Pause then play

TV tech deal is must-see M&A

A TV tech deal is must-see M&A. Rovi's $1.1 billion purchase price for digital-recording pioneer TiVo should mostly be covered by the anticipated cost savings. As the merger cycle has progressed, transactions have become more and more financially irrational. This one suggests there can still be another way.

Rovi, which generates revenue by licensing its on-screen guides, fits nicely with the DVR maker whose quirky name became a verb in the early days of pausing live TV and recording programmes digitally. Each holds a trove of patents that also has turned them into aggressive litigators. Rovi, for instance, is currently embroiled in a lawsuit with Comcast over the cable company's new X1 set-top box.

By joining forces with TiVo, Rovi reckons it can slash $100 million in annual expenses. Those would be worth $750 million today, once capitalised on a multiple of 10 and taxed at 25 per cent. That more than covers the premium Rovi is paying to TiVo's undisturbed share price before news of a possible deal leaked out. In fact, the sum represents nearly 70 per cent of the entire price tag.

Such benefits haven't been adding up as much of late. Back when the merger boom began a couple of years ago, some 80 per cent of US acquirers enjoyed a pop in their stock price when announcing a deal. In recent quarters, the proportion has dipped to four out of 10 as companies have pursued more aggressive and complicated transactions. Abbott, for example, paid a steep price in market value for this week's proposed $25 billion acquisition of St. Jude Medical.

Rovi's stock initially jumped on its TiVo takeover news before investors got spooked amid a broader market downturn. The merger math nevertheless stacks up. Chief executives should be tuning in to these kinds of deals more often.