Media savvy

Will media mergers and acquisitions continue to be a tool for growth in the industry?

History suggests the answer is yes. While M&A activity in the broadcast sector peaked in the late 1990s in response to governmental deregulation, deals continue in today's market, and current industry challenges signal a potential spike in activity. The receding economy threatens organic growth, and the declining stock values of many companies make them attractive takeover targets. Therefore, growth by acquisition has become more attractive.

It is important for media companies to understand their various exposures in potential deals in order to be strategic during a potential merger and bring a risk management perspective to the negotiating table.

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Determining the true value of the organization targeted for M&A is essential to the success of the deal. However, it is not enough to glean the present and peer into the near future in the due diligence process. Buyers need to be sensitive to the very real possibility they could be held legally responsible for the seller's past actions, regardless of whether the buyer was "at fault" and the fact that the seller's action predated (even by many years) the deal.

For media companies, copyright infringement and defamation exposures are among the most difficult to uncover during due diligence, in addition to being among the most costly to litigate and the most difficult to successfully defend against. A media company should scrutinize the licenses granted by intellectual property owners to determine whether it can abide by the scope of those licenses or attempt to renegotiate them so they fit the buyer's needs.

Managing intellectual property rights is critical due to the increased use of alternative distribution channels, such as the Internet and mobile devices. Additional revenue derived from intellectual property royalties is a valuable source of income, and companies that create content engage in aggressive policing and licensing practices. As a result, intellectual property litigation is on the rise.

Defamation is another area susceptible to successor liability claims. In one case, a West Coast cable company acquired several cable channels in the Midwest in its quest to expand. Months prior to the deal, a popular morning talk show, programmed by one of the stations being sold, reported on the trial of a state politician who allegedly used state funds for private home improvements. Although the trial was in the early stages, the talk-show host vilified the defendant on the air and asserted that he was guilty. The host also made several false accusations about the defendant's sexual orientation. Months later, after the station had been sold, the politician was cleared of all charges. So, in order to rebuild his reputation, what better place to start than by filing a defamation suit against the new, larger West Coast media company?

During due diligence, it is important to also study successor liability exposures emanating from premises, equipment and employees. Understanding the potential liabilities will help the acquiring company more accurately value the deal and mitigate risk. The risk or financial manager should work with a cross-functional team of building and equipment engineers, media lawyers, human resource professionals and others.

It is also important to obtain and save the seller's old insurance policies, as they may be the only possible source of insurance for claims that don't become apparent until after the deal. Buyers should review a seller's in-place insurance portfolio, minimally, for the past five years to ensure the seller had an acceptable level of insurance in place to protect property and operations from losses or legal liabilities. However, keep in mind that most liability insurance policies do not apply to loss events occurring (even in part) before the date the merger or acquisition closes. Buyers may want to consider purchasing successor liability insurance to help protect against future claims that arise out of an acquired company's
prior activities.

Whether the liabilities are in the area of intellectual property, buildings, equipment, workers' compensation employment practices or directors and officers' liability, an acquisition, along with its untold opportunities, represents unknown risks that have the potential to undermine the deal and the financial vitality of your organization.

Timothy Ehrhart is a vice president and broadcasting segment manager for Chubb Commercial Insurance.

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