Session 18 Time

8/13/2019 Session 18 Time

1/14


2/14

1

Cross Media Rivalry Matrix

Company News-

paper

TV Cable Pub Live Out-

door

Radio Online Video

and

Ent.

Music

Tribune X X X X X X

New York

TimesX X X

Dow Jones X X

Gannett X X X

Knight-

RidderX X

Clear

ChannelX X X X

Viacom X X X X X X X X

AOL/Time-

WarnerX X X X X X

Disney X X X X X X X


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2

One of The Problems

Sources: Scarborough Research 1999 Release 2, Top 50 Market Report Prepared by NAA Research Department

Note: Radio drive times reflect Mondy-Friday average quarter hour

1 Average day readership

2 Average half hour

3 Average quarter hour

4 Average half hour

58.8% 58.7% 58.6%

57.9%56.9%

56.2%

45.3%

42.4%40.8%

39.6%38.5%

37.8%

25.5% 25.4% 25.7% 25.5%24.5%

23.4%

11.0%10.4% 10.3%

10.5% 11.3%12.0%

Daily Newspaper1

Prime Time TV2

Morning Drive Radio3

Prime Time Cable4

1996 1997 1998 Spring 1999 Fall 1999 Spring 2000

0%

10%

20%

30%

40%

50%

60%

70%

Exhibit 1

Percent of Adults Reached


4/14

3

MOTIVATIONS FOR A MERGER AT TIME INC.

Slow growth in magazine divisionGrowth in cable networksTime Inc.s decision to enter the entertainment industry is being

driven primarily by deregulationenabling vertical integrationin media.

Vertical integration in being motivated by Increasing risk of holdup in acquiring programming andoutlets for Times HBO and Cinemax

Reduced risk of losses from growing film production costsdue to guaranteed runs in self owned outlets

Multipoint competition


5/14

4

TIMES OFFER FOR WARNER

Time shareholders offer a 59% stake in the merged firm toacquire Warner (through a stock swap)

MVT= $109.125 * 57M shares = $6,220,125 M MVW = $45.875 * 178.5M shares = $8,188.6875 M Assumes share prices at the data of the

announcement

Completion of the acquisition requires shareholderapproval; combined T-W value = $14.4B


6/14

5

EVALUATING THE WARNER OFFER

Is Warner worth giving up 59% of Time Warner?

Market value of T-W is $14.4BTime pays 0.59 x 14.4B = $8.496B for Warner

For Time shareholders to be indifferent between holding Timeand holding 41% of T-W must have a value of $15.17B.$6.22B x 100% = Value T-Wx 41%; Value T-W= $15.17B

Time-Warner must create an additional $771Min synergiesbeyond their cumulative market values.

This requires about $75M in additional annual cash flows.

Assuming a perpetui ty wi th a 10% discount rate.


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EVALUATING THE PARAMOUNT OFFER

Is Warner worth giving up the Paramount Offer?

With Paramounts offer, Times value increases to $9.975B$175 x 57M shares = $9.98B

For Time shareholders to be indifferent between holding Time(cash from Paramount) and 41% of TimeWarner, T-W musthave a value of $24.3 B.$9.98B x 100% = VALUE (T-W) x 41%; VAL UE (T-W) = $24.3B

Time-Warner must create an additional $9.929Bin synergies forshareholders to justify spurning Paramounts offer.

This requires almost $1Bin additional annual cash flows.Assuming a perpetui ty wi th a 10% discount rate.


8/147

ANALYTICAL ISSUES

Which stakeholder interests should be served?

Which interests are being served? (agency problems)

How do we value the options?

Where do we find the potential synergies?


9/148

TIMES DECISION

Time dropped its stock offer for Warner and paid a higher price($13.1B; $72/share) for Warner with cash.This avoided the need for shareholder approv al of the merger that surely would

have fai led given the Paramount offer.

Paramount boosted its offer to $200 per share and indicated awillingness to go higher.

Paramount sued based on the business judgment rule and lost.


10/149

CORPORATE-LEVEL STRATEGY- How big is the sandbox?

The Scope of the Firm

Corporate-Level Strategyis action taken togain a competitive advantage through theselection and management of a mix ofbusinessescompeting in severalindustries or product markets.

Vertical IntegrationDiversification

1. Choo se bu siness areas to part icipate

in

2. Choo se strategies to enter/exitbu siness areas


11/1410

CRE TING V LUE THROUGH DIVERSIFIC TION

Diversificationis a strategy attempting to improve long-runprofitability by acquiring and managing new business lines.

Related diversificationvalue chain commonalitiesUnrelated diversificationtotally new business activities

Similar Value Chain

Hardlines Softlines Food

Travel

Insurance

Different Value

Chains


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EVALUATING DIVERSIFICATION

How can diversification create value?Acquiring and restructuring

Transferring competenciesEconomies of scaleEconomies of scope

How can diversification dissipate value?Bureaucratic Costs

Information overload Coordination limitations

Pooling RiskManagerial Opportunism (Agency Problems)


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CREATING VALUES THROUGH ECONOMIES OF SCALE

Eliminate operational redundancies Reduce costs in common activities

Eliminate a competitor Reduce competition and rivalry; increase prices

through increased market power


14/1413

CREATING VALUE THROUGH ECONOMIES OF SCOPE

Operational Economies of Scope Shared activities Core competencies

Financial Economies of Scope Internal capital allocation Risk reduction Tax advantages

Anticompetitive Economies of Scope

Multipoint competition Exploiting market power

Documents

Session 18 Time