International Journal of Arts and Sciences 3(8): 469 - 486 (2010)

CD-ROM. ISSN: 1944-6934 © InternationalJournal.org

A Review of Diversification Performance of Media Conglomerates Ah Reum Hong, Seoul National University, Korea Abstract: With deregulation and digitalization, the media and telecommunication companies accelerate the merger and acquisition (M&A) for process in oreder to diversification their business area. Based on the M&A effect of diversified firms, this paper suggests the measuring method of firm’s performance based on the synergy effect and competition encouragement. This paper introduces several methodologies for measuring firm’s performance in terms of finanacial status, the growth rate and potentiality. Finally, we measure if that the effort of media and telecommunication conglomerates diversification will be profitable or wasteful? Keywords: Diversification, media and telecommunication conglomerate, Tobin’s Q, performance measure, digital convergence

1. Introduction This paper introduces the diversification of media and telecommunication conglomerate

under the digital convergence era. And this diversification within the value chain of media and digital content would be related to the traditional economic theory. To understand what makes the media prooduct such as content is different to the consumer and supplier of traditional product such as agricultural foods and manufacturing goods. It needs to verify the characteristic of media product. There are five key characteristics of media products such as contents. First the creation and

distribution of content is dual, complementary. Second, the suppliers of media product can gurantees of dual revenue resource from consumers and advertiser. Third, most media content product is non-excludable and non-depletable: Like public goods. Fourth, media content products are marketed under a windowing process: delivered to consumer via multiple outlets sequentially in different time period. Finally, media products are highly subjective to the cultural preference and are often subject to more regulation control from the host country. So if the firms deal with the media product, they need to diversify their business area not focusing on the only their core business. To definition a diversification, there are several points of view. Gort (1962) defined it as the

concept of ‘heterogeneity of output’ based on the number of markets served by that output. Berry (1975)’s definition is an increase in the number of industries in which firms are active. Definition of diversification is to expand their business area with improvement of productivity efficiency and reduce the investment pattern so that they have the larger based of customer and service division and to introduce the new product. (Ansoff, 1965) So the purpose of diversification link to the traditional economic theory.

The background economic principles of diversification are summarized into four aspects: a

economies of scale and a economies of scope, the synergy effect, the network effect and a economies of multiformity (Albarren and Drimmick, 1996). The major purpose of diversification is the synergy effect through the economies of scale and scope (Baumol et al., 1982). So this synergy effect will be related to firm’s performance and increase their profit beyond the transaction cost related to their M&A, partnership and stragic alliance. The diversification firms categorized with the entent of diversification, the direction of

diversification and the cross-overseas diversification (Chan-Olmsted & Chang, 2003). In fact, the type of diversification is summerizing as follows: one is the strategic alliance, a partnership, a joint research and research and development (R&D) and M&A. Chan-Olmsted and Kim (2001), Dimmick and Wallschlaeger (1986), Junh and Chan-Olmsted (2005) focus on the diversification strategy in media industry. There are 6 categories of media and information communication technology (ICT) industry and classified the strategy of diversification under the broadcasting and telecommunication convergence (Kim, 2002). It related with the purpose of diversification. If the media firms select the M&A for the diversification, the time required doing M&A needs the short time but there is the higher risk and more acquisition premium. Also if the diversified area is not related to their core business, there is the lack of business administration and the management of new product and service. There are several empirical studies about the performance of related diversification and

unrelated diversification (Buckely and Casson, 1976), (Dunning, 1981), (Rumelt, 1982). The definition of related diversification is to expand their business into their major source of business. Unrelated diversification is entering the business into their non-major business or market. More detail of diversification category shows two dimensions: one is diversified horizontally, vertically, complementaly, and conglomerately. The other is horizontal diversification, vertical diversification, unrelated diversification and crossover diviersification. (Albarran and Chan-Olmsted, 1998) Beatie (1998), Bettis and Hall (1982), Montgomery (1985), Palepu (1985), and Chang and Thomans (1989) show that the unrelated diversification is not difference with related diversification and it does not gurantee the performance improvement of the firms. Other issue of diversification is that the global diversification of media and

telecommunication conglomerate focus that the US domestic company expand their market into international because of the saturated US domestic market and the competitive media market could not have more profit within this market (Mcchesney, 1999). Merger and acquisition among the media company, the entertainment company and the internet company after 2000, the market is monopolized and oligopolized so that the few leading media media and telecommunication conglomerate control the global media market with such a market concentration. The few media and telecommunication conglomerate concentrate media industry and hinder

the new entrant, so publics worried about the impediment of freedom of expression and diversity. The negative side of globalization is focus on the different cultural background and

taste diversity, the regulation gap between the glabal diversified media firms and the target market. So the global diversified media firms choose the various firms structure and the way how they enter the glabal market. So the global firms operate their firms with direct foreign investment and complex network structure by the firm’s capability. The positive effect of global diversified firms is to minimize the effect from outside to have a leading media firms and it goes to have a powerful domestic media and content industry that created more value than other product. The purpose of study is to review and discuss the effect of diversification of media and

telecommunication conglomerates. In terms of measuring effect of diversification, this paper discuss about the several methodologies for measuring firm’s performance in terms of finanacial status, the growth rate and the potentiality. As the result, this study would benefit for the selecting the diversification strategy for media and telecommunication conglomerates which level of diversification would be profitable or watesful in the digitalization and convergence area? The paper is organized as follows. Section 2 gives a summary of the diversification and the performance measurement literature so far. Section 3 describes the theoretical background of the measurement type of firms’ performance, section 4 the research question for the future study and section 5 concludes.

2. Previous Research of Diversification and Performance Measure

Beside not only focusing on the media and telecommunication conglomerates like Time

Warner, AT&T and News Corporation, the diversification stragegy is the major concern to who want to expand their business area and enter the new market. There are many literature reviews on the diversification across all different kinds of industry. This chapter discusses a controversary opinion on the relationship between level and extent of diversification and firms’ performance. The effect of diversification is two aspects; one is value-enhancing view with positive effect and the other is value-reducing view with negative effect of diversification. The positive effect of diversification on firms’ profitability is from Khanna & Palepu

(1995). They mentioned that the diversification stragtgy takes advantage of internal capital market in business group and use the efficient allocation of resource in business group. Also the relationship between diversification and firms’ performance is non-linear but somewhat there is positive effect of conglomerates in Chile (Khanna and Palepu, 2000). The reason is that the internal market theory supports the positive effect of firm’s diversification. Also, there is the joint insurance effect means that capability of current liabilities is increased with diversifcaition and incurs the deduction of tax from the usage of debts (Lewellen, 1971). Villalonga (2004) called the premium from the diversification like M&A premium. Stulz (1990), Comment and Jarrel(1995), Bengstsson(2000) and Gillan et al., (2000) support that hypothesis of value creation from the diversifcaiton. This means that firms diversification

strategy affect the increment of firms value from the increasing the level of productivity efficiency and higher profitability which called internal capital market management. For the Korean domestic research, Jung (1991) shows that diversified firms of Korean

conglomerated have a higher profitability and growth rate than one specialized business firms. Kang (1991) use the panel data from the 53 firms across the 18 industries within the six year, the diversified firms has higher profit beyond 6 years. However, the negative effect of diversification on firms’ profitability is mentioned by Lin

and Servaes (2002) who said the diversification incur the 13% ~ 15% devaluation of firm’s asset. Lamount (1997) point out the internal capital market effect does not work on the diversification. Houston et al., (1997) , Shin and Stulz(1998), Scharfstein(1998), Rajan et al., (2000) follows the depreciation of firms’s value from the diversification. Berger and Ofek (1995) support the cross protection effect from the information asymmetry that evokes the unbalance among the business division within one company. And the good performance division may support compulsory the financially to poor performacen division because of the information asymmetric. Jensen (1985) brings the discount the firms’ value to allocate the resource arbitrary to pursuit the investment on diversification decision which depreciates the firm’s value. More diversified firms suggest that excessive investment with increased the amount of debt to borrow can decrease the firms’ value. Still, cho (1990)’s empirical study indicated there is no effect from the Korean cheabeol’s

diversifcaiotn strategy. His opinion is neutral because positive results of the growth rate and negative results of profitability ratio from the finanacial report.

Advantage Disadvantage

Related Diversification Economies of Sacle Internal Knowlege of product Acquire an

experience of related business

Large amount of Transaction cost

International Diversification

The opportunity of high return The correltation between the country assets

so reduce the risk.

The complex of management of International corporation Exposure the

uncertainty The difference preference across the

contient. Incremetn the Risk

Interaction between International

diversification and Related diversification

Apply their own core technology Use the Know-how knowledge Reduce the uncertainty Organizational learning

Potentail risk taking two strategy simultaneous

Table. Advantage and Disadvantage of diversification

Source : Chan-Olmsted et al., (2003) To measure the diversification, Comment and Jarrell(1995) discusss three different method.

One is Herfindahl Index (HHI) of sales by segment and HHI of assets. The increasing degree of diversification redue the HHI index.The other is counting the numbers of segment which firms operate their business. This segment is divided by the stardard industry code(SIC). The variable for measuring performance is summarized into three things: one is potential growth which is calculated by averaged total revenue, averaged revenue growth. Second one is profitability that earning before interest tax depreciation and mortization (EBITDA) shows

the level of profit for the current situation. The last one is future profit for the effectiveness and efficiency by Return on Asset (RoA), Return on Investment (RoI) and Return on Equity (RoE).

3. Theoretical Background

3.1 Diversification

3.1.1 Current Status of media conglmerate Representative 10 global media and telecommunication conglomerate are SONY, AOL Time Warner, Bertelsmann, Vivendi Universal, News Corporation, Disney, Viacom, Liberty, General Electronics (GE) and AT&T. In addition, the telecommunication company has also entered the content business to become a media and telecommunication conglomerate that mean the movement of power source within the value chain of conte. The M&A horizontally and vertically of telecommunication company is the one of diversification effort. Also they want to preempt the new market form the broadcasting and telecommuncaiton convergence environment. Finally the demand of mobile communication is satured so that the entry of new market is higher and the margin of profit is staged so far. They would like to join and make the open market and adopt new source of power for the next stage of their business. So their diversification strategy is the new corporate strategy to overcome the current digital content epidemic. Even though the internet service provider (ISP)s have the conten from the web source, google and naver provide the video service to enter the content provider. For the recent diversification of global media and telecommunication conglomerate,

Comcast sets $30 billion to merge NBC Universal in Dec, 2009. Comcast, the largest cable company in the U.S., has agreed to merge its fortunes with NBC Universal via a $30 billion deal with General Electric, owner of 80 percent of NBC Universal. Comcast is to contribute $6.5 billion in cash and $7.25 billion in cable channels, including the Golf Channel and E! to the new entity, which will be headed by NBC’s Jeff Zucker. GE will receive $8 billion in net cash, and NBC Universal will contribute the USA, CNBC, MSNBC, and Bravo channels, NBC's broadcast networks and stations, a film studio, and amusement parks. Comcast will take a 51 percent stake in the new venture. Second case is the Comcast do merge and acquire AT&T broadband, affiliated company of AT&A. They suffer from the finanacial problem of AT&A broadband so that AT&T decided to sell it to Comcast. The purpose of this deal is the financial reason, procurement of the content more efficienct way and the integration between the content creation and distribution. The core business of AT&T broadband is focus on the telephone business and data transmission and Comcast is on the programs and the content. The synergy effect of this M&A is possible to have the more than 10 billions of telephone subscriber of AT&T broadband. So Comcast could cope with the cable telephony market more actively (Moon, 2002).

Fig. 1

Diversification Strategy of Global Media and Telecommunication Conglomerate Source: Screen Digest (2007) The issue raised by the Federal Communication Commission (FCC) whether the horizontal integration affects the price in the relavent market (Waterman, 2000). The 2nd stage of evalution, FCC raised the violation of dual network ruIe and national television ownership limit by 35%. They conclude that the horizontal integration shold not relate to the pricing policy therefore FCC decide to make the target firm to divestiture (FCC CBS-Viacom Oder, 2000). For the Korean market, CJ and On-media has just merged into one group in Dec, 2009. Also possible media conglomerate are Korea Telecom (KT) and SK Telecom Co., Ltd.(SKT) to become a 3 majoy player in the Korean domestic market. In case of KT, they start the Internet Protocol Television (IPTV) service, they regulated by Broadcasting Act and Telecomunication Act. Also the politically the target number of subscriber by 2010 is 2 millions. So until now, the statics shows 950 thousands subscribers for the IPTV service and 110 thousands subscriber for the Vdeo on Demand (VOD).

3.1.2 Value Chain of Content The value chain of content has been changed from content digitalization and various distribution platforms focusing on only distribution from former value chain. The background of diversification of media and telecommunication companies emphasize on the distribution of digitalized contents varied across the internet, wireless through mobile, and digitalized broadcasting which is called layer model.

Fig. 1

Layer model and Relationships of ICT industry Source: Martin Fransman (2007)

The general configuration of ICT industry contains the 4 layer model. (Fransman, 2007) The first layer of this model has a network element provider which provides router, computer and appliance providers of OS components such as Alcatel-Lucent, Microsoft and Cisco. The second layer of this model contains the network operators that provider the network facilities like telecommunication, cable, satellite and broadcasting. For example, France Telecom and Deutsche Telekom are in the 2nd layer. Layer 3 is the content and applications providers such as google, yahoo and facebook. The traditional ICT industry clearily classified their role of layer but the convergence of telecommunication and broadcastin changes the dynamics of layer congence. It is related to firms’ diversification strategy to copet with this circumstance. The regulation and strategy changes allow the convergence vice versa. In this point of views, the telecommunication industry can be investigated the diversification strategy within the layer convergence to diversify vertically between layer 1 and layer 2 or between layer 2 and layer 3. For example, the alliance between AT&T and apple is the layer 1 and the layer 2 convergnce. The leading telecommunication company, AT&T expands their business area into the content business. More details about this layer classification, next figure explains about the relationship between the underlying technologies and platform.

Fig. 2

Digital Platform to diversify in Media and Telecommunication Convergence Market Source: Screen Digest (2007) The underlying technologies and network in the convergence media and telecommunication industry has a type of satellite dish, Direct to Home (DTH), Cable, Digital Subscriber Line (DSL), International Mobile Telecommunications-2000 (IMT-2000) called 3G, Digital Video Broadcasting–Handheld (DVB-H) and Internet Protocol television (IPTV). Thes technologies are distributed through digital platforms such as digital interaction TV, online and mobile wireless. The content categories through these platforms categorized in TV programs, musics, film, radio, games and publishing.

3.2 Performance Measure Tobin’s Q model is used to measure the relationship between diversifcaition level and the

performance of media and telecommunication conglomerate with fianacial date and stock price with panel data. What is the most effective measurement of diversification within the media and telecommunication conglomerate under digitalization and convergence media industry?

3.2.1 Stock Price _ AR, CAR Tatiana et al,.(2001) said that the purpose of M&A is two issues: one is gurantee the

monopolistic power and the other is the increment of competitiveness. Doing M&A, the firms improve the efficiency and the synergy effect to eliminate and reallocate the inefficiency managerial factor, product factor, financial factor and tax reduction. Horizontal M&A lead to the monopolistic power, growth maximization, free cash flow and reduction of employment risk. Other 4 listed factors of M&A are as follows. One is the industrial aspect. Deregulation of

1994 affect directly from the Communcaition Act. Common carrier such as Telecommuncaiton Company created the new service so the most suppliers reduce their profit margin. It began the effective competition for the monopolistic telecommunication

operators. Second is the technology aspect. Digital technology through the convergence broadcasting and telelcommunciation industry vanish the boundary of market definition. Such as LMDS (Local Multipoint Distribution Service) is connected to wireless, video and two-way multichannel data and DSL (Digital Subscriber Line) improve the exited telephone line into high speed data link. Third is the service aspect. The firms provided the bundling product which can do one stop shopping such as Triple Play Service (TPS) and Quadriple Play Service (QPS): local, long distance, wireless telephone, internet connection, cable TV service, IPTV, DTV and VoIP. The advantage of bundling service to customer is the finding new source of profit and excpecting cost reduction from the scale economies. Fourth is the international aspect. The domestic market is satured that show the one digit growth rate. One of diversification strategy is the M&A. M&A have not only become prevalent, but also

been a progressive increase in their size. (Bradley and Korn, 1982; Davidson, 1985) M&A is the stronger bond within the divisions than strategic alliance, partnership and the joint R&D because of the share of ownership. M&A has the announcement date so that Fama et al. (1969) measure the abnomarl return (AR) and culmulative abnormal return (CAR) from stock price for the first time. The market model is used to calculate the abnormal return of the acquirer, and expect the

return of the specific firm on the specific day to be proportional to the market return.

: the return of firm i's stock at time t. the market return of each firm at time t.

: the market return of each firm at time t. : An ordinary least square model is used to estimate the of each firm using the

market return and firm’s return in the estimation window. The return of firm i's stock at time t is calculated as below.

: the return of firm i's stock at time t.

: the stock price of firm i's stock at time t. : the stock price of firm i's stock at time t-1.

The market return of each firm at time t is calculated as below.

: the market return of each firm at time t. : the market index of each firm at time t.

: the market index of each firm at time t-1. Above market model, we can estimate the in the estimation period and the abnormal

returns is calculated as the difference between the observed return and expected return in the event window.

: the abnormal return(AR) of ith acquirer’s stock for the event day t. : the return of acquire i's stock at time t.

: the expected return of ith acquirer’s stock for the event day t. The mean of abnormal returns (AR) for the target sample firm is calculated by average AR

of each firm.

The cumulated abnormal returns (CARs) for the event window [t1, t2] are calculated as

below:

To test statistic significance of AR and CARs in the event window, t-test is used.

Tatiana et al,.(2001) measure the stock price reaction from AR and CAR of M&A announcement between the USA telecommunication company: Bell, SBC, Sprint, MCI, Quest and AT&T. Although the purpose of M&A is different from firms’ size and firms’ facing business strategy, they divide into target groups and bidder groups. For example, the purpose of M&A between Bell and SBC Communications is geographical diversification and the synergy effect from the larger network facilities. Bell Atlantic and Nynex M&A is product diversification for acquiring long distance market and their technology. Also, Sprint and MCI World M&A focus the concentration level on the long distance market for market share of AT&T is 45 percent and Sprint–MCI takes 34 percent. The main finding from CAR result show that long distance telecommunication company has

sever competition within the same area so that doing M&A, they enter the local market where is less competitive and monopolistic power existed. M&A among the long distnac company shows that the positive CAR although horizontal market concentration level increased. Diversification of the long distance company to Cable TV company or local company shows close to 0 or negative CAR. Last, the average CAR of target firms is positive wthile the average CAR of bidder firms is negative. Moeller and Schlingemann (2004) investigate that the AR of Cross border M&A. They define the M&A more specific with amount of deal and exclude the joint venture; naturally owner and private acquire and eliminate leveraged buyout, recapitalization and repurchase. Using the panel data set, the control variables as they used in the model are the number of transaction, percent of transaction cost among the total stock, transaction value, the average stock price and the type of transaction wherer domestic M&A or cross-border M&A. The cross- sectional analysis model is used. CAR = f(Cross-border, Market_Value, Related Industry1, Cash Consideration2, Tender Offer3, Transaction Value, Public_target1

1 A dummy for matching 2 SIC digit. Whether it matched into 2 SIC digit, this is the related industry. (Lewinski et al., 2004) and (Bradely et al., 1998)

)

2 Loughran and Vijh(1997) 3 Tender offer is a formal offer of determined duration to acquire a public company’s shares made to equity holders and the offer is often conditioned upon certain

3.2.2 Productivity _ TFP To measure the firms’ performance measure, the productivity efficiency is used with decomposition of total factor productivity (TFP) index. (Guellec et al.(2004), Lokshin et al.(2006)) Long-term performance is measured by Data envolopement analysis (DEA) with output productivity, stochastic frontier analysis (SFA) and metafrontier analysis (Song, 1992). Jeong et al. (2000) determine the inefficiency of each firm by data envelopment analysis (DEA) to show the efficiency of the Korean stock market. The relationship between the productivity results and the performance of economic indicators provide an insight into how the economic environment can contribute to the realization of growth potential.

3.2.3 Financail Reports _ ROE, ROI, Growth Rate Gort(1962) and Berry(1975) discuss about the relationship between the effects of industry

and diversification strategy on profitability with diversification index. Gort (1962) set the firms in the Class j’s number of segment as D= N/ max ( jp ). And Berry (1975)’s HHI used

the equation: H = 1- jj

p∑ . Their indices have an advantage of concrete and replicability but

the shortcoming of these is not the same SIC class of diversification with just compared two digit of SIC. So, Rumelt(1982) subdivided into the 4 type of diversification class. Specialization

ratio( sR ) means the revenue ration of most large profit business unit. Related core ratio ( cR ) indicates the revenue ration of business unit which shares the core skill and resource. Vertical ratio ( vR ) means the revenue ration of business unit to have the joint product and in the middle of product processing with raw material. The last one is related ratio ( rR ) concerns the revenue ration of business unit which include in the biggest related business. Then according to this ratio, they break into 7 business group compared between sR , cR , vR and

rR . The representative seven business groups that show the form of diversification are single business(SB), dominant vertical(DV), dominant constrained(DC), dominant linked unrelated(DLU), related constrained(RC), related linked(RL) and unrelated business(UB) by the ratio scale. After they divide 7 categories of diversification, Rumelt(1982) use the measure of firms’ profitability as return on investment capital equal

to net income after taxes plus Investment expense on long-term debt and then divide sum of t

he book value of owner’s equity. The follow 7 4 ~

1 1i j ij k ik i

j kR a s b T e

= =

= + +∑ ∑ equation indicated

that iR is the average of the return on capital (ROC) for 5 years.

requirements such as a minimum number of shares being tendered. (Jensen and Ruback, 1983) 1 Bietal, Schiereck, and Wahrenburg(2004)

7

1j ij

ja s

=∑ connects to the 7 categrories effect multiply by whether ith firms use j strategy or not.

4

1k ik

kb T

=∑ means the four time block multiple with ith firms is in the time block k or not. After

that, ^

j ij ii

R P R=∑ calculated the expect return (^

jR ) is equal to the capital investment

fraction of j the firm. Finally, Premium(P) is calculate from their ROC minus ^

jR . The specification of premium equation is 0 1 2 3 4P = + + + + s v c uR R R Rβ β β β β . The coefficient distinguishs of the category effect from the premium equation. The result provide taht the single business group and the dominant constrained group are the highest premium for the expect return among the 7 groups.

3.2.4 Tobin’s Q Larry and Stulz (1994) analyze the relationship between diversification and Tobin’s Q.

From 1960 to 1970, more diversified firms had more \efficient to manage their business but after 1980 the diversified conglomerate firms hinder the investment from the high transaction cost to control the management of business. To measure the firm’s performance, the sample period of estimation period affect strongly to the empirical result. The two problems of sample period selection are the choice of benchmark point and searching for poor performance firm into the sample. In case of using AR and CAR with stock price, it does not matter from the original financial report. So conglmerate’s ex post return generate lower profir ratio than non-diversified firm because of the size effect as well. In this paper, firms operate their business more than 5 business sector or their division called highly diversified firms.

Larry and Stulz (1994) use the Tobins’ Q model to analyze the firm performance. Usually Tobin’s Q is the present value of future cash flow divided by the replacement cost of tangible asset. The advantage of Tobin’s Q incorporates the profit from the diversification into capitalized value. However no matter what the benefit from using the diversification strategy would be illusion, the market affects it on purpose. Becasue of the firm’s business strategy behaviour starts valuation of intangible asset. Also the intangible asset contains the brand loyalty, the level of awareness; monopolize rent cost and investment opportunity. The problems of intangible asset valuation do not count on the capitalized R&D cost which should be including the replacement cost of aseet. By their Tobin’s Q technique, they manipulate the traditional Tobin’s Q specified the diversifired firms’ Q and related industry firm’s Q. So they compare the average Q of related industry firm. Other example of Tobin’s Q is Lindenberg and Ross (1981) , Lindenberg and Ross (L-R)’s Q. L-R Q = PREFST + VCOMS + LTDEBT + STDEBT – ADJ / TOTASST – BKCAP + NETCAP

PREFST : Liquidating value of a firm’s preferred stock VCOMS : Price of the firm’s common stock * number of shares LTDEBT : Long term debt adjusted for its age structure STDEBT : Book value of the firms current liabilities ADJ : Value of firms’ net short term asset TOTASST : Book value of firms total asset BKCAP :Book value of firms net capital stock NETCAP : Inflation- adjusted net capital stock Chung and Pruitt(1994) invent the approximation of Q from the L-R Q. Approximation of q = MVE + PS + DEBT / TA MVE : share price * number of common stock PS : Liquidity value of preferred stock DEBT : The value of firms short term liability net of its short term asset + book value of total asset The model they use the ordinary least square (OLS) regression to compare accuracy between the approximation of Q and the L-R Q. Dependent variable is the approximation of Q and the control variable is the L-R Q. The result indicate that there is no significant difference result between the the approximation of Q and the L-R Q. With this result, Tobin’s Q is used wildly to measureing firm’s managerial performance. Servaes (1991) evaluate what is the best M&A strategy between the firms’ Tobins’ Q levels. The acquirer should be higher Q firms or lower Q firms. Then, target firms would be better having higher Q level or lower Q level. The provide as a result, high Q firm as acquirer and low Q firm as a target firm is the best strategy doing M&A. The model specification of Servaes (1991) is divided into without control variable of CAR and with control variables of CAR. Without control variable model CAR = a + b1(target q dummy) + b2(bidder q dummy) With control variable model Car = a + b1(target q dummy) + b2(bidder q dummy) + b3(Relative Size) + b4(Cash payment) + b5(Multiple bidders) + b6(After 1980) + b7(Hostile). Breif important variable description among the variables, when Q dummy variable is one that means the target industry Q is higher than the average industry standard. Relative Size is log of the ratio of market value 11 days prior to the initial announcement. When the cash payment is one, it is that the payment of target deal complete in cash. When the variable of multiple bidders is one that means there are more than one bidder. The variable hostile means the hostile deal or not after 1980. Many of research about USA M&A market divided two time period: one is the 1960s when

happen the main stram M&A between unrelated firms (Ravenscraft and Scherer, 1987).

The other is the 1980s that the representative behavior most of firms return to the corporate specialization. (Bhagat, Shleifer and Vishny, 1990) Montgomery (1994) investigates the diversification effect in USA market. She tested using Tobin’s Q; the firm’s performance from the diversification is negative. The Korean case study, Park (2002) examines the relationship between ownership structure and Tobin’s Q from the Korea cheabol company which is Samsung, Hyundai, and Deawoo. The study categorized the performance into financial performance and firms’ value. The factor of financial performance is RoA (Return on asset) and RoS (Return on Sales). (Changanti and damanpour, 1991) (McConnel and Servaes, 1990) To measure the firm’s real value, they use the Tobin’s Q. So he used the RoA, RoS and Tobin’s Q as dependend variable to measure the firm’s value. Kim and Park (2002) measure the relationship between CAR and Tobin’s Q. The interesting point on their model is using the correspondent variable market value to book value ratio (MBR). Above all, Tobin’s Q can calculate the varios kinds of firm’s performance with finanacial report.

4. Research Question

Chan-Olmsted et al., (2003) raises the 5 research questions about the diversification. To summarize her research questions, the geographical and international diversifcaiton

stragety of media and telecommunication conglomerate classfies in terms of the extent (whether more or less diversified), direction (whether related or unrelated diversification) and mode (whether domestic M&A or international M&A). And which strategy is preferred by media and telecommunication conglomerate: product

diversification, free distribution channel and content integration? Related geographic diversification is preferred or not. The performacen of media and telecommunication conglomerate is different aspects

between the international diversificaiotn and product diversification. Also, the category of diversification by Chan-Olmsted et al., (2003) is product

diversification, geographic diversification and the relationship between the product and geographic.

Future Research Questions on Diversification and Performance

A. Due to the firms’ diversification strategy, whether firm can enhance their value with the financial performance or not?

B. What is the synergy effect and network effect for diversification in media and

telecommunication conglomerate?

C. Is the diversification strategy related to scale of economy or scope of economy?

D. To extent of value enhancing and value reducing, do three measurement techniques have the same result? Tobin’s Q, CAR, ROI.

Future Research Questions on Antitrust behavior.

A. The more diversified firms compete with new entrant more effectively, if there were no restrictions on media cross ownership?

B. What is the role of media conglomerate to encourage the service competition?

C. FCC antitrust decision is not considering the size of firm but judding the level of

competition encouragement in the related market.

5. Summary and Discussion To discuss the effect of diversification, we summerize the four aspects of this issue. First of

all, the diversification strategy of media and telecommunciation firms is the method of securing the new source of competitiveness under broadcasting and telecommunication convergence. They need to seek for the potential stable profit source with content-centered. So they remodel their firm’s structure into the content-platform standard and the content-application standard. Second, the internet and mobile seems to be inevitable up to now. Digitlaization of content

apprear the complex multi-platform for the media product, video oriented contets, the diffusion of UCC and on-line content market place. Digitalization issue restructures the value chain of media and contect product. So the related industry does not define their market specifically. Also they need to have an open market structure. Third, the creation of new business model has the content format issue. The definition of

content format is the consistent factor through the series and episode in media content. For example the idea and formate of entertainment program can export new type goods even though it is not the complete media product. (Eun, 2008) Fourth, the platform issue is caused by the digitalization. Traditional media environment

centered the platform-orient and dominate the content formate. But platform oriend firms should acquire the content and media firms with digitalization of content. The importance of possessing the content is higher because of the new application and device to communicate with internet and mobile phone. For the globalization approach of media firms have priority through the contents.

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