Viacom's decision to sell video game maker Harmonix last week may have seemed out of the ordinary, but the odds of success are often stacked against many such acquisitions.
Last week, Viacom sold Harmonix to investment firm Columbus Nova for an undisclosed amount. The sale represents a failure to meet high expectations of a match that appeared to work well on paper. It also falls in line with research that explains why many acquisitions fail to be profitable.
On paper, Viacom's acquisition of Harmonix might have made sense because of revenue synergies, or the additional revenue that results when combined businesses take advantage of opportunities standalone companies do not have. Viacom's MTV Networks is deeply embedded in music and has cable and online platforms and relationships throughout the music industry. It planned to leverage its customer base and use its marketing might to promote Harmonix gaming properties.
In short, Viacom saw great opportunity it believed Harmonix could not capture on its own. "The acquisition of Harmonix will deepen MTV's connection to its audience via on-line, mobile and console music gaming, and expand the relationship with both labels and artists through the creation of games based on classic songs as well as future album releases," Christina Norman, president of MTV, said in a press release when Viacom acquired Harmonix in September 2006.
But revenue synergies are tough to achieve -- even for a company with an eagerly awaited Beatles version of Rock Band and an entertainment network to promote it. A 2002 study by consulting firm McKinsey revealed that 70% of mergers failed to reach their predicted revenue synergies. They are more difficult to attain than cost synergies. When one company buys another company, or when two companies merge, the combined company tends to eliminate redundant positions. The new company, for example, will not need two accounting departments. Removing these positions represents a cost savings the combined entity will carry into the future.
Cost synergies are the basis for much of the consolidation in the record and music publishing businesses. Combining record companies or combining music publishers is much easier than combining either with a different type of company in the supply chain.
Revenue synergies are alluring but slippery and often misunderstood. There is frequent talk about Google or Apple acquiring a record label or movie studio. Similarly, a pundit will occasionally suggest that an Internet service provider acquire a major label in order to create more value for broadband and mobile services. Such an acquisition would be almost entirely based on the necessary existence of revenue synergies. It would make sense if Apple acquired a company in its supply chain. Such vertical integrations are common in manufacturing, which is closer to Apple's core competency than music copyrights. But adding a content company to a technology company would be fraught with problems, from operational to cultural.
As the McKinsey study suggests, revenue synergies are more likely to be missed than captured. That lone fact says a lot about which music companies should and should not merge.