Paramount, Warner Bros. Discovery Merger Is 'Not The Answer': Analysts Highlight Deal Positives, Negatives

A mega-merger could happen in the world of media with two television, movie and streaming companies joining forces.

Here's a look at what analysts are saying about a potential combination of Warner Bros. Discovery Inc WBD and Paramount Global PARAPARAA, which was reported as a potential merger Wednesday.

What Happened: The CEOs of both Warner Bros. Discovery and Paramount Global reportedly met Tuesday to discuss a potential combination.

A transaction would essentially create a streaming powerhouse, bringing the Max and Paramount+ platforms together. Other assets include several media brands, cable channels — including the CBS broadcast network — and sports media rights deals.

Here's a look at how analysts responded to the news:

Needham: The two studios could maximize value with a merger, Needham analyst Laura Martin said.

"Both companies have streaming assets that are sub-scale, but together their OTT bundle would be one of the largest," Martin said.

The combination would also make the combined entity one of the largest cable channel providers alongside the CBS broadcast network, which could lead to better negotiating leverage, Martin explained.

"Their combined film and TV libraries would have one of the largest content IP portfolios," she added.

Martin also believes the companies could complement each other. For example, Paramount will have better kids content and Warner Bros. will have better international distribution.

The two companies would also become juggernauts in the news and sports spaces with their combined assets and negotiating power for future sports rights.

The deal would also get regulatory approval, whereas other companies like Apple Inc AAPL or Amazon.com Inc AMZN might struggle to get approval to buy Paramount, she noted. Laws prevent any company from owning more than one broadcaster, making it hard for Disney DIS or Comcast Corporation CMCSA to buy Paramount.

Martin has a Hold rating and no price target on Warner Bros. Discovery. The analyst has a Buy rating and $15 price target on Paramount Global.

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LightShed: Cord-cutting is getting worse, and advertising struggles for media companies have led to losses in the billions for streaming operators. That’s why LightShed Partners analyst Rich Greenfield doesn't see the pending merger as a likely success.

"I wonder whether the reason we're seeing merge talk is because the entire industry…is realizing there are no green shoots in TV advertising. It's never ever getting better," Greenfield said.

Greenfield told CNBC that the discussion of a merger between the two companies comes as media companies don't know what to do with recent struggles.

"How bad are numbers for Q4 for this industry," he said. "Putting these companies together is not the right answer. Merging is not the answer."

Greenfield said companies can't compete with Netflix Inc NFLX in the streaming space and need to take a step back with their streaming platforms and plans.

"These companies need to change course."

The solution for companies like Warner Bros. Discovery and Paramount is to go back to making great content and to stop being a streaming platform, Greenfield added.

For Warner Bros. Discovery, Greenfield said that includes going back to the strength of HBO and not having the Max streaming platform. The analyst said the company should be an "arms dealer" for television and movie content for the industry.

"Don't try to compete in the streaming wars."

Interestingly enough, Paramount shareholder and legendary investor Warren Buffett argued against streaming platforms last year.

"It isn't fundamentally that good a business," Buffett said.

Why It's Important: Recent results from the companies show Max with 95 million subscribers and Paramount+ with 63 million subscribers. The numbers trail the leads of Disney+ and Netflix at 105 million and 247 million respectively.

A poll conducted by Benzinga and Dig Insights in March showed that Netflix and Amazon Prime Video were the top streaming networks if consumers were forced to get rid of all but one. About 29% of those polled selected Netflix as the one they would keep.

Max ranked fifth at 8% and Paramount+ ranked seventh at 5%.

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