Here's Why That Fox/Time Warner Deal (Still) Doesn't Make Sense

I spent a couple of years covering Wall Street for a Silicon Valley start-up, and one of the things that I learned is the difference between deals that make logical sense and those that will work financially. Just because a merger or acquisition sounds like a good idea doesn't make it a good financial deal. And at the end of the day,  making the bottom line stronger is the driving force behind nearly all big media deals.

Rupert Murdoch is one of the last big imperial media moguls and when he publicly discussed his desire to have Fox acquire rival Time Warner, the conventional wisdom was that the acquisition was a "done deal." Nearly every story about the deal included reminders that Murdoch nearly always gets what he wants, as if his massive ego was the ultimate deciding factor in Fox's acquisition plans.

Even when Murdoch very publicly walked away from the deal on Tuesday, many media reporters and stock analysts simply refused to believe he was serious. As Brian Stelter reports in this CNN Money piece, many observers suspect that this latest public proclamation is just some sort of effort to put pressure on Time Warner management to eventually make a deal.

Murdoch's deal-making takes time, Murdoch biographer Michael Wolff observed in an interview on Bloomberg Television. There, he reaffirmed his view that Fox's takeover of Time Warner is "inevitable."

"Rupert has put Time Warner in play; Time Warner will remain in play; Rupert wants Time Warner; Rupert is trying to figure out how to get it," Wolff said.

All of this talk of an eventual takeover ignores a vital piece of the puzzle. Aside from the relentless driving force of Murdoch's ego, what is the advantage of combining two large media companies? The fact that Murdoch hasn't been able to articulate a financially viable reason for the takeover was the reason for that price drop of 21st Century Fox shares following the announcement of Murdoch's plan. It's also why the stock rose after Murdoch announced plans to drop any Time Warner takeover. Murdoch might be a mogul, but even the Murdoch family eventually has to answer to shareholders. And while he could push through a deal despite anyone's objections, in the face of falling stock prices, the cost would be too dear for even Murdoch's ego to stomach.

The problem for Murdoch and fans of this deal is that aside from the money that will be made by Time Warner executives and companies who will execute any takeover, combining the two companies doesn't offer any immediate or even mid-term financial upside. And without that, how do you get Fox shareholders to buy into the deal?

Much is made of the concentration of sports programming assets following a Fox/Time Warner deal. But so what? It's clear to anyone in the sports content negotiating trenches that size isn't enough to reign in the rapidly increasing costs of sports programming. And since both companies have essentially built out their sports channels already, then what's the advantage in combining the companies?

It's the same problem when you look at the content side. Sure, having control of so many valuable content assets is great. But what's the financial upside for Fox? Both Fox and Time Warner have made it clear that while they'd like to have a piece of the streaming media business, they can't afford to pass up the money from Netflix, Amazon and Hulu. So if you're not launching a direct competitor to Netflix, then what's the point of having more assets?

And while it's pretty clear that Time Warner is hoping to build HBO GO into some sort of over-the-top service, that value proposition isn't lucrative enough to make an expensive takeover of Time Warner financially viable.

Then there is the question of scale and large media companies. Media reporters like to argue that "size is everything" and that the only way to survive is to get as big as possible. But there is a point where size becomes a hazard and your business includes too many competing components, each with its own priorities and needs (see: Comcast). We're in the middle of an massive change in media viewing and distribution habits and it's not a coincidence that the companies growing the fastest are those that are nimble enough to change their business model in mid-stream.

I'm not arguing that Time Warner will stay independent forever or that Rupert Murdoch won't eventually figure out a way to make a takeover make financial sense to shareholders. But he hasn't publicly articulated that winning argument yet and until he does, any takeover plans will continue to live in the land of "this sounds like a good idea."