King World Productions makes lots of money by producing syndicated television game shows that keep contestants and viewers guessing. Playing for stakes much larger than the cost of a living-room sofa or a car, shareholders and other observers are starting to wonder what lies behind the curtain. For more than a year, the company has hinted at looming acquisitions. So far, however, no dice.
Taking aim at a company for not making acquisitions is risky, given the evidence that deals seldom create as much value as predicted.
Where King World goes astray, according to its critics, is not so much in failing to announce a deal, or even in failing to close one. Instead, its fault lies in fanning expectations and not fulfilling them.
Lately, the Los Angeles- based syndicator of "Jeopardy!," "Wheel of Fortune," and "The Oprah Winfrey Show" has sounded like a company about to pounce. "Our top priority continues to be the development and acquisition of new programming assets," chairman Roger King declared in a company press release last December. And he's not restricting his sights to more TV shows. As senior vice president and CFO Steven LoCascio puts it, King World is leaving no stone unturned in its search for an "accretive, synergistic acquisition."
Recent steps appear to give some credence to the commitment. King World has hired consultant Frank Biondi, former chairman of Universal Studios Inc., to guide it toward a business combination. However, King World triggered similar anticipation in June 1997, when it hired Jules Haimovitz, a veteran of PolyGram and Viacom Inc., as president and chief operating officer, with a mandate to find acquisitions. He left King World after only one year, with no significant acquisition to show for his brief tenure.
King World did buy television station WIVB, in Buffalo, in 1988, but sold it in 1995 at a loss. "As soon as it took a downturn, which is inevitable in broadcasting, they sold it," says Jessica Reif Cohen, a managing director at Merrill Lynch Global Securities.
Like other analysts, she has be-come skeptical of King World's intentions. "I think they look at everything," Cohen observes. "They get close, and then they back away."
Adds Edward Hatch, managing director of SG Cowen Securities Corp., "Investors have been waiting five years for a big move."
Want of a deal also puzzles Richard Greenfield, of Goldman, Sachs & Co. "That has troubled us for a long time," Greenfield says. "We continue to hope King World uses its cash to make a strategic and accretive acquisition."
Meanwhile, closely held King World will be sitting on more than $1 billion in cash (according to Cohen), well over half of its total assets, and cash flow is far more than adequate to meet operating costs. In a business that seeks return on investment in excess of 15 percent, more than half of its assets scarcely outperforms U.S. Treasury securities. The result: a massive cash-drag effect on earnings.
In effect, excess cash penalizes shareholders twice. First, they can't get their hands on cash that belongs to them, which they could reinvest elsewhere or keep in certificates of deposit themselves. Second, idle cash weighs down King World's financial performance.
Moreover, a recent study contradicts the assertion that cash fosters good acquisitions. The study finds instead that cash-rich companies tend to make the worst acquisitions, for the most obvious reason: Cash burns a hole in their pocket, explains Jarrad Harford, assistant professor of finance at the University of Oregon, who conducted the survey.
This odd behavior often suits family-run businesses with public shareholders. At King World, run by Roger King and his brother, Michael, who is vice chairman and CEO, insiders control more than 23 percent of the shares. In these companies, what's good for the goose isn't always good for the gander. "Closely held companies have a tendency to hoard cash," Harford observes. Unlike investors seeking to maximize re-turns, small groups of wealthy owners often are more interested in conserving capital than in increasing it--especially when their wealth is concentrated in a single company. "They want to be conservative," Harford says. "They want to make sure they can weather any storm." If promising a deal to fellow shareholders provides cover, so be it.
Stay tuned, however. Something has to give eventually, warns Merrill Lynch's Cohen. "If they don't do something soon, they are going to have to do a buyback. They can't just continue to sit."
Joseph McCafferty is an associate editor at CFO.