CH-ZWA645-005jsmGB

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James Oldroyd Kellogg Graduate School of Management Northwestern University j-oldroyd@northwestern.edu 801-422-7888 650 TNRB

X Music Tribune X X X X New York Times Dow Jones Gannett KnightRidder Clear Channel Viacom X X X X X X X X X X X X X X X X X X X X X X AOL/TimeWarner Disney X X X X X X X X X X X X X 1 .Cross Media Rivalry Matrix Company Newspaper X TV Cable Pub Live Outdoor Radio Online Video and Ent.

7% 58.3% Prime Time TV2 42.5% 23.9% 56.4% 25.0% 0% Prime Time Cable4 10.4% 10% 11.5% 20% Morning Drive Radio3 25.7% 25.4% 10.2% Daily Newspaper1 60% 50% 45.9% 56.5% 24.5% 37.8% 58.5% 11.0% 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 2.3% 12.6% 38.One of The Problems Exhibit 1 Percent of Adults Reached 70% 58.8% 39.3% 10.6% 57.8% 40% 30% 25.4% 40. Top 50 Market Report Prepared by NAA Research Department Note: Radio drive times reflect Mondy-Friday average quarter hour 2 .

’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 Time’s HBO and Cinemax • Reduced risk of losses from growing film production costs due to guaranteed runs in self owned outlets • Multipoint competition 3 . Slow growth in magazine division Growth in cable networks Time Inc.MOTIVATIONS FOR A MERGER AT TIME INC.

125 M MVW = $45.220.875 * 178.5M shares = $8.188.TIME’S OFFER FOR WARNER Time shareholders offer a 59% stake in the merged firm to acquire Warner (through a stock swap) • • • MVT = $109.6875 M Assumes share prices at the data of the announcement Completion of the acquisition requires shareholder approval. combined T-W value = $14.125 * 57M shares = $6.4B 4 .

5 .EVALUATING THE WARNER OFFER Is Warner worth giving up 59% of Time Warner? Market value of T-W is $14. Assuming a perpetuity with a 10% discount rate.4B = $8.4B Time pays 0.496B for Warner For Time shareholders to be indifferent between holding Time and holding 41% of T-W must have a value of $15.59 x 14.22B x 100% = Value T-W x 41%. $6. This requires about $75M in additional annual cash flows.17B Time-Warner must create an additional $771M in synergies beyond their cumulative market values. Value T-W = $15.17B.

3B Time-Warner must create an additional $9.98B For Time shareholders to be indifferent between holding Time (cash from Paramount) and 41% of TimeWarner.3 B. Assuming a perpetuity with a 10% discount rate. VALUE (T-W) = $24.EVALUATING THE PARAMOUNT OFFER Is Warner worth giving up the Paramount Offer? With Paramount’s offer. T-W must have a value of $24.975B $175 x 57M shares = $9. 6 .929B in synergies for shareholders to justify spurning Paramount’s offer. Times value increases to $9. $9.98B x 100% = VALUE (T-W) x 41%. This requires almost $1B in additional annual cash flows.

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? 7 .

TIME’S DECISION Time dropped its stock offer for Warner and paid a higher price ($13. This avoided the need for shareholder approval of the merger that surely would have failed given the Paramount offer. $72/share) for Warner with cash. Paramount boosted its offer to $200 per share and indicated a willingness to go higher. 8 .1B. Paramount sued based on the business judgment rule and lost.

How big is the sandbox? The Scope of the Firm 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. Choose strategies to enter/exit business areas 9 . Choose business areas to participate in 2.CORPORATE-LEVEL STRATEGY. Vertical Integration Diversification 1.

Related diversification – value chain commonalities Unrelated diversification – totally new business activities Different Value Chains Similar Value Chain Hardlines Softlines Food Travel Insurance 10 .CREATING VALUE THROUGH DIVERSIFICATION Diversification is a strategy attempting to improve long-run profitability by acquiring and managing new business lines.

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 • • Information overload Coordination limitations Pooling Risk Managerial Opportunism (Agency Problems) 11 .

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 12 .

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 13 .

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