The biggest story this week has been the decision by AT&T (T) and Discovery (DISC) to create a new global $150 billion company. The decision caught many – including me – by surprise since AT&T has been building a giant streaming business after the Time Warner acquisition. A lot has been said about this deal. In this article, I will explain one reason why the NewCo makes a good investment.
Time Warner and Discovery merger
There is a lot that we still don’t know about this deal. We don’t even know the name of the upcoming media giant. I am still trying to guess this one. Time Discovery? Warner? DiscoWarner? Columbus?
What we know is that Time Warner has been building HBO Max to become a better alternative to Netflix and Disney+. We also know that Discovery has a similar product known as Discovery+. The NewCo will also have loads of debt.
Further, we are aware that the merger combines two of the leading scripted and non-scripted media businesses that are facing stiff competition from companies like Google, Facebook, and Amazon. In fact, after the deal came out, it was revealed that Amazon was holding talks to acquire MGM for $9 billion.
Also, other media deals have been hinted such as a combination of ViacomCBS and NBCUniversal. On a side note, we know that Jim Cramer is not happy with AT&T’s value destruction.
Why NewCo is a good buy
Again, there is a lot that we don’t know. However, based on historical data, we know that spin-offs tend to outperform their previous parent companies. This is simply because the new company is able to operate independently without worrying about the bigger company.
PayPal and eBay
Let’s look at a few examples. In the chart below, we see that PayPal (PYPL) has done really well as a public company. It now has a market capitalization of more than $290 billion and the stock has surged by more than 549% since its IPO. Today, PayPal is the fifth financial services company in the world after Berkshire Hathaway, JP Morgan, Mastercard, and Bank of America.
In the same period, eBay stock price has jumped by 120% and is valued at more than $42 billion. This is also notable considering that eBay acquired PayPal in 2002 for just $1.5 billion.
United Technologies and Carrier Global
In 2020, United Technologies completed its spin-off of Carrier Global as part of its Raytheon merger deal. The separation created one of the biggest HVAC, refrigeration, and fire and security company in the world. As a separate company, Carrier is able to focus on building these businesses well since there were no major synergies between HVAC and military products. Since the spin-off, Carrier Global stock has jumped by more than 50% while Raytheon stock has jumped by just 50%.
Zoetis (ZTS) and Pfizer
In 2013, Pfizer completed its merger of Zoetis. The logic was simple. Pfizer would continue focusing on human health products while Zoetis would focus on animals. In the past five years, Zoetis stock has jumped by more than 260% while Pfizer has risen by just 20%.
To be clear. At times, NewCos can underperform their parent companies. For example, Match Group has underperformed IAC while ConocoPhillips has outperformed Philip66. Still, there is a possibility that Warner Media and Discovery will be a good investment.