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Louis Rhéaume
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Mr. Rhéaume has the scolarity of a doctorate in business administration, concentration in strategic management, innovation management and corporate finance. He holds a Master’s degree in finance. He has numerous years of experience in consulting, strategy, financial analysis and business... More
My company:
Infocom intelligence
My blog:
Infocom Analysis
My book:
New reports available online from Infocom Intelligence: 1- Canadian wireless 2- Angel investing
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  • AOL versus Time Warner, what is left?

    I began to study "mergers and acquisitions of convergence" in the information and communications industries, 6 months before it became a hot topic in the media, with the merger of AOL with Time Warner (deal announced January 10, 2000). After this transaction the term "mergers and acquisitions of convergence" became widely popular and several M&A followed in few years, making combinations of content with pipes: i.e. Vivendi and Universal, Quebecor and Videotron, BCE and CTV and Globe & Mail, etc.

    According to Wikipedia: Time Warner (formerly AOL Time Warner) is the world's second largest entertainment conglomerate in terms of revenue (behind Disney and ahead of News Corporationand Viacom), as well as the world's largest media conglomerate. Formerly two separate companies, Warner Communications, Inc. and Time Inc., (along with the assets of a third company, Turner Broadcasting System, Inc.) form the current Time Warner, with major operations in filmtelevision and publishing. Among its subsidiaries are New Line CinemaTime Inc.HBOTurner Broadcasting SystemThe CW Television NetworkTheWB.comWarner Bros.Kids' WBCartoon NetworkBoomerangAdult SwimCNNDC Comics and Castle Rock Entertainment.


    What was the value creation of AOL and Time Warner? In December 2009, Time Warner made a spin-off of AOL and they became two distinct firms.  You can see in the second chart that AOL-TimeWarner destroyed a lot of value for its shareholders, and after the spin-off, Time Warner started a recovery. The share of AOL is almost at the same level of the day of the spin-off, one year ago.  


    The recent quarterly results of Time Warner showed that the firm raised its 2010 profits growth target from 20% to high 20s.  It appears that they had solid advertising and subscription growth.  New technologies appliances such as smartphones and iPad has helped to increase the demand of its content.  The new Harry Potter movie started November 19.  In publishing, the firm faced lower subscription levels but made big cost reductions.


    The recent quarterly results of AOL showed that the company is deeply restructuring and in massive divesting of unsuccessful assets such as: ICQ messaging, travel website Kayak and social network Bebo. They newly redesigned web sites such as the portal aol.com, MapQuest and AOL Travel.   While, their advertising revenues has dramatically dropped from 27%, eMarketer estimates that overall advertising spending grew around 12% compared to Q3-2009.  The firm hopes that its new advertising system will create important shareholders' value.    One growth avenue resides also on selected M&A.  They bought recently the tech blog TechCrunch for $25M and 5min Media, which is a syndication platform for lifestyle, knowledge and instructional videos for $65M.


    Sources: Yahoo news, Bloomberg, Wikipedia.


    For more information on M&A of convergence see 
    http://infocomanalysis.blogspot.com/2008/06/article-convergence-mergers-and.html


    Louis Rhéaume
    Infocom Intelligence
    louis@infocomintelligence.com 

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: AOL, TWX
    Dec 05 11:34 PM | Link | Comment!
  • BCE strategy revisited (BCE)

    The good strategic realisations

     

    Bell Expressvu DTH service has been a great success for BCE.  It is a key element in the bundling of the « triple play » which is the combination of voice, data and video through a sole provider (cable or telco).  The triple-play is becoming increasingly important:

     

    « Coincident with the ability of the copper and coax networks to carry non-traditional services, customer needs are also evolving around three key services: voice (wireline and wireless), video and data. While some customers will prefer to select service providers on an individual basis based on a “best-of-breed” approach, many individuals have a clear preference for simplicity and low price. Perhaps ironically, the most important service is increasingly becoming the broadband connection. Operators with the ability to provide this triple-play offering (increasingly as part of a bundled offering) should have a decided advantage over those without. The benefits for the operator are:

    (1) Enhanced revenue and cash flow generation per customer; and,

    (2) Reduced customer churn and improved loyalty levels.

    As a result, overall growth and visibility should improve. Those operators without the ability to offer a triple play, should consider partnerships and/or alliances (Richard Talbot, RBC).»

     

    The wireless division was the first in the industry to become free cash flow positive around 2002. Another important strategic realisation was the building and development of Sympatico, the Internet arm of BCE.  The company was slow to enter the dial-up Internet provider access. Several little dial-up providers have flourished over the years, before Bell entered the market in November 1995.  However, during this period, Bell made a lot of money from the new dial-up services of the small providers.  Residential and business customers who used often the Internet needed a second telephone line, which increased the profits of Bell.  It is one of the main reasons why Bell and the majority of telcos, were late in the race for high-speed Internet over cable providers such as Videotron. It acquired TotalNet a growing Internet access provider, with its investment in Mpact Immedia (merged with BCE Emergis) in 1998.

     

    Previous CEOs of BCE have started to reduce the overlapping in the activities between BCE and Bell Canada.  Jean Monty made some improvements in this area of cost-cutting and after, Michael Sabia reduced management staff between Bell Ontario and Bell Quebec. A clever strategic move during the reign of Monty has been the excellent timing for the spin-off to the BCE shareholders of the shares of the holding in Nortel.  The spin-off was done around the peak of Nortel in 2000 before it crashed by over 95%.  For Richard Talbot of RBC, it was a tough decision to do at this time but it was the right thing to do.  Among the others good realisations there are the investments in Bell Nexxia to compete the ex-Stentor member alliances, which help Bell to retain customers according to Talbot and the investments in Manitoba Telecom and Aliant (the consolidation of the Atlantic regional operators). 

     

    The strategic errors

     

    The wedding between the local services and the long-distance services appeared to be just an extension of the core activities of Bell.  Thus, a participation in Teleglobe with finally its acquisition in 2000, was not very surprising.  However, Teleglobe’s acquisition was the idea of Monty. Monty wanted to transform BCE from a Canadian telephony player into a global “Internet firm” through connectivity, commerce and content and by integrating information, communication and entertainment services.  With his background of investment banker, he maintained good relationships with this sector, in order to get advices for potential business target prospects.  Teleglobe was the nemesis of Jean Monty.  The acquisition turned in a disaster, Bell managers were « pitchfork » to Teleglobe, and tried some risky data projects which didn’t get tangible customers.  The Excel division was in a real mess and was divested at a fraction of its acquisition price paid by Sirois. BCE poured billions of dollars inside Teleglobe mainly for its data strategy, until it pulled the switch with Monty’s resignation. It appeared that the value of Excel divestment would even be higher than the value that BCE would get for its divestment of Teleglobe, to Cerberus Capital Partners in 2002.   A negative consequence of the problems of BCE with Teleglobe, have been the divesting of a very profitable cash flow generating subsidiary: the directory division Bell Actimedia (Yellow-Pages).

     

    At its inception, Bell Canada International was the vehicle of BCE to export its specialised telecommunications know-how internationally, like in Saudi Arabia.  In the beginning of the 1990’s, there was an emerging globalisation movement where several players like the Baby Bells in the USA invest massively in privatisation bids in order to get international foothold, and diversifying the risk of intense competition in their local and long-distance domestic markets[3].   There was investment frenzy similar to the recent bubble associated with the prospects of 3G cellular licenses internationally.  Over-bidding was often seen, since the firms who didn’t win a series of bid had strong pressures to finally win a bid.  According to Richard Talbot, BCI created a lot value, but the exit strategy of these international investments was poorly managed, and that value was never crystallized, unlike the spin-off of Nortel shares.  It hurted badly the reputation of BCE on financial markets since many lawsuits were launched in the closing and divesting of BCI.

     

    THE MIXED SUCCESSES

    In order to better position itself in the content and distribution sector, Monty acquired the broadcaster CTV for $2.3 billion, ten days after the acquisition of Teleglobe in February 2000.  Another important investment, was made with Thomson in the Globe and Mail, which strengthened the new division Bell Globemedia.  Sympatico was also added but later separated from this division, raising the expectations over a sale of some of its assets.  Owning the content of the Globe and Mail permits for example for BCE to make special distribution agreements with its other subsidiaries such as Bell Mobility on its wireless devices.  However, critics argue that BCE could pay monthly subscription fees to access this content instead of owning theses highly paid assets.  These two major investments were made during the stock market bubble.

     

    The repurchase of the 20% investment of SBC in BCE in 2002 appears like a failed attempt for synergies with the American operator, but the timing (sold during the correction phase of 2002) seems good since the stock of BCE is still facing turbulence and is expected to rebound moderately in the future, meaning that the repurchase could have been even more expensive. The cash infusion for BCE helps the firm to complete the repurchase of the public shares in BCE Mobile.  Bell ended its relationship with Lycos, which obtained mixed results. The company switched to select a new partner, the colossal Microsoft MSN.ca, for the development of a joint Canadian Internet portal in 2003.  

     

    According to Richard Talbot of RBC, a questionable tendency at BCE have been deals where they have ceded major control of power, by giving put options to partners.  Thus, a deal such as CGI where the power was heavily concentrated in the hands of the three founders while they possess few shares of the company is an example.  The put option of SBC in its 20% investment of BCE was very expensive to repurchase, and so was the investment in Bell West with Manitoba Telecom.

     

    IMPORTANT VALUE CREATION AND CORRECTIONS

    Two investments made over the reign of Jean Monty created a lot of value, but was also seriously affected by the crash of the dot.com bubble: CGI and BCE Emergis.  However, CGI was first the idea of Louis Tanguay the CEO of Bell Canada, who got a call from Serge Godin of CGI.  The 26% participation of BCE in CGI for $18.4 million in 1995 would become a very profitable investment since CGI revenues were only $100 million (revenues will be around CAN$4 billion in 2005). Bell Sygma was merged after with CGI and the participation increased to 44% (under press at March 2004, the participation is now 29.5% due to the shares issuance of the acquisitions); with the goal that customers need more integrated package of computing and telecommunications solutions.

     

    BCE decided to not use its option to become the majority shareholders and buy more shares of CGI.  The company brought around $200 millions directly in contracts to BCE.  A strategic option could be similar to the former relationship with Teleglobe: BCE could sell its position in the long term while maintaining a « preferred supplier » relationship with CGI for its telecommunications needs.  The synergies between computing and telecommunications services didn’t appear much attractive for BCE: Sabia later sold BCE’s investment in CGI.

     

    BCE invested $100 million to acquire Mpact Immedia in two rounds of financing, and merged its activities with Bell Emergis.  The combined company had revenues of $75 millions in 1998 and $316 million in 2003 ($346 millions in 2002).  CGI has now a market capitalisation of $3.1 billion and BCE Emergis $593 millions, at March 27, 2004.  However, these investments have consumed a lot of management time at BCE recently. Sabia divested Emergis and Monty later became involved on the board of directors.

     

     

    The reactions over BCE convergence strategy

     

    The financial market was first receptive with the diversification moves of Jean Monty, which goes in line with some academic research. However, the perception of the stock market and the business press changed dramatically with news such as the big write-offs of AOL Time Warner and Vivendi Universal.  The Canadian press was quick to critic the convergence acquisitions of Monty for the reason behind the turbulence of the stock.  Monty mentioned himself that he had mainly a problem of credibility with his decisions to buy and further invest massively in Teleglobe, which pushed him to resign.  The convergence strategy of combining several forms of information inside an information sector such as content and highways appears recently promising for a company such as Quebecor.  Innovation capacities, cross-selling and cross-promotion takes some time to implement and project such as Star Académie seems to demonstrate that convergence at this scale can create value.  According to Kona Shio, financial analyst, the business community didn’t not let Monty the time to execute properly his strategy (he himself mentioned the need to wait for two years), they wanted results in the short term, while the economic context was tough.    For Dr. Yvan Allaire, Emeritus professor of strategic management at University of Quebec at Montreal (UQAM):

     

    « The decision of Jean Monty to resign is the proof that executions of convergence strategies are difficult. At the beginning of turbulence, there is very tough to predict the behaviour of consumers and which new services will be driven by demand in a new context. In infocom sector, convergence is still a bet on the benefits of an real integrated economic value for consumers.  Some managers suffer from presbyopia in the impact of ongoing change, more than it is actually.  In new markets, consequences of those new technologies are real but could happen later.  Convergence will bring new combinations, but the point is to bet when this will really happen.  Stock markets want short term results and don’t necessarily want to wait.      

    Men of actions want to transform their firm to catch new opportunities.  It is a paradox that organizations are rarely sanctioned for omission faults than action faults, which can be hardly sanctioned. »

     

    One error of the convergence vision could have been to focus too much on acquisitions to put in place the convergence in the info-communications sector.  BCE could have tried more alliances and partnerships at lower costs than acquisitions, while leveraging and not stretching too far the centre of gravity of its core competencies.  The international activities of BCE have been a disaster since BCI is liquidated all its assets and Teleglobe felt in bankruptcy.  However, a promising development of the convergence strategy could be the triple play, the ability of BCE to offer 3 or 4 types of services to its existing customers, while reducing its churn.  That opportunity could create a lot of value for its shareholders.  Sabia even discarded the over-used term “convergence” from his communications with financial analysts. 

     

    At June 1998, the international activities of BCE: Nortel, Bell Canada International and Teleglobe consisted of half of its market value.  In 2004, Nortel was no more related to BCE, BCI is divesting all its assets (some with profits) and Teleglobe assets were sold at a small fraction of its purchase after falling in bankruptcy.

     

    Under Michael Sabia, BCE has retired from some activities and started new products linked to the Internet[i].  The company faces some challenges particularly in its business division while the residential performs well.  BCE later announced an aggressive decision to use around 90% of its traffic with VoIP, up to 2006.  The aim was to save in the operating costs and to offer new high value services.  Furthermore, the Internet platform would be dereglemented which would let more flexibility in the strategy of BCE.  The company intend to build a quick lead in order not be bypassed by competitor such as Primus or Vonage Phone in the retail, or Allstream in the business sector. 

     

    According to Sabia : « BCE is living in a time where innovation, simplicity and speed are now very critical… we are dealing with an identity crisis, the market doesn’t understand us anymore. Who are we? In the past the company focused too much on technology and products and not enough on customers… Changing the culture of a company takes many years, but I am not a patient man.»

     

    New trends

     

    Still, today under CEO George Cope,  the shares of BCE remains a solid “market performance” investment with the recurrent cash flow from operations of Bell Canada particularly, and the fact that the dividend yield is among the highest of the Toronto Stock Exchange (5.20%). Stock beta is also 0.99.  However, BCE rely heavily on the project fibre-to-the-home (FTTH) in Québec City, and Bell’s Fibber TV service for interesting growth in revenues and profits in the future.  The stock has increased in the last year mainly due to the rise of its dividend, and cost savings, which is not a long term sustainable value creation avenue. Last month BCE just bought again CTV, after it was divested by Sabia. BCE is paying $1.3 billion plus debt, for full control of the company. BCE currently owns 15 per cent equity in CTV.  It is the first move of BCE toward convergence since the departure of Jean Monty.  

     

    Louis Rhéaume

    Infocom Intelligence

    Louis@infocomintelligence.com



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: BCE
    Dec 05 11:14 PM | Link | Comment!
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