I had to make a correction this week. It happens to everyone in my business, but boy, I hate when it happens. I am an anxious wreck before any article runs; I check my work at three different points (when it goes to my editor, when it comes back from my editor, and when it comes back from the copy desk for final review.) I can’t sleep when I think I’ve made a mistake.
Luckily, I haven’t had to run many corrections since I started writing a column a decade ago; these things may be correlated.
However, last week I wrote a column on AT&T’s announcement that the company would be spinning off its WarnerMedia unit into a merged firm with Discovery. This was interesting for two reasons: first, Warner has been through a string of disastrous mergers, including the legendary AOL/TimeWarner debacle. And second, because AT&T only bought it three years ago; usually, firms that own Warner wait a lot longer before throwing in the towel.
My column was on whether this new venture might finally be the magic one that has a happy ending. Short answer, I think it’s possible, but you’ll have to read the column to find out why.
Here, I’m going to talk about the figure I had to correct: exactly how much AT&T lost on their ill-fated acquisition. This discussion will be about 800 words.
Nerd Alert: the next paragraphs contain a mild form of financial analysis. Readers should not drive or operate heavy machinery while perusing this material.
Megan, I hear you asking, you are a journalist, not a financial analyst. Who wants to listen you your thoughts on deal valuation?
No idea, my friends! Quite possibly, no one. But in just a second, we’re going to find out. Isn’t that exciting? We’re like Arctic Explorers, except with arithmetic instead of life-and-death acts of derring-do.
Anyway, if you’re not interesting in some modestly technical financial nerdery, just scroll on down until you see big, bold letters advising you that we’re done with the boring financial stuff. The rest of us are going to put on our green eyeshades and our scuba gear and dive in.
Onwards.
In the original version of my column, now updated, I had used the widely-reported figure of $85 billion for AT&T’s purchase of Warner in 2018. From this, I subtracted the $43 billion AT&T was reportedly getting in exchange for selling its Warner stake to the new Discover/Warner venture, which seemed to imply they’d lost about $42 billion.
However, after the column ran, a spokesman for AT&T contacted me, and argued that the $43 billion wasn’t really comparable to the $85 billion; they were snapshots of different things. Some back-and-forth ensued, and eventually, alas, I agreed with him.
I was obviously very upset over having said a Wrong Thing to my readers, even though the mistake had been made in good faith, and I sure wasn’t the only one who made it. But it soon turned out I had another problem: it wasn’t obvious what the correct figure was. AT&T had suggested I use very specific language: “The transaction values the combined entity at about $130 billion including debt, based on WarnerMedia’s estimated enterprise value of more than $90 billion.”
This wasn’t very relevant to my column, and that language would have confused the heck out of ordinary readers who aren’t up on technical jargon like “enterprise value”.
For those who are wondering, enterprise value is a firm’s market capitalization—another technical term which just means “the total value of all its outstanding stock”—plus whatever debt it has on the balance sheet, minus its cash-on-hand.
If you’re not deeply into matters financial, the utility of this particular sequence of addition and subtraction might seem … dubious. Frankly, it took me a while to wrap my head around the thing back when I was in business school. But eventually I realized the beauty of enterprise value: it lets you look at the total value of the business operation, not its financial structure, which is a useful thing to know.
Anyway, now back to our regularly scheduled programming.
Enterprise value is beautiful, conceptually, but like many beautiful things, it doesn’t really suit every analytical occasion. If the $43 billion AT&T got out of the Discovery deal isn’t directly comparable to the $85 billion they reportedly paid in 2018, the $130 billion enterprise value of the combined new entity is even less so, especially considering part of it will be owned by Discovery shareholders.
So I started contemplating other ways of figuring out how much value was created or destroyed.
One way to think about that question is to add up the cash and stock that AT&T exchanged for Time Warner (now Warner Media) in 2018, and the Time Warner debt the company assumed, and then subtract out the cash and debt that the company is walking away with. So I dove into the 2018 annual report, which I must tell you, now reads rather wistfully: “We expect to reach a $2.5 billion merger synergy run rate from WarnerMedia by year-end 2021”.
According to that annual report, total consideration paid for Time Warner was $79 billion “excluding Time Warner’s net debt at acquisition”. Net debt, it turns out, was $22.9 billion. That would seem to put the total price tag, including the extra debt the company assumed, at $102 billion, not the $85 billion that has been widely reported.
Now, if we subtract the $43 billion the company is reportedly walking away with, then from the perspective of the company, we get $59 billion in lost value, not $42 billion.
However, that’s not really fair, because AT&T shareholders are also getting something out of the deal: 71% of the new shares in the combined entity. If we knew how much those shares would be worth, we’d have a good, comparable price for the value of this spinoff/merger. Unfortunately, we can’t even guess what the new firm’s share price will be, since the merger is slated to close in 2022.
But after talking to brilliant Washington Post business columnist Allan Sloan I realized we do have a proxy: shares of Discovery, which will be merging with WarnerMedia.
By the terms of the deal, Discovery Inc. shareholders will receive 29% of the combined company in exchange for their shares. Since Discovery had a market capitalization of about $22 billion as of Wednesday, that would imply that stock in the whole firm will be worth about $76 billion (because 22 is 29% of 76, you see). If that’s correct, then AT&T shareholders will get 71% of $76 billion, which works out to about $54 billion worth of new stock.
So AT&T paid $102 billion, including the debt it assumed, and exited with $43 billion, including the debt it shed, plus $54 billion worth of stock to their shareholders. By my estimates, that still leaves a hole of roughly $5 billion somewhere, which is at least not $42 billion, but is still very large. It’s even larger if you consider the money that AT&T shareholders lost on their existing AT&T stock, which fell when the new deal was announced. Conservatively, the stock lost $2 a share, or $14 billion worth of total value for all the shareholders.
None of which ultimately changes the point I was making: Three years ago, AT&T bought Time Warner in the hopes of building a streaming juggernaut, as their 2018 annual report made clear. The acquisition was a failure, or they wouldn’t be getting rid of it. Which may be the reason that both shares of AT&T and Discovery are down since the merger was announced.
I think that maybe this new merger—unlike the others—makes sense. But it’s equally clear that AT&T had no business buying the company in the first place.
Nerdery Over. It is now safe to resume your reading.
In other news, I wrote up a new paper on the question that has been dogging “Defund the Police” efforts: will defunding the police help Blacks and Latinos, or hurt them?
Well, a team of researchers looked into the matter, and I explored their very interesting findings, and what that suggests for criminal justice policy.
Megan Out Loud
I was on First Look, the Washington Post’s live video show, talking Israel/Palestine and congressional politics. I also appeared on Left, Right and Center talking those issues, as well as science funding, and vaccine hesitancy.
Elsewhere at the Washington Post
Economist and former Treasury Secretary Larry Summers says inflation risk is real:
Inflationary pressures are mounting from the boost in demand created by the $2 trillion-plus in savings that Americans have accumulated during the pandemic; from large-scale Federal Reserve debt purchases, along with Fed forecasts of essentially zero interest rates into 2024; from roughly $3 trillion in fiscal stimulus passed by Congress; and from soaring stock and real estate prices.
This is not just conjecture. The consumer price index rose at a 7.5 percent annual rate in the first quarter, and inflation expectations jumped at the fastest rate since inflation indexed bonds were introduced a generation ago. Already, consumer prices have risen almost as much as the Fed predicted for the whole year.
Salman Rushdie mourns what was irretrievably lost in the Plague Year:
Many people wanted to feel that some good would come out of the horror, that we would as a species somehow learn virtuous lessons and emerge from the cocoon of the lockdown as splendid New Age butterflies and create kinder, gentler, less greedy, more ecologically wise, less racist, less capitalist, more inclusive societies. This seemed to me, still seems to me, like Utopian thinking. The coronavirus did not strike me as the harbinger of socialism. The world’s power structures and their beneficiaries would not easily surrender to a new idealism. I couldn’t help finding strange our need to imagine the good emerging out of the bad. Europe in the time of the Black Death, and later London during the Great Plague, weren’t full of people trying to see the positive side. People were too busy trying not to die.
Byelorussia essentially hijacked a plane to arrest a journalist who had been critical of its dictator. Max Boot provides the context:
We are probably not marching toward World War III — although Chinese and Russian aggression raises that risk. (See Elliott Ackerman and James Stavridis’s “2034: A Novel of the Next War” for a chilling war scenario.) What we are definitely seeing, however, is a rapid erosion of international norms as rogue states find they can do what they want. That is making the world a more chaotic and dangerous place.
Substackery
Ross Douthat notes the problem of making a prequel for an epic fantasy series—specifically, the prequels that are due for Lord of the Rings and Game of Thrones.
It’s true that in these cases, unlike with some cash-ins, you do have existing narrative structures to work with, drawn from Tolkien’s Silmarillion and Martin’s Westeros pseudo-history Fire and Blood. But narrative structures aren’t the same thing as actual storytelling or character development, of the kind that the LOTR and Game of Thrones novels offered to their adapters, so these projects will only succeed if their screenwriters can effectively graft a richer story onto the outline supplied by the “historical” materials. And after watching how David Benioff and D.B. Weiss managed when they only had Martin’s outline to work with rather than a full-fledged novel to adapt … well, let’s just say I wish HBO and Amazon had invested in adapting some successful, completed fantasy sagas instead of just going back to Martin and Tolkien’s worlds.
Astral Codex 10 reviews a terrifying-sounding book on how the things in our lives are increasingly designed to addict us.
People who spend hours and hundreds on machine games are not after big wins, but escape. They go to machines to escape from unpredictable life into the “zone.”
The primary objective that machine gambling addicts have is not to win, but to stay in the zone. The zone is a state that suspends real life, and reduces the world to the screen and the buttons of the machine. Entering the zone is easiest when gamblers can get into a rhythm. Anything that disrupts the rhythm becomes an annoyance. This is true even when the disruption is winning the game. Many gamblers talk about how winning the game brings them out of the zone, and they actually dislike winning for that reason. For some gamblers, the very act of pressing buttons to play the game disrupts the rhythm. These gamblers use autoplay modes on games that offer them, and jerryrig an autoplay mode on machines that don’t by jamming something into buttons to keep them pressed. They don’t want to chase a win or pick their lucky numbers, they want to disappear into the zone.
The economics of pseudonymity are explored by Byrne Hobart, if that is their real name.
What would the world look like if reputations were fungible in this way—if you could back claims with the authority of your previous accomplishments, without actually identifying yourself?
For one thing, we would have known about Covid a lot earlier. One of the barriers to early Covid-panic was the fact that it was low-status to worry about disease, and very low-status to do things like hoarding food, refusing to shake hands, and putting copper tape on doorknobs. Plenty of people were privately worried well before they were publicly worried. Many of these people worked in tech, and had track records that led to substantial net worths (some of my evidence for this is anecdotal, and some of it is from the fact that Zoom's stock started outperforming the broader market in February, as Covid paranoia discreetly ratcheted up. The people who were reacting financially to Covid—using a markets as a decentralized, anonymized prediction market about current events—were disproportionately likely to phrase predictions about the future in terms of asking “which high-growth software company benefits from this trend?”). If more of them had been able to say "I won't tell you who I am, but I'm credible at the job of predicting the consequences of exponential trends, and let me tell you about a really big one," that could have shifted public discourse.
But it will also lead to similarly bold predictions that don't pan out.
And Matt Yglesias explains why the anti-SAT push is misguided.
The whole anti-test push is misguided in some pretty fundamental ways.
And by relying on sloppy, factually inaccurate critiques of widely used tests, it’s ultimately going to end up empowering and reifying some very conservative, deeply inegalitarian views about how society and economics should work. Like anything you could come up with, the SAT is not a perfect test. But it does, in fact, work pretty well at its intended purpose of providing a meritocratic sorting tool for academic skill. If you want to build a better world for the kind of people who do poorly on that kind of test, you need to actually go do the work of building that better world.
Elsewhere on the web
The indispensable Derek Lowe brings some sanity to the discussion of the origins of covid-19.
Ever wondered how many Tyrannosaurus Rexes roamed the earth? Me neither—but it turns out to be a very interesting question.
Dogs eating kibble. Way more awesome than the description sounds.
Extraordinary interview with a Titanic survivor.
Some people have trouble letting their grievances go.
We’re learning more and more about the Vikings, and yet they remain a great mystery:
Blood sacrifices were everywhere, and poor dogs and horses bore the brunt, but humans were sacrificed to accompany aristocrats in death. These were not the high-minded self-sacrifices depicted in so much fiction about the Vikings, but murders of young women, accompanied by gang rapes. The violence of the rituals was obscured by bands beating drums to keep disoriented those who knew just what was happening.
Children of Ash and Elm is five hundred pages and includes an extra hundred pages of sources and notes. Yet, I wish more was said about what remains a puzzle, to me, at least. How exactly did such a people convert to Christianity?
… not to mention the world’s leading advocates of gender equality and welfare states?
Truly the world is surpassing strange and wonderful.
… and that’s all she wrote, folks. See you next week.