier performer and a model for how to use
acquisitions to profitably grow. When it made non-cable
investments, such as the Golf Channel and the E! Entertainment
channel, it stayed close to its core cable business.
Making the Disney deal succeed will require a very different set
of capabilities. Indeed, when companies abandon their core and
start looking for alternative platforms of growth, it often signals
trouble. There is portent in Comcast's announcement, but it
probably is not the message that Brian Roberts wants to send.