NEW YORK — In a landmark merger that creates the largest entertainment company in the world and promises to quicken the realignment of Hollywood, the Walt Disney Co. agreed Monday to buy Capital Cities/ABC Inc. for $19 billion in cash and stock.
The combination brings together the No. 1 television distributor and network and the nation's premier producer of movies to create a one-of-a-kind global powerhouse with combined sales of $20.7 billion.
If the deal is approved as expected by federal regulators and shareholders, the resulting Walt Disney company would dwarf the current entertainment leader, Time Warner Inc., which has about $16 billion in revenues. It would be the second-largest merger in U.S. history, after the $25-billion acquisition of RJR Nabisco Inc. by Kohlberg Kravis Roberts & Co. in 1989.
The merger also comes on the eve of the anticipated sale of the third-ranking network, CBS Inc., to Westinghouse Electric Corp., which could be announced this week.
"This creates a company with global reach that can meet the ongoing demand for American entertainment in the multichannel environment around the world," said Christopher Dixon, an analyst at PaineWebber Inc. "It gives them two very strong brand names and the scale to go up against Viacom, Time Warner and News Corp."
Perhaps the most stunning part of the deal was the reaction. It drew widespread praise from Wall Street investors and media executives on the inside and outside of both companies. Analysts said the merger was good for shareholders of both companies and called the partners perfect mates, with matching corporate cultures, similar conservative business philosophies and a long history.
Even the most hardened critics were impressed with the lack of overlap between the two operations and the possibility for cross-promotion between their properties. Unlike many mergers, this one is not expected to result in layoffs of any of the combined 90,000 employees. The network will continue to be headquartered in New York, and will be a subsidiary of the Burbank-based Disney company.
The industry also congratulated Michael Eisner, the often risk-averse chairman of Disney, for stepping up to the plate after several rounds of warm-up talks with both ABC and CBS. Eisner, who will head the combined company, said he has held talks with Thomas S. Murphy, the founder of Capital Cities/ABC Inc., six times over the last three years about pairing up.
"This is a triumph for Eisner," said Gordon Crawford, an investor with the Capital Group, which owns stock in both companies. "He got the best network, the best cable network in ESPN, and major stations in New York and L.A."
In an unusual symbol of Wall Street's acceptance, the stock prices of both companies traded up. Cap Cities surged $20.125 to $116.25 on a deal valued at $122.37 per share; Disney rose $1.25 to $58.625.
The stock price of an acquiring company generally drops after an acquisition announcement because of the debt and uncertainty it creates.
"The professionals immediately understood the synergy of the deal," said Mario Gabelli, a money manager who has a large stock interest in both companies. "This is about globalism. Advertisers like Procter & Gamble and Coca-Cola are going around the world and want the frequency and reach broadcasters provide."
In addition to a raft of characters that play well from Japan to Scandinavia--such as Mickey Mouse, Snow White and Donald Duck--Disney owns theme parks in the United States and abroad, a professional hockey team, 400 retail stores, a record and book arm, the Disney Channel pay TV service and a television and movie studio with a rich vein of hits that include "Pocahontas" and "The Lion King."
Created in a merger in March, 1985, Capital Cities/ABC owns the most profitable network, eight of the best-managed television stations in the country--which reach 25% of the nation's viewers--21 radio stations, the ESPN sports cable networks, a gaggle of trade magazines and interests in cable networks, including Lifetime and A&E. It has 225 affiliate broadcasters. Its newspaper group includes the Kansas City Star and the Ft. Worth Star-Telegram.
The companies have something of a history together. Murphy talked about teaming up with Roy Disney Sr. years ago. In 1953, then ABC Chairman Leonard Goldenson helped finance Disneyland. Eisner landed his first job in 1969 at ABC Entertainment, and joked at the press conference about his scheduling of soap operas when he was a programming chief there. Today, the popular Disney show "Home Improvement" airs on ABC.
"I always thought the combination was perfect," said the 70-year-old Murphy, chairman and chief executive officer of Capital Cities/ABC, who will relinquish his title when the merger takes effect late next year and will join the Disney board. "And the idea of Michael ending up with CBS just killed me," he said, alluding to the talks between Disney and CBS.