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The Real Culprits of the WarnerMedia Mess

Randall Stephenson in 2019
Photo by Win McNamee/Getty Images
William D. Cohan
June 9, 2021

The key to understanding the genesis of AT&T’s humiliating spin-off of WarnerMedia actually comes down to understanding the motives of the people who made it happen: the bankers.

M&A bankers, after all, get paid for their deal-making advice—fees that can run into the tens of millions of dollars—regardless of how the deals turn out. Good, bad, indifferent, most bankers care a little, but not a lot. We don’t know yet what AT&T agreed to pay Goldman Sachs and the prestigious advisory boutique, Lion Tree, for their advice on unwinding WarnerMedia, which they acquired in 2018 for $85 billion plus debt, into the $43 billion sale to Discovery plus 71 percent of the equity in the newly formed company, Warner Bros. Discovery. But as a proxy, we can look at what TimeWarner paid its three bankers for the sale of the company to AT&T three years ago: Allen & Co got paid $50 million, as did Citigroup. Morgan Stanley got paid $40 million. That’s $140 million alone, just for their sagacious advice and valuation work.

It’s no surprise then that the investment bankers involved in AT&T C.E.O. John Stankey’s Great Unwind appear to view the deal as evidence not of tail-between-the-legs ineptitude but rather his courage and genius. According to my well-informed sources with knowledge of the deal, the investment banking logic for AT&T’s capitulation on WarnerMedia goes something like this: AT&T is really just a holding company for a bunch of OpCos, and Stankey’s job is to “allocate capital”, “unlock value,” find the “right home for assets,” and create the right “financial flexibility” for a fast-shifting media and entertainment landscape that was rapidly going direct to the consumer, instead of from business to business. Investment bankers prefer to talk about industry “transformations” rather than “transactions.” The Great Unwind, so the M&A logic goes, is an example of Stankey being flexible enough to initiate an industry “transformation” by recognizing that the WarnerMedia assets would perform better in the hands of a new leader, instead of those of Stankey, who ran WarnerMedia before becoming C.E.O. of AT&T in July 2020, or Jason Kilar, who succeeded Stankey at WarnerMedia and got the cold shiv in this merger.

The Wall Street banker view of the world also highlights the deal’s masterful financial engineering. Nowadays, AT&T’s world-beating debt is down to around $145 billion, from about $180 billion at the time that the TimeWarner deal closed in 2018; its credit rating remains a manageable BBB, according to S&P. This new deal is structured as a “Reverse Morris Trust,” which allows it to be tax-free to AT&T shareholders, despite the sale—a veritable fantasy for investment bankers, for whom matters of tax avoidance border on legit erotica. The Financial Times estimated the combined WarnerDiscovery could be worth around $150 billion, giving AT&T a stake in the company, which will be run by Discovery C.E.O. David Zaslav, one of the smarter executives in the industry, worth $106 billion. So AT&T sheds the responsibility of running WarnerMedia, along with billions of debt, and retains the possibility of recouping its initial investment if Zaslav continues to work his magic. That’s the kind of deal Wall Street loves.

Investment bankers believe Stankey should be rewarded for having the guts and the bravery to undertake the Big Pivot away from AT&T’s media assets. Thus, the banking logic continues, Stankey deserves to take his place among the greatest pivoters of all time—men like Reed Hastings, who had the vision to turn Netflix into a streaming company after it started as a mail-order version of Blockbuster. Another legendary pivot occurred when Naspers, a South African newspaper and broadcast company, decided to invest $32 million for a 31 percent stake in Tencent, a Chinese media and technology company with a current market value of around $750 billion, making Naspers’ stake worth around $250 billion.

Would you prefer, this line of thinking continues, that Stankey & Co. put its collective head in the sand and continue to run its media assets poorly? Far better to have other managers run those companies and use the cash proceeds from the sales to pay down debt and focus on the one thing you do well, or well enough: providing wireless telephone service to hundreds of millions of people. Stankey should be applauded, the logic concludes, for recognizing the need for the Big Pivot and executing on it. Scott Galloway summarized this idea on a recent episode of Pivot: “a mistake is bad, not acknowledging the mistake is worse.” He added that “A step back when you’re on the wrong path is a step in the right direction. And to Stankey’s credit he said, ‘This isn’t working. And how do we have some sort of peace with honor here and make this mistake—or the exit wounds—the least damaging as possible?’”

Is this all bullshit? In part, yes, and Galloway acknowledged that himself, too, later in the podcast—comparing Stankey to Adam Neumann, among others in the hall of fame of value destruction. During that Pivot episode, Galloway figured that during Randall Stephenson’s 13-year tenure atop AT&T, ending in 2020, he hoovered up for himself “at least $250 million,” including a $64 million pension as a “parting gift.” Stankey, meanwhile, has been paid compensation totaling $60 million in the last three years alone, according to AT&T’s 2020 proxy statement.

Maybe it will all work out and AT&T will somehow recoup the $175 billion it spent on DirecTV and TimeWarner. (TPG, which is acquiring a third of DirecTV, is an investor in the company behind this email.) At least Stankey reversed course, while effectively throwing his predecessor under the bus.

But if it doesn’t, and soon, shouldn’t Stephenson and Stankey regurgitate a portion of the hundreds of millions of dollars in collective compensation they took out of the company they have run so poorly? AT&T’s stock was trading around $35 a share on the announcement of the DirecTV acquisition. Seven or so years later, it’s around $27 a share, a decline of 16.4 percent, during a time period when the Dow Jones Industrial Average has increased some 108 percent. It is a mystery how the board of directors at AT&T, which includes buyout mogul Glenn Hutchins and Samuel De Piazza Jr., the retired C.E.O. of PricewaterhouseCoopers, justifies paying these two men so much money for such mediocre financial performance. Shouldn’t there be some accountability for poor management decisions over a long period of time? (AT&T did not respond to a request for comment on the compensation paid to its two top executives.)

Of course that’s not going to happen. Corporate chieftains have long figured out how to get themselves paid, often despite the stewardship of their companies. There are very few Elon Musks, who somehow got Tesla’s stock price to increase 209 percent in the past year, while raking in billions in new Tesla stock grants. More often, the way it goes is the story at GE, where Larry Culp, the C.E.O. since October 2018, just collected two stock awards totaling $120 million while the stock has barely budged; it’s up 12 percent during his tenure, while the Dow Jones Industrial Average has increased 31 percent. Stephenson’s own compensation rose nearly every year he led AT&T, despite a decade of ill-conceived deals and sideways stock action.

But it’s not investment bankers who feel the sting when a telecom acquires $175 billion in media assets only to unwind them at a massive discount a half decade later. They are, after all, paid to execute and ratify the industrial and strategic logic of the executives who hire them, often with the implicit expectation that their counterparts in the boardroom will provide repeat business. Goldman dropped two places in the metaphorical league tables, missing out on bragging rights (and tens of millions in merger fees) when it was shut out of the AT&T-Time Warner combination in 2018. The bank—whose CEO, David Solomon, has promised to boost revenue by closing more deals—would have presumably been unhappy had the mighty Goldman missed out on the Great Unwind.

And there will be more business to come, as the latest fusion of streaming entities triggers another round of media industry consolidation. Days after the Warner/Discovery deal, Amazon decided it had to own a movie studio and ponied up $8.45 billion for MGM, giving the hedge fund Anchorage Capital, with a roughly 30 percent stake, a windfall. Both of these deals followed Verizon’s decision to get out of its own failed (albeit much less costly) incursion into the media world when it sold the vestiges of Yahoo! to Apollo Global Management, the buyout firm co-founded by Leon Black.

Already, the bankers and investors are wondering what the next moves on the three-dimensional chess board will be, with much of the focus landing quickly on ViacomCBS, the subscale entertainment company under the thumb of Shari Redstone. Few think ViacomCBS can make a go of it alone anymore in the land of the giants: Disney, Netflix, Comcast, and the newly christened Warner Bros. Discovery. (One thing is for sure, there is no way Comcast will be buying ViacomCBS, as some have suggested.) Maybe Amazon buys that too, or Apple or Alphabet. The good news is that Redstone has made her ViacomCBS snack easier to swallow after re-combining the two companies in 2019, although that merger comes at a price: the market value of ViacomCBS, at $27 billion, is $3 billion less than the combined market value of the separate CBS and Viacom in August 2019, as word leaked definitively of the combination.

As always, for the investment bankers, none of this particularly matters. Put it together, take it apart, move it around, do it all over again. The rinse and repeat cycle never stops, at least not while there remains the opportunity to get some big fees.