Disney and Fox: How Bankers Merge Giants

Disney is one of the most recognizable names in the world. From their classic movies and parks to the recent expansion into new intellectual property like the Star Wars franchise, they have been a powerhouse in media for decades. Just last year, it was announced that Disney was making an offer to acquire 21st Century Fox’s assets, effectively absorbing it entirely after selling off certain subsidiaries and side businesses. After some back and forth, antitrust approvals, and a counter-bid from Comcast, it was confirmed that Disney would move forward with the acquisition, making two of the biggest studios in Hollywood into one and greatly expanding Disney’s growing media empire. Here we will take a look into the role investment bankers play in making this deal possible and its larger implications.

Disney and the Bidding War

The initial bid that Disney placed for 21st Century Fox’s assets, which was reached by Disney’s advisory team from Guggenheim Partners and JPMorgan, was $52.4 billion.

They were not the only ones who wanted a part of the powerful 21st Century Fox if it was indeed up for sale, and AT&T and Comcast entered the ring. AT&T faced a lawsuit from the Department of Justice over its attempt at the acquisition due to antitrust laws, and the competition quickly shrunk to include only Disney, the initiator of the acquisition, and Comcast.

After Disney’s first bid, Comcast countered with a $65 billion cash offer for Fox. Within a week, Disney responded with a $71.3 billion bid. Chances for Comcast to counter a second time dwindled significantly in the face of possible antitrust regulation after seeing AT&T’s Time Warner merger investigated by the DOJ for a possible reversal of approval.

Finally, Disney was set to achieve what it wanted from the start, albeit at a nearly $20 billion higher price. Shareholder approval sealed the deal, and the merger is expected to be complete by mid-2019 after national approvals and additional transitions to ensure legality and successful integration.

The Bankers Behind the Curtain

On Disney’s side, they had Guggenheim Partners and JPMorgan advising them on price and valuation. 21st Century Fox employed Goldman Sachs and Centerview Partners for most of its sell-side advisory.

As explained in previous articles on this page, in the process of mergers and acquisitions, both sides consult investment bankers for their expertise. On the buy-side, Guggenheim and JPMorgan worked primarily to understand and pinpoint the following:

Projected Value of Fox — The benefits of the synergies the horizontal integration could bring them. These would include the connection of their huge networks in media and television or movie production studios as well as

Fox’s Assets — The effective value of the actual assets being acquired, both tangible and intangible, such as distribution rights. Market value is often used here, but there is considerable room for senior banker judgement on the whole asset valuation considering assumptions made due to the size of the merger and the variety of assets being acquired.

What Price Makes Sense to Pay Today — Is raising your bid amount by $20 billion viable? Your initial bids and later changes are key considerations and is affected by many external and internal factors. Projected cash flow and savings on revenue as well as cost in the long-term are carefully considered when bankers on the buy-side are deciding what price to offer. Overestimating the worth and therefore paying an unnecessarily large premium can backfire painfully if the results do not pan out or the integration proves less than stellar.

How to Finance the Purchase — The options for financing include cash, equity, and debt. Most companies do not have enough cash on hand to pay for an entire acquisition, so debt and equity are used frequently. Cash and debt are usually considered cheaper than equity, since equity does not have required payments like interest and principal repayment. The economy and market greatly affects the availability of each type of financing. Bankers work intensely on calculations and financing models to find what can offer an attractive return based on synergies and growth. The final financing decisions aim to be sustainable for a company like Disney that is making this acquisition as a calculated strategic move instead of a short-term investment to be sold later.

On the sell-side advisory, the bankers working for Fox had similar concerns. They wanted to value themselves for sale. Without such valuations, how would they know if they were receiving a fair price for what they were giving up?

They also considered the process for the sale and whether it would be viable considering the size of the transaction and the difficulty of ensuring that it would be approved. If a seller is trying to hurry the process, specific potential buyers may be reached out to more enthusiastically in hopes of persuading them directly rather than waiting in a longer auction to see who would be interested from a wider audience.

What this Means for Disney & Media

Despite being approved by the DOJ, some critics have voiced their concerns over the idea of excess corporate power in this deal. Disney is taking over one of the other most significant and far-reaching media companies in the United States and globally, while itself being a corporate giant as well. It may seem reminiscent of Rockefeller adding every refinery he could find to his collection to grow his empire.

When a small handful of companies control most of the resources or means of getting information, such as with the networks Disney is acquiring and their new possession of Fox’s studios, pricing power is placed more heavily with the company instead of the customer.

As a result, mergers and acquisitions like these are subject to close scrutiny by governments, which aims to stop the throttling of the ideal “open market” competition. Disney received approval, but the concerns that this deal will do just that for the media and film industry are still being discussed as it moves toward completion.

Disney does stand to benefit from the addition of Fox’s assets, and should see its position as a market giant solidified as a result. It can be expected, then, that other media companies will have to follow in Disney’s footprint with growth in size or new strategic tactics to remain competitive now that two of their competitors have been morphed into a single and powerful entity.

The bankers who work alongside Disney and Fox are doing analysis, sourcing funds, and making suggestions for transactions and mergers that will make ripples throughout the market. These teams of analysts and senior bankers help Disney tap into the financial markets and guide Fox in setting a price range even when the good for sale is a marvel of modern enterprise.

Though the acquisition is not yet fully finalized, the combination of Disney and 21st Century Fox should presumably be greater than the sum of their parts, and the media industry landscape will undeniably be changed by Disney’s decision.