Here's the Live Nation-Ticketmaster merger in a nutshell: a company with nearly a 40% gross margin percentage and a slight but positive net profit (Ticketmaster) is going to build a live events powerhouse with a company with a 20% gross margin percentage and recurring annual losses (Live Nation).

The pair generated about $4.4 billion in revenues through the first three quarters of 2009 but their combined net loss was $33 million.

A merger makes sense if there are cost savings, or if the merged company can generate more revenue than the two companies could do on their own. These are called synergies, as in 2 + 2 = 5. Monday's news that the U.S. Department of Justice approved the companies' merger has the business world wondering what Live Nation plus Ticketmaster equals.

Supporters and critics of the deal both have supporting evidence for their opinions. On one hand, Live Nation Entertainment, as the merged company will be called, is a reaction to a shift in the entertainment industry. Products and services centered on live events are grabbing revenue from the content industry. Combining artists, promotion and ticketing is a bold move to create a barrier against the competition and unlock greater value in products and services.

On the other hand, operational hurdles exist and it is difficult to estimate the potential of the combined company. And synergies.... well, they're difficult to pin down. On the tenth anniversary of the ill-fated decision to merge AOL and Time Warner, we are too easily reminded that synergies are easier said than done.

Merger statistics alone give ample reason for doubt: 65-70% of deals fail to enhance shareholder value (McKinsey 2000, 2001); 39% of firms reached their cost-cutting goals (PriceWaterhouseCoopers, 2000); and 42% of CEOs of disappointing mergers are gone within two years (Booz Allen Hamilton, 2001).

Whether or not the deal should have taken place depends on the answers to questions like these:

Will The Synergies Materialize?
Estimating revenue synergies, the basis for this merger, requires a lot of guesswork, optimism and best-case scenarios. Just what new products and services LNE will create remain unknown, but opportunities do exist. LNE will be in a better position to take full advantage of its multi-rights contracts. It will be better equipped to implement dynamic pricing for ticket sales. And there is definitely value on the content side of LNE's artist management division that could potentially be exploited across various LNE products and services. Still, many of the presumed financial synergies will come from one act at a time, one promotion at a time, from the efforts of separate divisions within the same company.

Cost synergies, easier to estimate than revenue synergies, are barely spoken of in talk about this merger. Put simply, there won't be many cost synergies. Many signs point to a merged company that will continue to operate distinct divisions, meaning there will be little cost savings from the elimination of redundant expenses. Outside of ticketing and some e-commerce functions, the two companies operate very different businesses. Still, the company will have the chance to merge offices and reduce headcount.

Ticketing is the most obvious source of cost synergies. Through Q3 2009, Live Nation had $51 million in direct operating costs and SG&A (selling, general and administrative) expenses in its ticketing division. And a merged LNE could benefit from more favorable financing costs. Live Nation, the more heavily leveraged of the two companies, uses a greater percentage of its free cash flow to service its debt than Ticketmaster.

How Will LNE's Products Be Intertwined?
One key issue is how LNE will use its ticketing data. According to the Department of Justice's press release, the settlement creates firewalls that prevent LNE from using data gained in its ticketing business in the day-to-day operations of its promotion and artist management businesses.

If one side of LNE cannot access ticketing data, a key force behind revenue synergies has been taken away. Ticketing is an extremely data-driven business. If sharing was allowed, better analysis of that data would lead to new marketing opportunities. Ironically, the data restriction does not appear to apply to AEG in its use of LNE's ticketing platform. And Comcast-Spectator, which plans to buy Paciolan from Ticketmaster, will similarly benefit from having access to its own ticketing data.

How Will Post-Merger Integration Proceed?
Post-merger efforts are the invisible ingredient to a successfully merged company. But integrating two companies is a difficult task. Merger of equals, which is the case here, tend to have unique post-merger problems: there may not one clear leader to steer the company, and the two companies may not merge culturally or structurally. Nearly 80% of executives say they regretted not moving faster in integration (PriceWaterhouseCoopers, 2000).

Value Creator or Value Destroyer?
Given the nature of the merger and the limitations placed on the merged company, one question lingers: What products and services will Live Nation Entertainment offer that could not have been achieved through strategic partnerships? Live Nation's No Service Fee Wednesdays promotion in the summer of 2009, a big step away from the status quo, is an indication that LNE has the potential to reinvent both the consumer concert-going experience and the very power structure of the music industry.

Questions? Comments? Let us know: @billboardbiz

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