Companies to Take Hard Look at Their
Revenue and Cost Structures
|By Brian Ford, July 29, 2004
If they can win regulatory approval, Harrah’s Entertainment Inc. and MGM Mirage Inc. expect big payoffs from their respective acquisitions of Caesars Entertainment Inc. and Mandalay Resort Group. Harrah’s recent agreement to acquire Caesars for $5.2 billion came about a month after MGM Mirage said it would acquire Mandalay Resort for $4.8 billion. Both transactions are subject to assumption of debt.
The combined Harrah's and Caesars will create the world’s biggest gaming and entertainment company, with $8.8 billion in annual revenue, 96,000 employees and as many as 54 casinos across the country. Harrah's has grown through years of acquiring or managing casinos on riverboats and Indian reservations across the U.S.
MGM Mirage has grown by focusing on the Las Vegas market. Following the Mandalay Resort acquisition, it will be the industry’s second-largest player, with $6.4 billion in annual revenue and 64,000 employees.
Both companies are betting that the synergy created by the mergers will yield increased market share, large revenue gains, and substantial cost reductions. Harrah’s President and CEO Gary Loveman said the company expects to realize $80 million of synergies in the first full year of the Caesars acquisition and significantly more over time.
The two companies bring to their acquisitions years of experience and demonstrated expertise in maximizing cost savings across multiple properties. Now, they could realize substantial cost savings by consolidating management, operations and support functions including marketing, accounting, human resources, legal, information systems, and legal.
The mergers could also enable the companies to market more efficiently, reach gaming customers through more comprehensive promotion efforts, and reduce the costs of acquiring revenue. Harrah’s has focused on the more casual gambler, and it has a fairly homogeneous customer base nationally. With Caesars, it will have entrée into the mega-player market. The Mandalay acquisition will give MGM Mirage an even bigger presence in Las Vegas; the company will control about half the hotel rooms on the Strip.
The acquisitions could force other companies to take a hard look at their cost structures and determine how to stay competitive. A few decades ago, about 20 large companies accounted for most of the gaming business in the U.S. But with the industry’s consolidation of the past 15 years, and the proposed acquisitions, Harrah’s and MGM Mirage could control as much as half the market, half a dozen companies could account for 15% - 20%, and small companies for the remainder.
Whether regulators will approve the acquisitions, and in what form, remains to be seen. The Federal Trade Commission is expected to take a close look, as are state regulators. Harrah’s and MGM will also have to address other merger issues, such as integrating different cultures, and staying focused on their core businesses despite the inevitable distractions of a merger.
But the companies also will have opportunities to capitalize on the gaming market’s continuing growth. Since the first casinos were opened in Atlantic City in the late 1970s, the market has grown at about a 3% annual rate, and more states are enacting gaming laws. Pennsylvania recently authorized as many as 61,000 slot machines, more than any other state except Nevada. Gaming has become a more acceptable form of entertainment, an increasingly important source of state and local tax revenue, and a leading employer – following the acquisitions, Harrah’s and MGM will be Nevada’s largest employers. Even so, there is room for the industry to grow. It’s estimated that less than 25% of the eligible population in the U.S. participates in gaming.
Brian R. Ford is the national director of gaming services of Ernst & Young LLP. He may be reached at (215) 448-5010 or by e-mail email@example.com.
The views of the author do not necessarily reflect those of Ernst & Young LLP.
Brian R. Ford
|Also See:||Federal Trade Commission Officially Requests more Information from MGM Mirage and Mandalay Resort Group; Competitive Consequences of Proposed Merger Under Scrutiny / July 2004|
|The MGM Mirage-Mandalay and Harrah's-Caesars Mergers Create Questions No One Can Answer; Worst-case Scenario: the Federal Antitrust Officials Could Kill Both Deals / July 2004|