Dear Valued Clients and Friends,
At the beginning of December, the household name Netflix announced its plans to acquire the household name Warner Bros. This came a couple of months after the household name Paramount announced its pursuit of Warner Bros, which came a month after the not-quite-household-name Skydance closed its deal to buy Paramount. Of course, the entity known as Paramount was really the combined household names of Paramount, Viacom, and CBS. It may not quite be the drama of ICE raids or the removal of a South American narco-thug, but as corporate skullduggery (and just general suit-and-tie action) goes, it has been a pretty exciting ride. None of the aforementioned companies are owned by any of The Bahnsen Group portfolio strategies (nor have they ever been), but the relevance of these related stories across corporate M&A, implications for broader antitrust and regulation concerns, lessons in the entire media and content sector, and most interesting for me, the connections to a larger and even more dramatic historical story, all serve to make this a story of serious interest. But as much as I love market history and corporate drama just as a matter of intellectual curiosity and personal history, what always animates me for the pages of Dividend Cafe is some investment lesson. And I want to suggest today that the history of mergers and acquisitions in the media sector is one giant lesson about dividend growth investing.
The history of Paramount is a fascinating story no matter what your interest in investing may be, and no matter what happens with Skydance’s quest (remember, Skydance now owns Paramount) to nudge Warner Bros. away from Netflix, there are decades of action in the Paramount story that speak to one of the most significant lessons I have learned as a dividend growth investor. Whether it be in the 25 years I have practiced dividend growth investing, or in the decades-long study I have devoted myself to, I believe history provides ample reinforcement of some basic realities of capital allocation. If you ever need to be reminded why a company’s approach to capital return for its investors matters, look no further than the media and content sector.
In today’s Dividend Cafe, we look to history as a guide, and some “household” names that have managed to set billions upon billions of dollars on fire despite their stewardship of some of the most iconic brands and media properties in world history. At the end of the day, not only do profits matter, but what a company does with them.
Let’s jump into the Dividend Cafe …
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When Destroying Capital Runs in the Family
It wasn’t one of the most heavily trafficked issues of Dividend Cafe last year, but one of my personal favorites (as the writer) was my reflection on the AOL-Time Warner merger of 25 years prior. I specifically, and quite literally, referred to it as “the worst business deal in history.” The staggering stupidity, arrogance, recklessness, and delusion that went into that deal are no less stunning to read about today than they were in the immediate aftermath a generation ago.
Past is Prologue
Though I am going to be focusing more on the company formerly known as Paramount in today’s Dividend Cafe, the aforementioned AOL-Time Warner is not completely separate from even this contemporary saga. Besides the connection in investment principle (valuation insanity and corporate egos are a very, very bad substitute for prudent capital return to shareholders), there is also a literal connection in the chain of events. Consider the timeline:
- In 1989, Time Inc. merged with Warner Communications, essentially merging the Time and Life magazine properties (which included Sports Illustrated, People, and Fortune, but also the HBO cable channel) with Warner Bros. (film/TV/music)
- In 1996, Time Warner acquired Turner Broadcasting (CNN, TNT, TBS, the MGM film library, etc.)
- In 2000 that Time Warner conglomerate was acquired by AOL, a company generating not even half of the recurring earnings of the acquired company, in a deal that was priced at 100x pro forma earnings if one is being nice to the accounting, and 300x that pro forma earnings if one is doing math the way human beings do it
- In 2009, the deal was fully and completely undone, resulting in two separate companies (much of it had already been undone, sold off, and shed, but I don’t want to get too into the weeds).
- In 2018, AT&T acquired what was still left of Time Warner’s media assets
- In 2022, AT&T spun off Time Warner and merged it with Discovery, creating the company “Warner Bros. Discovery.”
- Under the 2025 deal Netflix has entered into with Warner Bros., the company will “spin off” the legacy properties of CNN, Discovery Channel, TNT, and TBS into a separate company called Discovery Global. That piece of the deal is being priced at something around $0. Zero. Zilch. Now, that is not literally true. But again, in the interest of staying out of the weeds, this spin-off would have negative equity after debt assignment. Regardless of how they exactly slice it up, and where it trades in public markets (if all this ends up happening), this is essentially a “call option” in the deal with little, no, or negative equity value.
By my count, there are seven mergers of massive companies described above, each with iconic value and brand significance, and in the end, a major part of the final result is worth $0. Of course, there are other assets at play here, but even if we look at the complete and total picture, AT&T paid $108 billion for something they sold for $43 billion. That spin-off company lost money every year and is now being bought by Netflix.
The shareholders of the merged Time, Warner, and Turner companies were crushed in the AOL deal. The splinters of what was left became a standalone company (ticker: TWX) that had one season of actual operating performance and financial performance bliss … 2010 through 2018. What did TWX do in this period of just being a normal company, growing, creating, marketing, and operating like a real business? They doubled the quarterly dividend from $0.21/share to $0.40/share in six years (11.3% annualized dividend growth), and lo and behold, the company’s market cap more than doubled in that period (from $35 billion to $77 billion).
Note, by the way, that the $77 billion of nearly a decade ago is more than the value of the company now at Netflix’s current offer.
Steady, organic dividends as management ran a growing business: shareholders make a fortune, receive cash, de-risk their investment, and participate as a minority owner in the profits of some of the best media content assets in the world.
Wild M&A, deals, mergers with hot internet companies: payments to shareholders are eliminated, money is set on fire, the acquiring companies have to cut their own legacy dividends, and the shareholders of the acquired companies lose both cash flow and underlying value.
Sounds great, right? Well, before you think it was all bad, at least think about the investment bankers and lawyers on all these deals. They have families to feed, too. (Total fees across these transactions exceed $1.2 billion, not even counting the current deal with Netflix).
A Paramount Understanding
I recently read The King of Content by Keach Hagey about the life and legacy of Sumner Redstone. Last year, I read Unscripted by James Stewart about the same subject. While some may find the whole saga of Redstone and his family drama to be fascinating because of the, well, tawdry details, the court battles, the dysfunctional relationships, and the utterly bizarre (and often downright disgusting) dynamics that are paramount to the entire story (see what I did there), I have studied this whole case study in business history for one reason, and one reason only: What it teaches us about business and investing.
Paramount is as legendary a studio as Hollywood has ever had or will have. In 1966, it was acquired by Gulf & Western, a multi-sector conglomerate. In 1994, under new management after Gulf & Western’s long-time founder and CEO, Charles Bluhdorn, died, the company was sold to Viacom (which was by then owned and controlled by Sumner Redstone, who used an inherited family interest in drive-in movie theaters to leverage his way to buy Viacom in 1987). Viacom owned and operated MTV, Nickelodeon, and Showtime. The 1994 acquisition of Paramount gave Viacom a premier Hollywood studio, the Simon & Schuster book publishing behemoth, several amusement parks and sports venues, and a 50% ownership stake in the USA Network. Viacom paid a stunning $10 billion for Paramount in 1994 after winning a bidding war with Barry Diller, once and for all allowing us to define “winning” very differently than people who do regular math define it.
In 2000, Redstone’s Viacom/Paramount would buy the major television network of CBS. In 2006, it split CBS and Paramount into two separate companies, and in 2019, it re-merged the two. In 2025, the combined Paramount/CBS company was sold to Skydance for $6.6 billion (while also injecting a fresh $1.5 billion of primary equity capital into the company). Now, the company also has $15 billion in net debt, so the total enterprise value is closer to $23 billion. But I just want to be clear: CBS was bought at a $35 billion valuation 25 years ago, and Paramount was bought at a $10 billion valuation 32 years ago. There is a lot of adjustment to do here to get a perfect apples-to-apples comparison, and some of these deals merging companies with stock swaps make it tricky, but what we can say here is that over $10 billion of value has been set on fire, at the bare minimum, over a period of 25 years. This has not happened with failing companies, but successful, profitable, brand-name enterprises – what I previously referred to as “household names.”
Doing the Math
Last summer, I tasked TBG Equity Analyst Ishan Chhabra with analyzing the lifetime return for a Viacom shareholder since the early 1990s, when these mergers and acquisitions began. The frequent mergers, splits, and combined entities made it necessary to calculate period returns for five different periods and create an apples-to-apples analysis of a combined, total return for a hypothetical investor over the entire period. When all is said and done, Ishan’s brilliant analysis found that investors throughout this whole saga (coinciding, might I add, with the greatest bull market in human history) had a total holding period return of -21.14%.
As Ishan so eloquently put it:
“From 1990 through 2025, Viacom’s corporate strategy of aggressive M&A activity fundamentally failed to generate shareholder value, culminating into a -21.1% total shareholder return based on a hypothetical investment in late 1993. Research reveals a consistent degradation in share price over the 35 years. The steepest drawdown occurred over a period of merging, splitting, then re-merging with CBS Corporation. The 2005 split, motivated by internal corporate conflicts and perceived operational complexity, fragmented synergies and created two weaker entities that struggled independently for over a decade. The eventual 2019 re-merger, rather than resolving these structural issues, occurred at precisely the wrong moment—coinciding with the onset of the brutal streaming wars that demanded massive capital investments with uncertain returns. Then, between 2019-2025, ViacomCBS/Paramount Global’s stock price collapsed by approximately 70%, driven by unsustainable streaming losses, cord-cutting acceleration, and management’s failure to execute a coherent digital transformation strategy. The following analysis, along with an event-driven walkthrough of a hypothetical portfolio establishment, demonstrates how corporate restructuring decisions, when divorced from operational realities and market timing, can systematically destroy decades of shareholder value creation.”
Now, let me make things a lot worse … The $1,000 hypothetical investment turning into $788 over 32 years includes $442 in dividends paid over 32 years. In other words, this failure of a company was much, much, much worse of a failure when divorced from the paltry capital it did actually return to its own risk-taking investors.
But as we shall soon see, their refusal to pay dividends is not just a problem because less cash went to investors in calculating their total return – it is, itself, a major source of the fundamental problem.
Compare and Contrast
We can look at failed media companies like AOL Time Warner and Viacom/Paramount/CBS all we want, but has the entire sector failed? Has anything in media content and distribution failed? Of course not. Indeed, how has a company like, say, Comcast (ticker: CMCSA – TBG does not and has now owned this name) compounded at 13% per year for the same 32 years that Viacom/Paramount blew itself up?
To quote Ishan’s research again (emphasis added is mine):
“Financial discipline represented perhaps the most critical difference between the two companies’ approaches. Comcast maintained consistent dividend policies and share repurchase programs throughout its expansion phase, ensuring that shareholders benefited from cash generation even during major acquisition periods. The company used debt prudently, maintaining investment-grade credit ratings and avoiding the over-leveraging that characterized Viacom’s major deals. This financial conservatism provided operational flexibility that proved essential during industry disruption, enabling Comcast to invest in broadband infrastructure upgrades and streaming technology without compromising core business operations or shareholder returns.”
My point here is not to tout or celebrate Comcast, which is not even a name we have been invested in … It is to use it as an illustration of a much broader point: Companies that respect their shareholders enough to maintain a growing dividend while they invest in needed infrastructure, while they ride out tough cyclical times, while they pursue acquisitions, have an embedded governor of responsibility, prudence, and dare I say, survival.
For the last ~20 years, Comcast has grown its dividend by 19.7%. Paramount/Viacom/CBS shrunk it by 9% per year. Yep, one company eroded at their dividend year over year over year, while another grew it generously and prudently.
The Heart of the Matter
To hit the point home with a final punch from Ishan’s research:
“The most fundamental difference between the two companies is their approach to shareholder capital allocation and investor relations. Comcast maintained a consistent philosophy of returning capital to shareholders throughout its expansion phase, treating dividend payments and share repurchases as essential components of total shareholder return rather than optional expenses during growth periods. This approach demonstrated management’s confidence in the underlying business model and ensured that shareholders participated directly in cash flow generation even during major acquisition cycles. The consistency of these returns created investor trust that supported higher valuation multiples and lower cost of capital, providing Comcast with strategic advantages in competitive situations. In stark contrast, Viacom’s leadership repeatedly sacrificed dividend policy and share repurchases to fund acquisitions, signaling to investors that management prioritized empire-building over shareholder value creation. This approach eroded investor confidence over time, contributing to valuation discounts that made subsequent transactions more expensive and reduced strategic flexibility during critical industry transitions.”
My friends, I do not know that the pages of Dividend Cafe have ever contained words wiser than what Ishan has hit home here.
We are not talking about media companies that make bad decisions, or bad shows, or are late to streaming, or hire bad executives, or get caught in sexual harassment scandals, or have governance problems. Well, okay, we are not only talking about those things, I guess. What we have here is the most basic of investment lessons I have learned in 25 years:
- The dividend is a sign of management’s own confidence in their own business decisions and the model of business they have
- The dividend is a reward for a good business model that, itself, creates a lower cost of capital for capital-intensive businesses
- The dividend is a governor of boardroom egos and, in some cases, psychopathic decisions that destroy shareholder value while narcissists pursue delusions of grandeur.
The Dividend Cafe would become a historical journal if all I ever wrote about were documented cases of the latter in corporate history.
Conclusion
I write all the time about the reality of human nature in our investing decisions. I want to assure the readers of Dividend Cafe that corporate managers, founders, tycoons, and even board members are also human beings, also subject to the demons of nature. We accept the constrained vision of reality that the shortcomings of human nature force upon us. And we seek to mitigate that reality with as many tools as we can to optimize our results. In dividend growth investing, we not only get an embedded mitigator of our own human nature (resistance to euphoria and crowd-chasing, and the automatic reinvestment of dividends in inevitable bad times), but also a mitigator of the human nature that plagues corporate managers, too. Media companies are not unique. The temptation to do bad things with someone else’s money is real. The prudence of returning capital to those who took risks is a game-changer.
And history will not stop telling that story.
Quote of the Week
“Behind every stock is a company. Find out what it’s doing.”
~ Peter Lynch
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If you missed last week’s annual Year Behind, Year Ahead paper, it can be found here.
With the MLK Day federal holiday on Monday, I will be doing the “Monday” Dividend Cafe on Tuesday next week.
And next Friday’s Dividend Cafe will look at the “gamification” of markets (and so much else) taking place before our very eyes.
Enjoy your weekends, and reach out with any questions anytime.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
