Skydance's merger settlement limits where Ellison can find $6 billion in cuts

Skydance's order of work is set by what it borrowed. The company took on more than $80 billion of debt to buy out Warner Bros. Discovery investors at $31.17 a share, the Los Angeles Times reported ^[2]. On its first day the stock traded at $9.51, down 2.7% from Monday's close ^[9]. Business Insider reported the shares are down 30% this year and have lost nearly half their value in 12 months, despite a gain of more than 5% on Thursday ^[18]. Spread evenly, the $6 billion savings plan comes to $2 billion a year ^[24].

Vox noted that debt-financed buyers can come under pressure to cut costs, and that one way to do it is to make fewer films or cancel unreleased ones ^[19]. Cinema United, a theater industry group, counted about half as many theatrical releases from Disney and 21st Century Fox after their 2019 merger as before it, leaving out 2020 and 2021 ^[20]. Skydance's settlement puts a price on that route. The floor adds up to at least 156 films over five years ^[23], and missing it means paying a fee, NBC News reported ^[3].

A skeptic would say the floor costs Skydance little, because the company had no reason to cut films in the first place. The European Commission concluded that Paramount and Warner depend more on film revenue than Disney does, and that cutting output after the merger "would not make economic sense," according to Vox ^[21]. I think the Commission is right about the films, and the skeptic is right that the floor will rarely bind.

If the Day 1 memo is a guide, the savings will come from people. Ellison and his co-CEO, Ynon Kreiz, wrote that "integrating two companies will bring change, including difficult decisions that affect our workforce" ^[11]. Kreiz is known for cutting costs at Mattel, NBC News reported ^[13]. Ellison wrote that cutting $6 billion of spending "will make us leaner and more nimble and free up capital to invest in the stories, creators and technology that matter most" ^[10].

Business Insider wrote that HBO Max and Paramount+ may be stronger together, but Skydance's leaders still have to work out how to integrate them while competing with Netflix, Disney and YouTube ^[16][1]. HBO's Casey Bloys will lead the combined streaming effort, and Paramount streaming chief Cindy Holland has announced her departure ^[8]. Film went the other way. Paramount Pictures co-chairs Dana Goldberg and Josh Greenstein run the expanded studio, and Warner's film chiefs, Mike de Luca and Pam Abdy, have left ^[17].

The ownership lets Ellison set a long horizon. His father, Larry Ellison, is backing the deal with tens of billions of dollars of his own fortune, according to NBC News ^[12]. "As owner-operators, we're in this for the long term," David Ellison wrote in the memo, adding that the company is "not simply optimizing for the next quarter or the next year" ^[15]. "We are positioned to win in every single vertical that we operate in," he told CNBC at the exchange on Thursday ^[22]. The headcount and streaming decisions made this quarter will set how much of the $2 billion a year is in hand before the film floor rises to 32 releases in year three ^[24][3].