By Jen Saarbach & Kristen Kelly, Co-Founders of The Wall Street Skinny
If you’ve been following the news, you probably saw two headlines back-to-back. First: “Warner Bros. Discovery Rejects Paramount Bid.” That part wasn’t surprising. The reported $30-per-share offer was the same price WBD’s board had already rejected privately. Paramount simply tried to take it public and force a shareholder vote.
The more interesting development came immediately after: Jared Kushner drops out of the deal.
A lot of the commentary since then has focused on politics. Specifically, was Kushner’s involvement meant to signal regulatory friendliness, given his proximity to Trump? And, was his exit tied to tensions between Trump and Larry Ellison?
We are not a political expert, so won’t pretend to know whether that was part of it.
But our theory? This was partially a financial decision.
And that brings us to a concept we teach whenever we discuss M&A: the difference between strategic buyers vs. financial buyers.
In M&A, every deal has a motive. Strategic buyers (think large operating companies like Netflix) buy other businesses to strengthen their competitive position. Financial buyers, think private equity firms, buy businesses to earn a return for their investors (their LPs or “limited partners”).
At the end of the day, both scenarios result in one company being acquired by another, but with very different objectives and mechanics.
Take Netflix, for example.
Netflix is your classic strategic buyer of Warner Bros. Discovery. The logic is straightforward: premium IP at massive scale, ensuring WBD does not go into the hands of a competitor, meaningful synergies, i.e. cost cuts from not having to pay licensing fees for various shows as well as possibly some headcount reduction.
Strategic buyers tend to focus on whether a deal is accretive or dilutive to earnings per share, because EPS is a proxy for long-term share price performance.
Financial buyers operate differently.
A private equity firm puts in cash, gets equity in the business, holds the company for a set time period (usually five to seven years) then exits, via sale or IPO. Their objective? A return of north of 20%.
What made the Paramount/WBD situation unusual is that it blurred those lines. Paramount itself was acting strategically. It needs scale to compete with Netflix, Apple, and Amazon. But it’s a tiny company relative to WBD. Paramount has only a $15bn market cap vs. a deal size of $108bn (!). So the broader bid was funded by a consortium of different investors, each with their own incentives.
The (now rejected) $108 billion proposal was reportedly financed by roughly $17 billion from Larry Ellison & RedBird Capital, who already have a significant investment in PSKY, and roughly $24 billion of outside money coming from Jared Kushner and several Middle Eastern sovereign wealth funds. PSKY would roll its own equity into the new business.
The motives here matter, though.
Again, Paramount’s rationale is strategic survival. Larry Ellison’s involvement is…personal (he’s the father of Paramount’s controlling shareholder) AND he and Redbird Capital are significant investors in PSKY already.
Sovereign wealth funds, while often thought of as financial buyers often are more strategic and think in decades, not fund cycles. Many will routinely accept returns that don’t make sense for traditional PE because they care about influence, diversification, and long-term positioning. Just look at PIF’s (Saudi Arabia’s SWF) investments in LIV Golf, global sports stars like Cristiano Ronaldo, Phil MIckleson or Jon Rahm, or gaming.
But Jared Kushner’s firm is different. Even if his capital ultimately comes from many of these same sovereign wealth funds he WAS going to invest along side in this deal, the structure is still private equity. He earns fees that are based on both management and performance: your classic “2 and 20”. That means his incentive is still tied to project-level returns. As it became clear this deal would not get done at a $30 offer price, his expected IRR may have just fallen too much. At some point, the deal simply stops working financially.
So while it’s very possible politics played a role, it’s equally plausible that increasing the bid price made the math unattractive for a traditional PE-style investor who is being paid based on their ability to achieve returns. And that’s the key takeaway: not all capital in a deal is motivated by the same thing.
Understanding who is at the table, and why, often explains deal outcomes far better than the headlines ever can.