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What's Left To Merge?

How do you spot the end of a trend? It's not easy, except in hindsight. But we can make an educated guess about the big media mergers: They may not be over, but they're entering a slimmed-down phase.

Don't let the two latest mega-deals fool you. One of the bigger media and entertainment deals of late—General Electric's $14 billion acquisition of the entertainment assets of Vivendi-Universal—is being finalized. And it looks like pocket change next to the newest proposal to rock our world: Comcast's bid for Walt Disney Co.

But, like the Concorde, few ever get to fly that high. The fact is, only a handful of such prospects make economic sense. Once GE, owner of NBC, has the content-production power of Universal under its belt, an important industry-wide process of consolidation will be completed. All six broadcast networks will be tied directly to film and TV production studios, thereby completing the vertical integration of their industry.

Most of the broadcast, cable, and movie audience will be owned by five companies: Viacom, Time Warner, Disney (or Comcast), News Corp., and GE. With their working parts in place, these firms will have no compelling short-term business reasons to expand.

This is not to say that M&A activity in the media industry is winding down. It's very much alive. But M&A transactions in the near future will probably operate on a somewhat smaller scale than in years past. And the rationale will be different.

Size and market share still matter, but efficiency and balance-sheet strength may matter more. In the M&A market emerging, there is a premium on deals that reduce debt and produce cash flow. During 2003, Time Warner was busy whittling down debt by selling off assets, creating new acquisition opportunities for others. As a result, it cut its net debt by $6 billion in 2003 to about $20 billion and met its debt-reduction goals almost a year ahead of its planned timetable.

In deciding what to sell, media giants are retreating from businesses that either don't fit their strategy, have a low-growth future, or both. Consider the recent sales of sports teams by media companies. They are backing away from the synergy-chasing and experimentation of the '90s. The search for growth resides in proven, reliable channels. They've also seen the dark side of new technology, which can rob them—as well as make them rich. They've learned to play defense.

The flip side of this posture is that a media company with plenty of buying power, such as Comcast, may have the deal field to itself. And Comcast has a particular reason for wanting Disney (or another entertainment firm not yet snapped up, MGM): As the largest cable service provider, it's a distribution leader looking for content. Once that's secured, it joins the ranks of fully integrated media and entertainment giants. If nothing else, it now has a shot at being the biggest dealmaker of 2004.