It's Showtime: Will the GE-Vivendi deal please the critics? (page 1 of 3)

After a bidding process that provided entertainment for the industry all summer, Vivendi Universal is now in exclusive negotiations to sell its entertainment assets to NBC in a deal that would create a company with annual revenues of more than $13 billion.

Vivendi is dismantling the entertainment empire created by its former chairman Jean-Marie Messier in an acquisition binge that brought the former French water utility to the brink of collapse last year.

The strategy of combining Universal's entertainment content with NBC's distribution network is similar to the rationale behind the 2001 merger of America Online and Time Warner which created the world's largest media conglomerate, says Wharton marketing professor Peter Fader. "Vivendi is a throwback to AOL-Time Warner where you have content and distribution coming together. There are differences between the two, but basically the perception of the AOL merger is that it has been a disaster," says Fader.

"There is still all this thinking about synergies and there is very little evidence anybody has been able to achieve them in this kind of setting. I'm not saying there's bad news here, but the potential good news is not as dramatic as pundits" are suggesting.

Despite the experience at AOL, Fader adds, the Universal-NBC combination may have a better chance of success. "For one thing it's a different era. Back then [the thinking was] up, up up. [The AOL merger] was trying to create [something] new rather than squeeze more blood out of stones like today's economy. Expectations are more realistic."

Another key difference, according to Fader, is the management strength of General Electric and NBC. "This is a much more cautious, conservative company than AOL. They know what they're doing. This is a more calculated move using proper business metrics."

Nor is General Electric expecting the assets to spin exponential value from imagined strategic synergies, Fader says. "NBC and GE are not counting on some secret homerun. They are content to get whatever they can out of the existing assets as opposed to counting on new magic they can create."

Taking On 'The Hulk'
Under the preliminary agreement, Vivendi would get $3.8 billion in cash and continue to own a 20% stake in NBC Universal. GE would also assume $1.6 billion in Vivendi debt. Analysts have put the value of the deal at more than $13 billion.

NBC, in addition to its broadcast network, owns local stations and cable channels CNBC, MSNBC and Telemundo. It would acquire Universal's theme parks and Hollywood studios, which along with Seabiscuit released The Hulk, Bruce Almighty and American Wedding this summer. Universal is the nation's third-largest studio with a 12.4% market share behind Sony (14%) and Disney's Buena Vista (20%).

In annual revenue the combination would rank behind AOL-Time Warner with $40.9 billion, Disney with $25.3 billion, Viacom with $24.6 billion, Bertelsmann with $19.2 billion and News Corporation with $17.5 billion.

John Kimberly, a management professor at both Wharton and INSEAD, is skeptical about the merits of the deal for both GE and Vivendi.

First, he is concerned that GE's management style will clash with the Hollywood creative culture. "This represents somewhat of a departure from the kind of [business] GE is used to managing - and managing extremely effectively. They have stayed away from that side of the business world. They know how to manage things with a certain degree of predictability as well or better than anybody.