In promoting its proposed $100-billion acquisition of Time Warner, AT&T argues that the merger of the two companies will produce all kinds of synergies between the content business and the telecom/distribution business.
But at least one prominent fund manager begs to differ.
Mitch Zacks is the president of Zacks Investment Management, which manages $5 billion on behalf of high net-worth individuals. The company owns approximately $60 million worth of AT&T stock (t).
Zacks tells Fortune that he is skeptical of many of AT&T's claims about the rationale for its purchase of Time Warner (twx). In particular, he says it is highly unlikely that the telecom company will be able to find enough synergies to justify the premium it is paying.
"Essentially, what is happening is AT&T is paying more for Time Warner than any other entity is willing to pay," says Zacks. "It's paying more than even Apple was willing to pay, and it's paying a lot more than what the market is saying it's worth. So by definition it's overpaying."
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The only way to justify overpaying, the fund manager says, is if AT&T was either going to find cost synergies—that is, cut costs by enough to pay for the premium price—or was going to generate additional revenue as a result of the acquisition.
"Because this is vertical integration, there's very few cost synergies available," says Zacks. "You can't just lay off people at HBO and replace them with people from DirecTV. That's just not going to work. So then the deal is predicated on revenue synergies materializing. And generally speaking, those kinds of synergies are very unlikely in large mergers."
Not only that, but Zacks argues that even if a merger with Time Warner could produce revenue benefits, there are cheaper and easier ways for AT&T to achieve them. For example, it could just license content from Time Warner instead of buying the entire company.
"Any incremental revenue growth that Time Warner could achieve for AT&T could probably be achieved contractually" rather than by acquisition, says Zacks.
The fund manager also said that he believes the acquisition is based on a fundamental misunderstanding of how content works now. AT&T wants to essentially lock up content as much as it can—including through the use of questionable strategies such as zero rating—in order to raise the switching costs for users of its network services.
"But the viewing habits of TV watchers are changing, and they are consuming media coming in through social networks and platforms etc.," Zacks says. "Content creation is more decentralized and content consumption is more decentralized. AT&T's approach is based on an old model."
AT&T to buy Time Warner for more than $80 billion. Watch:
Even if AT&T is right that there are advertising-related benefits to owning Time Warner—because it will be able to see what content people consume and then target ads to them based on that—those kinds of synergies could also be acquired simply by licensing content, he says.
In addition to the business risks, Zacks adds that AT&T is risking the long-term support of shareholders like himself, who look to the company for stability rather than growth.
"Because of its investor base, Amazon is able to spend money almost indiscriminately, because investors are expecting growth and they are willing to pay for it," says Zacks. "The investor base of AT&T is not looking for growth—the important thing is the dividend."
So is Zacks thinking about selling his AT&T stock because of the deal? He says no, in part because he doesn't think the acquisition will get approved by the FCC. And shareholders of the telecom company "will be better off in the longer term if it doesn't go through," he explains.
"The risk of something going wrong outweighs the potential benefits," Zacks says. "They have to have a lot of things go right in order for them to justify the premium they paid above the market price for Time Warner. And the odds are against them."