Media Mergers: Lights, Camera, Risk?

One content provider plus one cable company equals how many new risks? That was one question on the minds of executives as negotiations for Comcast to acquire NBC Universal began. This particular deal is unique in that Comcast, previously only a service provider will now be stepping into the world of content development, which will expose Comcast to risks that it did not have to be concerned with in the past. Whenever large companies tread into uncharted territory, risk managers and other relevant executives must ensure that seemingly tiny yet critical details don’t fall through the cracks.

Media companies involved in deals similar to this one should make sure that, as part of their due diligence, they consider the following four questions:

What are the new risk exposures?
As Comcast ventures into new media territory, it’s important for it to focus on myriad of potential unknowns. For instance, content providers like NBC Universal manage intellectual property and licensing rights issues every day; however, cable and Internet providers may not be accustomed to addressing these matters in the same context, and therefore need to prepare accordingly.

For example, without specific permission, the republication of content in a new medium can amount to infringement. A paper publication, which is republished in digital form on the Internet, can be considered an infringing copy if the original license only permits republication in paper form.

During due diligence, the acquiring company should always conduct searches to see if the intellectual property of the acquired company, including trademarks and service marks, have already been claimed by another individual or business. If so, the acquiring company may be faced with possible infringement lawsuits. Similarly, if the acquired company has ever received a cease and desist letter from another party claiming infringement, the acquirer must be prepared to deal with any lingering issues.

It is also extremely important to scrutinize the licenses granted to the acquired company by intellectual property owners to determine if the acquiring company can abide by the scope of those licenses or should attempt to renegotiate them with the intellectual property owners. This examination should occur during the acquisition due diligence process and prior to the distribution of newly acquired content.

Are there any outstanding liability issues?
While every company should perform thorough due diligence before committing to an acquisition, it’s especially important for an acquirer to note any current or potential litigation, claims or notices regarding the company being acquired. Past legal troubles of the acquired company will undoubtedly become present troubles for the new ownership. 

For example, consider a hypothetical cable network that is part of an upcoming acquisition that has been sued for an allegedly libelous comment made by an evening news reporter. How will that lawsuit proceed after the acquisition has closed? It is important that the acquiring company be aware of all legal actions against the organization it is purchasing in order to appropriately handle legal proceedings (and the costs associated with a lawsuit). Companies that don’t address how to handle pending litigation during due diligence could find themselves on the wrong end of a multi-million dollar loss.

If the legal liability exposures of the acquired company are not reviewed with a careful eye, the acquiring company’s balance sheet may take a hit from the unanticipated costs to defend prior suits and pay judgments or settlements. Customer relationships and reputations may also be tarnished.

Does each company have its own separate privacy/data security policy?
Privacy and data security are becoming more and more important to companies and their customers. Often when an M&A occurs, the merging companies come to the table with separate privacy and data security policies in place to protect their respective customers, employees and intellectual property. 

It is critical for the new company to develop a uniform privacy and data security policy for a number of reasons, not the least of which is to ensure customers that their valuable information, such as subscription information that includes their home address and credit card number, is safe and secure. Discrepancies between different policies can lead to confusion, disruption and eventual loss of critical company or customer information.

Are there any gaps in the current insurance portfolio?
More often than they would like, risk managers discover gaps in the insurance portfolio of both the acquiring and acquired companies when managing a merger or acquisition – if not addressed, these gaps could result in a loss that isn’t insured by the new owner’s insurance. For example, it’s critical that risk managers obtain either extended reporting period or successor liability insurance to address liability exposures stemming from the acquisition going forward.

Extended reporting period insurance provides a specific time frame after a claims-made policy has expired where a claim can be made against the insured and reported to the insurer so that the expired policy will respond as if the claim was made and reported before expiration. Successor liability insurance helps protect acquiring companies like Comcast from unforeseen liabilities that follow the company being acquired.

By addressing these questions as part of the due diligence process, media industry risk managers can more effectively approach industry mergers and acquisitions, especially those that result in the acquiring company entering into a new area or industry. As for the current NBC/Comcast merger, news sources say the companies are expecting regulatory approvals to take a year or more.

--- Tim Ehrhart, vice president, Chubb & Son, is responsible for overseeing the broadcasting industry segment for Chubb Commercial Insurance. TEhrhart@chubb.com. Chubb’s Twitter handle is @chubbinsurance.

Tweet