An Event Study of the Merger Proposal Between Comcast and the Walt Disney

An Event Study of the Merger Proposal between Comcast and the Walt Disney

Abstract

For the last decade the cable television industry has experienced restructuring through a large number of mergers and acquisitions. For the purpose of understanding the implications on shareholders wealth and the subsequent market outcomes in the US cable television industry, this study employs an event-study methodology to investigate the vertical merger between Comcast and Disney. This merger, proposed on February 11 2004 would create the world’s largest media conglomerate with the largest cable distribution system market in the US. This sparked fear of reducing competition through market foreclosure and thus harm consumers. However, the merger may also create efficiency gains which benefit consumers. Two hypotheses were then developed regarding these facts. The analyses concluded that: first, with regard to the efficiency hypothesis the merger will bring efficiency gains to the target firms but not to the bidding firms. Second, with regard to the foreclosure hypothesis there is insignificant effect on rival firms resulting from the proposed Comcast Disney merger. However, the overall welfare effect is mixed. Moreover, in terms of shareholders’ wealth, the negative abnormal returns for Comcast and the positive returns for Disney imply that the target shareholders gain at the expense of the bidder shareholders.

Introduction

The US telecommunications sector showed signs of revival in 2003 after experiencing a downward trend since the early 2000s, which was partly driven by the collapse of dot-com bubble. There has also been some pick-up in the level of M&A activity, demonstrating that the restructuring of the sector is underway (Curwen, 2008). From a cooperate perspective, vertical integration in the cable telecommunication industry can either have positive or negative effects. Of course, this depends on the outcome of the merger. Two types of outcomes are employed to...