Professional Documents
Culture Documents
Horizontal Scope
James Oldroyd Kellogg Graduate School of Management Northwestern University j-oldroyd@northwestern.edu 801-422-7888 650 TNRB
Tribune
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X X X
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X X X X X X X X X X
AOL/TimeWarner
Disney
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X X
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Exhibit 1
Daily Newspaper1
60% 50%
45.3%
40% 30%
25.5% 20%
10%
11.0% 0%
1996
1 Average 2 Average 3 Average 4 Average day readership half hour quarter hour half hour
1997
1998
Spring 1999
Fall 1999
Spring 2000
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
Slow growth in magazine division Growth in cable networks Time Inc.s decision to enter the entertainment industry is being driven primarily by deregulation enabling vertical integration in media. Vertical integration in being motivated by Increasing risk of holdup in acquiring programming and outlets for Times HBO and Cinemax Reduced risk of losses from growing film production costs due to guaranteed runs in self owned outlets Multipoint competition
Time shareholders offer a 59% stake in the merged firm to acquire 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 shareholder approval; combined T-W value = $14.4B
For Time shareholders to be indifferent between holding Time and holding 41% of T-W must have a value of $15.17B.
$6.22B x 100% = Value T-W x 41%; Value T-W = $15.17B
Time-Warner must create an additional $771M in synergies beyond their cumulative market values. This requires about $75M in additional annual cash flows.
Assuming a perpetuity with a 10% discount rate.
For Time shareholders to be indifferent between holding Time (cash from Paramount) and 41% of TimeWarner, T-W must have a value of $24.3 B.
$9.98B x 100% = VALUE (T-W) x 41%; VALUE (T-W) = $24.3B
Time-Warner must create an additional $9.929B in synergies for shareholders to justify spurning Paramounts offer. This requires almost $1B in additional annual cash flows.
Assuming a perpetuity with a 10% discount rate.
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?
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 approval of the merger that surely would have failed given the Paramount offer.
Paramount boosted its offer to $200 per share and indicated a willingness to go higher. Paramount sued based on the business judgment rule and lost.
Corporate-Level Strategy is action taken to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets. Vertical Integration Diversification 1. Choose business areas to participate in 2. Choose strategies to enter/exit business areas
Travel Insurance
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EVALUATING DIVERSIFICATION
How can diversification create value? Acquiring and restructuring Transferring competencies Economies of scale Economies of scope How can diversification dissipate value? Bureaucratic Costs
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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
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