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Losing bets is inevitable in the casino of capitalism. “The creation always looks good, but the destruction isn’t pretty, but it’s a very necessary thing,” says James Schrager, a strategy expert at the University of Chicago Booth School of Business. What is not required is to do it over and over for the same reason. Where so many bosses go wrong, says Mr. Schrager, one is mistaken about their expertise. AT&T is a technology based company that bought a company based on imagination. “The best leaders become incredible experts in their field,” he says. “You can’t have a comprehensive understanding of 20 different industries.”
The fallacy has its roots in the 1960s conglomerate era when companies like ITT, then AT & T’s international counterpart, and Ling-Temco-Vought believed they could run hundreds of different companies from a single headquarters. It found that the complexity eventually exceeded the portfolio managers’ ability to plan, allocate capital, or understand different customer groups.
In the 1980s, new acquisition airships like Beatrice hovered over the economy until they too became overweight. Tobacco companies wasted money buying lower-margin companies like groceries, breweries, and house building. Do you remember General Electric? It was the exception to the rule of diversification – until it was reversed during the Great Recession and its aftermath with poor allocation bets in everything from finance to gas turbines.
Mr. Stankey and Discovery’s chief executive officer, David Zaslav, who will lead Warner Bros. Discovery, said their respective boards of directors unanimously approved the transaction. Of course they agreed. Although boards of directors have independent directors, very few stand in the way of such “transformational” deals and a well-known selection of investment bankers, advisors and attorneys stand by their side.
In fact, every deal associated with the Warner name seems to be shredding money. Time Inc. paid too much to win Warner Communications in a 1989 battle with Paramount Communications, using the same distribution-plus-content logic that AT&T would later use. The combined Time Warner then merged with AOL in 2000, another transformation transaction that vaporized more than $ 160 billion in value before being rolled back. The revision of Time-Warner then bought cable television companies – content distribution pipes – which were later spun off. Likewise, AT&T paid too much in 2015 ($ 67 billion) for DirecTV to buy more pipes and then again for WarnerMedia ($ 85.4 billion) to raise more content for its pipes. Capital flowed down the pipe at every step.