horizontal scope
Post on 14-Mar-2016
42 Views
Preview:
DESCRIPTION
TRANSCRIPT
CH-ZWA645-005jsmGB
Horizontal Scope
James OldroydKellogg Graduate School of ManagementNorthwestern University
j-oldroyd@northwestern.edu801-422-7888650 TNRB
2
Cross Media Rivalry MatrixCompany News-
paperTV Cable Pub Live Out-
doorRadio Online Video
and Ent.
Music
Tribune X X X X X X
New York Times
X X X
Dow Jones X X
Gannett X X X
Knight-Ridder
X X
ClearChannel
X X X X
Viacom X X X X X X X X
AOL/Time-Warner
X X X X X X
Disney X X X X X X X
3
One of The Problems
Sources: Scarborough Research 1999 Release 2, Top 50 Market Report Prepared by NAA Research DepartmentNote: Radio drive times reflect Mondy-Friday average quarter hour
1 Average day readership2 Average half hour3 Average quarter hour4 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 20000%
10%
20%
30%
40%
50%
60%
70%
Exhibit 1
Percent of Adults Reached
4
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 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
5
TIME’S OFFER FOR WARNER
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
6
EVALUATING THE WARNER OFFERIs 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 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.
7
EVALUATING THE PARAMOUNT OFFERIs Warner worth giving up the Paramount Offer?
With Paramount’s 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 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 Paramount’s offer.
This requires almost $1B in additional annual cash flows.Assuming a perpetuity with a 10% discount rate.
8
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
TIME’S 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.
10
CORPORATE-LEVEL STRATEGY- 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.
Vertical IntegrationDiversification
1. Choose business areas to participate in2. Choose strategies to enter/exit business areas
11
CREATING VALUE THROUGH DIVERSIFICATION
Diversification is a strategy attempting to improve long-run profitability by acquiring and managing new business lines.
Related diversification – value chain commonalitiesUnrelated diversification – totally new business activities
Similar Value Chain
Hardlines Softlines FoodTravel
Insurance
Different Value Chains
12
EVALUATING DIVERSIFICATION
How can diversification create value?Acquiring and restructuringTransferring competenciesEconomies of scale Economies of scope
How can diversification dissipate value?Bureaucratic Costs• Information overload• Coordination limitations
Pooling RiskManagerial Opportunism (Agency Problems)
13
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
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
top related