The blockbuster announcement that Learfield Sports and IMG-College are negotiating a merger is a classic example of how to create an even more dominant company by merging two competitors that already control substantial segments of their shared market. It’s easy to see that the merger would be good for the private equity firms that own the two companies. It’s harder to understand how the merger would benefit the colleges and sponsors who have fueled the growth of the two companies to date.
One thing is clear: Private equity companies typically strive to maximize cash flow. To do that here will likely require some combination of raising prices paid by sponsors, reducing rights payments to colleges and reducing expenses.
On the revenue side, the pricing power of the combined company would be substantial. Together, their combined portfolio would include more than 70% of Division I universities, including 85% of the Power 5 member schools. More importantly, no other rights holder would even come close in being able to deliver sponsorship rights across any group of major colleges. Although many other sponsorship options exist today, logic would say that the combined company would want to use its even more dominant market position to raise prices.
On the cost side, the dominant market position of the combined company could be even more valuable. Two opportunities exist here. First, payments to colleges. While a few smaller rights holders have toeholds in college sports sponsorships—and the merger may bring a few more to the table—none of the smaller competitors has the financial resources, relationships or talent necessary to compete at the national level. This is particularly true on the present business model where Learfield and IMG-College pay colleges millions of dollars for exclusive rights over multi-year periods now stretching ten years or more. Given the lack of competition, logic again would say that the combined company would work to reduce what it pays to colleges over time.
The second opportunity on the cost side is operating expenses. The easiest way to improve cash flow in the short term is to reduce staffing—a favorite skillset of private equity firms. With the deep and talented teams both Learfield and IMG have in place across the country, it would make sense to look hard at reducing employee costs. To the extent that the reductions are focused on eliminating redundancies, the only losers may be the redundant employees. If the staff reductions go further, they could affect the level of service delivered by the combined company, both to colleges and to sponsors. Rights holders have been criticized in the past for devoting more attention to making sales than to helping their sponsor clients get what they pay for. If the position cuts adversely affect asset activation and event guest satisfaction, sponsors could suffer.
The really interesting question is how the Antitrust Division of the Department of Justice will view the deal. As with a lot of antitrust reviews, the key issue may turn on how DOJ defines the market. If the market is defined narrowly (for example, the acquisition and re-licensing of college sports sponsorship rights), the anticompetitive impact of the deal will be higher than if they market is defined broadly (for example, the acquisition and sale of sponsorship rights or sports marketing and advertising of any kind). From an academic perspective, a narrow market definition seems compelling. The long-term nature of the rights contracts that the parties have with many colleges also seems like a further argument that the deal would be anti-competitive. After all, it could take years for that market dominance to run off. But in today’s Administration, less aggressive antitrust enforcement policies might well result in a more pragmatic analysis supportive of approval.
If approval is in the cards, divestiture and opt-out commitments may need to be part of the deal. Although it would take a lot to lessen the dominance of the resulting company, strengthening the remaining competitors through divestitures could help foster industry support and DOJ approval. In a similar vein, letting some colleges out of their long-term contracts could accelerate the prospect of increased competition.
Divestiture offers invariably give merging parties opportunities to combine cries of woe with clever strategic decisions about what they really want to keep and what they are happy to divest. Both parties have examples of dropping or pricing-down colleges at the lower end of the value chain. We’ve also seen recent decisions by colleges to take back their rights marketing and activation and go it alone. You can be sure that Learfield Sports and IMG College know where they face risks of losing business and where they intend to preserve business at almost any cost. Don’t be surprised if their strategies about which colleges really matter find their way into any divesture discussions that may ensue.