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Contenu Accretion dilution concepts 1 Industry-specific valuation metrics 5 Sum of the parts valuation 9 What are Non-Operating Assets? How do they Affect Value? 19 Impact of stock versus cash deals 19 Operational efficiencies 24 Media Industry 25 Advertising 32 Print Media 32 Television 33 Filmed Entertainment 34 Video Games 34 Radio 35 Internet based Media 35 Media Technology Manufacturers 36
Accretion dilution concepts
Basically, accretion / dilution analysis answers the question: "Does the proposed deal increase or decrease the post-transaction earnings per share  (EPS)?" This determines the justification for the deal in the first place.
Accretion/dilution analysis is a type of  M&A  financial modelling performed in the pre-deal phase to evaluate the effect of the transaction on  shareholder value  and to check whether  EPS  for buying shareholders will increase or decrease post-deal.
Generally, shareholders do not prefer dilutive transactions; however, if the deal may generate enough value to become accretive in a reasonable time, a proposed combination is justified.
Accretion / dilution analysis is often seen as a proxy for whether or not a contemplated deal creates or destroys shareholder value. But how can you assess whether or not two entities should merge, if you are only analyzing a two-year horizon? For instance, if the combined entity has better manufacturing capabilities and more diverse offerings, it may take more than a couple of years to fully integrate both operations to leverage and realize efficiencies and for marketing to convey the message. This type of analysis is not a composite of the complete picture, nor does it contemplate on how a newly-combined entity operates, adjusts or takes advantage of opportunities years down the road.
Is the pro forma EPS higher than the original EPS? An increase to EPS is regarded as accretion, while a decrease is regarded as dilution. Many on Wall Street typically frown at dilutive transactions. If a deal has a reasonable likelihood of turning accretive from year two and onwards, a proposed business combination may be more palatable.
Accretion/dilution is relevant to a strategic buyer as it can be regarded as a proxy for whether the acquisition creates or destroys value for shareholders. EPS serves as an indicator of a company’s profitability. If a transaction is going to decrease the company’s profitability (i.e. it is dilutive), the value of the buyer should theoretically decrease following the transaction.
However, there are significant limitations to this analysis. First, accretion/dilution is looking at the transaction over a fixed period of time. Strategic buyers generally intend to own an acquired business indefinitely. Additionally, EPS is impacted by numerous accounting decisions (which can be manipulated) and does not necessarily reflect the economic reality or the combined company’s ability to generate cash flow.
Steps Involved in Accretion / Dilution Analysis
1) Estimate a pro forma net income for the combined entities.
Include conservative estimates of net income, taking into account prospective operational and financial synergies that are likely to result after the deal is finished. Some groups incorporate the last 12 months (LTM) as well as one- or two-year projections. Others include projected net income only. Regarding prospective synergies, the new company may anticipate higher revenues, due to cross-selling of a wider array of product and service offerings, as well as lower costs, due to the elimination of redundant functions and manufacturing facilities. (If you're unfamiliar with pro forma net income, refer to Understanding Pro-Forma Earnings.)
Aside from variables that affect the pro-forma net income due to anticipated synergies, the analyst should also account for transaction-related adjustments that may occur, such as higher interest expense, if this is a leveraged buyout and debt is used to fund the deal, lower interest income, if cash is used to make the purchase, and additional considerations on post-transaction intangible asset amortizations.
2) Calculate the combined company's new share count.
Tabulate the prospective acquirer's share count. Factor new shares that would be issued to make the purchase – if it's a stock deal.
3) Check the accuracy of your numbers.
Lest you risk looking dumb in front of the deal team, check your numbers before presenting them. Are you incorporating some professional skepticism on prospective synergies, or is the entire garden laden with beautiful roses?
4) Divide pro forma net income by pro forma shares to arrive at a pro forma EPS.
Is the pro forma EPS higher than the original EPS? An increase to EPS is regarded as accretion, while a decrease is regarded as dilution. Many on Wall Street typically frown at dilutive transactions. If a deal has a reasonable likelihood of turning accretive from year two and onwards, a proposed business combination may be more palatable.
Example
Pre-deal situation[edit]
BuyCo plans to acquire 100% shares of SellCo in a stock-for-stock transaction.[2]
BuyCo has a net income of $300,000 and 100,000 shares outstanding
Market shareprice of BuyCo is $50.0
Pre-deal EPS = $3.0
Pre-deal P/E = 16.7
SellCo has a net income of $100,000 and 50,000 shares outstanding
Market shareprice of SellCo is $60.0
Pre-deal EPS = $2.0
Pre-deal P/E = 30.0x
BuyCo agrees to pay a premium for control of 30%, so the offer price for one SellCo share is 1.3*$60.0 = $78.0
Stock-for-stock exchange ratio is $78/$50 = 1.56 of BuyCo shares for one SellCo share
BuyCo issues 1.56*50,000 = 78,000 new shares to exchange them for all the SellCo shares outstanding
Total shares of NewCo = 100,000 (pre-deal shares of BuyCo) + 78,000 (new shares) = 178,000 shares
NewCo expected EPS = Total net income/Total shares outstanding = ($300,000+$100,000)/178,000 = $2.25
NewCo expected shareprice = (P/E of BuyCo)*(expected EPS) = 16.7x*$2.25 = $37.45
Post-deal situation[edit]
EPS of NewCo fall from $3.0 to $2.25, so the deal is 25% dilutive for BuyCo shareholders
BuyCo shareholders own 100,000/178,000 = 56.18% of NewCo
SellCo shareholders own 78,000/178,000 = 43.82% of NewCo
We are now ready to complete the pro forma income statement for the combined business. Our goal here is to show whether or not the transaction is accretive or dilutive to the acquirer in the years subsequent to the transaction.
In calculating accretion/dilution, we must include all transaction adjustments. The equations used to calculate the "Interest (Income) / Expense" line item for 2009 and beyond might be intimidating, but can be broken down into four components: 1) the sum of the standalone companies' interest (income)/expenses, 2) incremental interest expense on acquisition debt, if any, used to finance the transaction, 3) any interest income lost due to the use of the companies' cash balances to fund the acquisition, and 4) a reduction in interest expense due to conversion, if any, of TargetCo's convertible securities (TargetCo's convertible debt pays 2.5% interest if not converted, but pays no interest if converted to equity). We could also make adjustments here for TargetCo's standalone contribution to the combined company's interest expense based on whether previously outstanding debt was retired or assumed by BuyerCo. For example, if BuyerCo retires TargetCo's $230 million convertible debt issue, there would be no post-transaction interest expense associated with the convertible debt regardless of whether or not the convert is "in-the-money"
In calculating the pro forma interest (income)/expense, we combine several steps that we perform separately in the "After-Tax Acquisition Adjustments" section of a  subsequent topic on accretion/dilution . Therefore, it may facilitate your understanding of how to compute pro forma interest (income)/expense by studying this topic first and returning to the pro forma income statement afterwards to complete the accretion/dilution.
Other adjustments are made in the "Other Transaction Adjustments" line item, including any write-down of deferred revenue and any deferred stock-based compensation expense previously calculated.
Note that we only computed accretion/dilution for cash, rather than GAAP, accounting results. You could take the pro forma P&L a step further by additionally computing GAAP accretion/dilution in a manner similar to that used to arrive at GAAP EPS on TargetCo's and BuyerCo's income statements.
Industry-specific valuation metrics
The EV/EBITDA ratio is a relevant ratio for market valuation. 
Excellent customer experiences are a vital aspect for the success and growth of any business. The customer experience is powerful and differentiating factors that can help businesses consolidate their customer base through strong customer loyalty to assist in increasing revenue.  Companies that focus on providing holistic customer experiences can ensure they will build a strong customer base and individualize themselves from their competitors. Top-notch customer experiences can help develop an emotional bond that drives them to buy a company’s product or service on multiple occasions. To get the best ‘value for their money’, customers turn to various mobile apps, social media, online comparison shopping, and customer reviews before making a purchase. Companies must ensure that customers get the same level of customer experience across all touch-points.  There is only one boss—the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.
- Sam Walton, Founder Walmart
Customer experience metrics help to quantify the overall experience in which customers have across all touch-points. It is the key indicator of a company’s success and relationship with their customers. Some of the metrics businesses should track to ensure supreme customer experiences include: Average Revenue Per User (ARPU) Average Revenue Per User (ARPU) is a widely used metric across various industries and is derived by dividing the total revenue generated by total number of subscribers. It calculates the amount companies bring in from customers or how much each subscriber buys from the company within a specific time frame. A company can increase the customer experience and ARPU by focusing on up-selling and cross-selling methods, offering bundled packages, and using scalable pricing. ARPU can reveal which layer of customer acquisition you need to improve upon and what methods are needed to improve customer experience. Customer Lifetime Value (CLV) Customer Lifetime Value (CLV) can be defined as the expected value of profit generated by a business due to the relationship with a customer over time. Customer experience is very much closely related to CLV and is a critical driver because the quality of customer experiences can greatly impact CLV. Every customer interaction during marketing communication, sales contacts, service/product delivery, and  customer service  can improve the customer experience and then positively impact future buying behaviors.  Customer Loyalty Customer Experience metrics include: Customer Satisfaction, Recommendation, and Customer Loyalty. These can measure the response or behaviors of customers and the result of their experiences after their interaction with an agent or representative. Businesses must provide a positive customer experience to reap the benefits of increased customer loyalty. In hindsight to this, quality customer experiences will ensure that businesses receive a greater profit, and the likelihood of their customers to recommend product and services to others. According to the Temkin Group Report published in March 2012 (1), there is a high degree of correlation between customers’ experiences and their likelihood to recommend a company and to consider purchasing more products and services from that company in the future. Share of Wallet The Share of Wallet metric can be defined as the share of dollars that customers are spending on a particular brand. Share of Wallet can be used by companies to identify which customers prove to be most loyal. This metric can also be used to increase repurchase options and assist companies in knowing about competitors. A higher share of the wallet metric shows that companies are providing higher customer experiences and are enjoying a greater customer loyalty.
Over the years, valuation experts have distinguished patterns in the selling price of businesses and financial ration of relevant groups. These patterns, industry specific multiples, determine the current value of a company. Industry specific multiples are the techniques that demonstrate what business is worth. To evaluate the estimate of the value of the business one can use financial ratios such as:
· Enterprise value (EV) to gross revenues or net sales
· EV to net income
· EV to EBIT and EBITDA (earnings before interest, taxes, depreciation, and amortization)
· EV to seller’s discretionary cash flow
· EV to total business assets
· EV to owners’ equity.
One can use different combinations of these financial performances to calculate the estimate of the firms’ value for different industries. (See Table 1) For instance, EV/revenue multiple is used to evaluate value of various new industries. While EV/EBITDAR multiple is used when there are significant rental and lease expenses incurred by business operations.
Market Capitalization
Market capitalization is the value of a publicly traded company based on current market prices. It is calculated by multiplying all outstanding shares by the share price. For example, you start up a company called XYZ, and you divide your company into 100 publicly traded shares. One share of XYZ costs $5 per share. Therefore, your market capitalization would be $500.
There are four categories for market capitalization:
· Large Cap companies have a market cap of over $10 billion.
· Mid Cap companies have one between $2 to $10 billion.
· Small Cap companies have one between $300 million to $2 billion.
· Micro Cap companies have one under $300 million.
Market capitalization can be deceiving and must be measured in correlation to other important business metrics. Just because a company’s market cap is soaring doesn’t necessarily mean that it is justified – it just means that the stock price is increasing at a rapid pace, thus increasing the company’s weight.
Price-to-Book Ratio
Let’s say your company, XYZ, has $500 in available cash. Remember that you issued 100 shares at $5 each. In this situation, the price-to-book ratio is now 1. That means that for each outstanding share, there is $5 in cash to back it up. It is calculated by dividing the share price by the cash (book) value per share. Let’s say your company’s shares increase in value to $10, but you still only have $500 in cash. Dividing $10 by $5 would now give the company a price-to-book ratio of 2.
Legendary investors such as Benjamin Graham and Warren Buffett have been followers of the book value principle. Graham famously taught that if a company is fundamentally sound and its price-to-book ratio falls below 1.0, then it is a good value investment, since logically, barring other capital losses, a company’s stock price should be worth at least its book value, if not higher.
Price-to-Earnings Ratio
Price-to-Earnings, or P/E ratio, is the most frequently used valuation technique for businesses. It is calculated by dividing the share price by its annual earnings (profit) per share. Let’s pretend your XYZ company, which now trades at $10, survived for a year, and at the end of the year you earned profits (revenue – expenses) of $50. Remember that you still have 100 total outstanding shares, currently worth $10 each.
Divide $50 by 100 and you have an EPS (earnings per share) of $0.50. Now let’s divide the share price of $10 by $0.50 = 20. 20 is now your current P/E ratio, which from now on will be referred to as a trailing P/E ratio.
Now your company will provide the public with a forecast, or guidance, of what your next 12 months are going to look like. You declare with certainty that your company will earn $100 next year and double your profits from this year. Divide that $100 by 100 and now you have an estimated EPS of $1. Dividing the share price of $10 by $1 now gives you a new P/E ratio – 10. This is now regarded as your forward P/E, or a forecast of how your stock will perform, based on your current promises.
Now, investors get really excited about the prospects of your business, so they bid your shares up to $20 per share. Your trailing P/E has now increased to 40, while your forward P/E has now risen to 20 – a fairly top-heavy situation. This is the reason stock prices increase and are ultimately throttled by P/E multiples.
Value investors will seek out stocks with low P/Es – usually under 20, but it can be higher in a high-growth industry such as tech – and declare that they are “cheap”. These stocks will tend to move slowly or not at all, but with limited downside risk.
Meanwhile, growth investors will search for stocks with high P/Es – some higher than 50, depending on the sector – in an effort to find stocks with the most momentum and driven by the most hype. These stocks can move very fast – see any Chinese Internet stock – but can also crash the fastest, due to the lack of fundamental scaffolding.
Other Valuation Metrics
These three are but the tip of a very big iceberg, but understanding these three valuation metrics will make it far easier to understand other important metrics, such as P/S (price-to-sales) and ROE (return-on-equity), and make it far easier to gauge the value and profitability of a business.
Sum of the parts valuation
10.4.3 Diversification Discount
Note that both the information- and the governance-related motivations for corporate
break-ups are based, at least to some extent, on reducing diversification.
Reduced diversification enhances the quality and quantity of analyst following
and boosts corporate performance by means of managerial incentives and specialization.
Theoretically diversification can produce some benefits (e.g., internal capital
markets, reduced cash flow variability, and hence lower cost of capital, etc.).
Nonetheless, it is well known that some conglomerates trade at discount to their fair
value: it is the “diversification discount” (i.e., the difference between actual market
value of the firm and the “sum of the parts” value) which justified many hostile
takeovers followed by split up strategies. Recently some studies have challenged
the size and even the existence of the diversification discount (Villalonga 2004).
Nonetheless, investment bankers often use the “diversification discount” motivation
to convince firms to undertake a break-up. Consider the following example:
assume Pharma (health-care industry) is a fully owned subsidiary of Giant Group
(food & beverage industry). Giant is publicly listed. Table 10.10 reports the last
available data about the two companies:
Also assume that the average EV/EBITDA multiple in the food & beverage
industry is 10x, while the average EV/EBITDA multiple in the health-care industry
is 20x.
Investment bankers normally use a “bottom-up” approach: in other terms they
estimate the value of the conglomerate as sum of parts, trying to prove that this
value is higher than market value. Since Pharma has an EBITDA equal to _100, its
estimated EV is _2,000 (or 20 times _100). The EBITDA of Giant excluding
Pharma (i.e., the pure “food & beverage” EBITDA) is equal to _900 (or _1,000
less _100), resulting in an estimated EV of Giant, excluding Pharma, equal to
_9,000. The sum of parts is therefore _11,000 (or _9,000 plus _2,000): it seems
therefore reasonable to unlock the hidden value (_1,000) by means of a break up.
While this approach is widely used by investment bankers in their pitches, it is
worth underlying that it is based on the crucial assumption that there actually is an
hidden value (i.e., not reflected into the stock prices) to be unlocked. What if the
market perfectly reflects the value of Giant and Pharma and there is no hidden value
Table 10.10 Carving out
*From consolidated financial statements
to unlock? Consider a “top-down” approach: by subtracting the estimated Pharma
EV (2,000) from the conglomerate market EV (10,000), we get the implicit
market EV of the pure “food & beverage” activity of Giant: 8,000. Since the pure
“food & beverage” EBITDA is equal to 900, the implicit market multiple is 8.89x,
well below the industry average, which is 10x. However, the lower-than-average
multiple of the Giant’s “food & beverage” activity might simply be justified by a
lower prospective growth or some other sort of competitive dis-advantage, that has
nothing to do with the hypothetical hidden value. In this case, separating Pharma
from Giant would not generate any incremental value: post-restructuring Giant stock
price would simply reflect an EV/EBITDA multiple lower than pre-restructuring.
The main point here is not to argue than one approach is better than the other
(bottom-up versus top-down) but simply to pinpoint that whatever estimate is
conducted pre-restructuring, the actual outcome of the restructuring can be assessed
only post-restructuring.
Valuing a company by determining what its divisions would be worth if it was broken up and spun off or acquired by another company. For example, you might hear that a young technology company is "worth more than the sum of its parts." This means that the value of the tech company's divisions could be worth more if they were sold to other companies. In most cases, larger companies have the ability to take advantage of synergies and economies of scale that are unavailable to smaller companies, enabling them to maximize a division's profitability and unlock unrealized value.
 We then use either DCF or price multiples to come up with value of each business and thus come up with the EV and subsequently value of  equity  of the firm.
The SOPT allows for
1) Computing the fair value of a company that is trading at a discount to the sum of its parts.
2) Restructuring a company’s value through a spin-off, or
3) Reorganization to unlock the value of business segments to their potential.
Diversification discount arises from sum of part valuation, due to Multiple Businesses, non clarity of business specifics and lack of management focus, market tends to give discount to the SOTP. This is known as Diversification discount or portfolio discount. Global Studies over the years on Diversified companies has shown that these companies trade at a discount in the range of 10% to 30%
It is also observed that very big companies attract more Discounts as there is difficult to reorganize them due to Mega Complex structures. However mid level companies can reduce this discount significantly through Management action and reorganization. Sum-of-the-parts ("SOTP") or "break-up" analysis provides a range of values for a company's equity by summing the value of its individual business segments to arrive at the total enterprise value (EV). Equity value is then calculated by deducting net debt and other non-operating adjustments.
For a company with different business segments, each segment is valued using ranges of trading and transaction multiples appropriate for that particular segment. Relevant multiples used for valuation, depending on the individual segment's growth and profitability, may include revenue, EBITDA, EBIT, and net income. A DCF analysis for certain segments may also be a useful tool when forecasted segment results are available or estimable.
Applications
SOTP analysis is used to value a company with business segments in different industries that have different valuation characteristics. Below are two situations in which a SOTP analysis would be useful:
· Defending a company that is trading at a discount to the sum of its parts from a hostile takeover
· Restructuring a company to unlock the value of a business segment that is not getting credit for its value through a spin-off, split-off, tracking stock, or equity (IPO) carve-out
This analysis is a useful methodology to gain a quick overview of a company by providing a detailed breakdown of each business segment's contribution to earnings, cash flow, and value. many companies can be viewed as a candidate for break-up valuation. The table below provides a number of examples:
Company
Disney
United Technologies
Fortune Brands
Tyco
Sara Lee
Theme parks:
Broadcast network:
Film Studio:
Distribution channels
Television:
Traditional Channels: Film content moves through a variety of channels with staggered release windows, conventionally beginning with theaters and ending with television.
New Channels: Industry is undergoing significant changes including digital release which comes earlier in a film’s lifecycle
Digital growth: $5.2bn of digital revenues in 2012, up 50% from 2011. Emergence of digital distribution platforms is increasing overall demand for content but also threatening networks and cable and satellite operators due to potential for substitution
Reason for using this method
A sum of parts valuation may be used to adjust a valuation method to suit different parts of a business. For example,
1) a company may have a growth business that deserves a high  PE  and a mature business that deserves a low PE.
2) A cyclical business may require a higher discount rate when doing a DCF.
How to calculate
Value the separately listed subsidiary using the market value of its shares, possibly with a premium for the fact that it is a controlling interest.
Use a  DCF  for the new start-up.
Use an  EV/EBITDA  for the stable business
How do you do the analysis?
1) Determine the value of each business units, using a combination of Discounted cashflow, multiple and asset-based valuation
2) Deduct the value of the corporate centre
3) Add non-operating assets (e.g. cash, marketable securities)
4) Deduct non-operating liabilities (e.g. debt, pension)
5) This gives you the implied market capitalisation
6) Compare to current market cap to determine conglomerate discount
Methodology
(1) Gather segment-level data from any of the following sources:
· Investor presentations
· Latest annual report, 10-K, or 10-Q
· Moody's company profiles, S&P tearsheets
(2) Spread LTM and, to the extent possible, projected financial data for each business segment
· Typical financial metrics used include EBITDA, EBIT, and net income
· The SOTP financial information should equal the consolidated financial information for the entire company
· As necessary, an "other" category may be used, but care should be taken to determine the nature of this category in order to assess multiples, value, etc.
· Allocate corporate overhead to divisions based on percent of revenues, EBIT, or industry norms for each segment. It is also acceptable to value overhead as a standalone item
· If depreciation and amortization are not provided by segment, allocate to divisions using methodologies that may include percent of assets, revenues, EBIT, or industry norms for each segment
· Use your judgment to the extent necessary
(3) Determine an appropriate range of multiples for each business segment by applying metrics and multiples which are most relevant for each business segment
· Use either trading or transaction comps, as appropriate, for each industry to determine the appropriate range
· Use a range of multiples, not point estimates
· To the extent overhead was not allocated, apply blended multiples to determine the "negative value" of overhead. Since this may create misleading values for the individual segments, allocating overhead is preferable, assuming there is sufficient data
· DCF valuations may be useful for certain business segments
(4) Sum the values of each business segment, offset by corporate overhead, if appropriate. The result is an aggregate EV range for the consolidated company.
(5) Deduct net debt and add/subtract other non-operating/financial items from the EV range to determine a range of equity values.
(6) Divide by the sum of diluted shares outstanding to arrive at a range of equity values per diluted share. Be sure to include any in-the-money options and convertible securities.
(7) Other considerations:
· Minority interest could be attributable to a single segment or may have components from all segments. If attributable to a single segment, be sure to make note of it in the valuation analysis
· Similarly, certain liabilities may be attributable to one or more segments, or may be entirely separate
Interpreting the Analysis
Compare the range of results to current trading levels and ask: "At the current share price, is the company being undervalued or overvalued compared to the SOTP equity value per share?" Also, compare results to any of the following metrics and look for consistency with the calculated range:
· 52-week high and low
Theme parks, broadcast network, film studio, retail stores, theaters,
What are Non-Operating Assets? How do they Affect Value?
From a business valuation perspective, non-operating assets (often referred to as “redundant” assets) are assets owned by a company, but not used in the day-to-day operations of the business. Common redundant assets include cash, marketable securities, loans receivable, unutilized equipment and vacant land. The identification of non-operating assets is an important step in the valuation process as these are often overlooked when the business is being valued based upon its earnings potential. The capitalization of earnings/cash flow approach does not capture the value of redundant assets. These assets must be valued separately and added to the value of the business otherwise determined.
Consider, for example, a company which owns a parcel of land (with an assumed value of $500,000) that is being held for future development or expansion. At the valuation date the land is not being used in the business. Using an earnings-based approach the company was valued at $2,000,000. However, because the land is not contributing to the company’s earnings, its value is not captured in the earnings based valuation approach. In fact, the vacant land likely is reducing the company’s earnings due to the property taxes that are being paid on the land therefore reducing the value of the company otherwise determined. These property taxes should be added back in determining maintainable earnings and the $500,000 value of the land (net of applicable taxes and disposal costs) should be added to the earnings value of the business. This same analysis also applies to cash, marketable securities or loans receivable.
Impact of stock versus cash deals
The market often reacts more favorably to a cash deal than a stock exchange. It is important to keep in mind that the market will react more positively to signals of confidence from the acquiring company = cash deal or fixed value in stock exchange. Sellers can often achieve a higher price for their companies by accepting stock deals
Stock Deal:
In a stock deal, the risk that the synergies do not materialise is share between the acquirer shareholders and the target shareholders (in cash deal the acquirer shareholders bear all the risk). There will also be a dilution of control for the shareholders.
It also offer the target favorable tax treatment as they will decide when they’ll sell their share and they’ll have to pay the taxes (in cash deal they have to pay the taxes on capital gain- however pension funds do not pay taxes)
a) Fixed Share
The number of shares are fixed both the value of these may fluctuate.
However the price of the shares of the acquirer may differ between the time of the announcement and the time of the trade (However the dilution of share should not change)- the target shareholders bear the risk that the shares of the acquirer decrease).
In long-term both shareholders parties support the risk that the premium paid was greater than the synergies. As such, they also share the increase in the stock value.
b) Fixed Value
The acquirer will issue a fixe value of share, in this method, the number of share may differ but the value of the exchange should not.
In this method, the proportion of dilution is not certain until the closing date of the deal. At that point, it is the acquirer’s shareholders who bear the risk of the decrease in price between the announcement and the deal dates. The price might decrease at an equal value of the premium paid.
Also the target’s shareholder do not bear the risk that the synergies does not materialise as the price of the acquirer’s company should had decrease by the amount of the synergies at the time of the deal.
Options for Reducing the Uncertainty of Stock Deals*
1. “Floor-and-ceiling” on the offer price: setting a minimum and maximum value that the seller will receive regardless of the acquiring company’s stock price (e.g. minimum 85% and maximum 115% of stock price at closing)
2. “Fixed dollar value of stock”: locking in the stock price at a fixed price
3. “Receiving a portion in cash”
4. “Hedging after the sale”/ “Establishing a Collar”: a collar means that the seller of a company simultaneously sells a call (seller of a call is obliged to sell a commodity at an agreed upon date for an agreed upon price) and buys a put (a put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) at a certain time for a certain price)
5. Softening the lockup provisions/no lockup
Cash deal:
A cash deal signal that the company is certain to materialize the synergies and that its stock is not over evaluated
In a cash deal, the company first has to pay a premium to the targets shareholders so that they’ll accept the deal. The remaining premium of synergies or the losses) will be shared only with their shareholders.
The only problem with cash deal is that often the company does not have sufficient liquidity to finance the deal. As such they will make a deal with both cash and stock.
How a company should make the decision to offer cash or stock exchange:
1) Are the share under, fairly or over evaluated?
If the acquirer believes his shares are currently under evaluated, it should not issue share for the deal (it will pay a higher price than it should). As such, if the company decides to finance the acquisition by issuing new shares the market will believe the shares are over evaluated which should decrease the price of the stock.
2) What are the risks that the synergies paid in the premium do not materialize.
If the management believes that the synergies will materialize the will offer a cash deal so that their shareholders are they only one to benefit from the synergies.
3) What are the risks that the value of the shares of the acquiring company drops between the announcement and the deal? (This question helps differ between fixed value and fixed shares in stock exchange)
A seller should consider the following aspects when weighing a stock deal versus a cash deal:
· tax implications
Stock deals enjoy a distinct financial advantage over cash deals due to U.S. tax policy (stock for stock deals are not considered taxable events)
· strength/potential of acquiring company
· seller’s risk comfort level
Extra
Mergers  usually occur between companies of equal size that believe that a newly-formed company will compete better than the separate companies can on their own. Mergers usually occur on an all-stock basis. This means that the  shareholders  of both merging companies are given the same value of shares in the new company that they previously owned. Therefore, if a shareholder owns $10,000 worth of shares before the merger, he or she will own $10,000 in shares after the merger. The number of shares owned will change following the merger, but the value of those shares remains the same. 
However, mergers are rarely a true "merger of equals". More often, one company indirectly purchases another company and allows the target company to call it a merger in order to maintain its reputation. When an acquisition  occurs in this way, the purchasing company can acquire the target company by either using all-stock, all-cash, or a combination of both. When a larger company purchases a smaller company with all cash, there is no change to the equity portion of the parent company's  balance sheet . The parent company has simply purchased a majority of the common shares outstanding. When the majority stake is less than 100%, the  minority interest  is identified in the  liabilities  section of the parent company's balance sheet. On the other hand, when a company acquires another company in an all-stock deal, equity is affected. When this occurs, the parent company agrees to provide the shareholders of the target company a certain number of shares in the parent company for every share owned in the target company. In other words, if you owned 1,000 shares in the target company and the terms were for a 1:1 all-stock deal, you would receive 1,000 shares in the parent company. The equity of the parent company would change by the value of the shares provided to the shareholders of the target company
the form of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earnout). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities.Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyer’s capital structure might be affected and the control of the Newco modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results. For example, in a pure cash deal (financed from the company’s current account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA). However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked (a more detailed overview on financing options will be posted at a later stage). If the buyer pays cash, there are three main financing options:
· Cash on hand: it consumes financial slack (excess cash or unused debt capacity) and may decrease debt rating. There are no major transaction costs.
· Issue of debt: it consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.
· Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.
If the buyer pays with stock, the financing possibilities are:
· Issue of stock (same effects and transaction costs as described above).
· Shares in treasury: it increases financial slack (if they don’t have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs.
In general, stock will create financial flexibility. Transaction costs must also be considered but tend to have a greater impact on the payment decision for larger transactions. Finally, paying cash or with shares is a way to signal value to the other party, e.g.: buyers tend to offer stock when they believe their shares are overvalued and cash when undervalued.
In conclusion, for the seller cash is often king, except if he believes in potential synergies and future higher value of the Newco. On the buyer’s side the mix between price, form of payment and financing must be carefully analyzed before submitting a deal structure to the target, in order to optimize the investment.
Operational efficiencies
Digital technology cuts both ways.
On the one hand, digital distribution is the great enabler, linking you to potentially unlimited consumer households and devices. On the other hand, it’s the great equalizer—linking your competitors to those very same people and screens.
The truth is, for traditional entertainment and media platforms, digital content and platforms are eroding advertising revenue, average revenue per user (ARPU), and profit margins—this while the industry is still in recovery mode from several years of downturn and low growth in certain territories.
What’s more, with the plethora of digital marketing alternatives and the rapidly developing behaviour of digital consumers, the media buying process has become vastly more comple
In a business context, operational efficiency can be defined as the ratio between the input to run a business operation and the output gained from the business. When improving operational efficiency, the output to input ratio improves.
Inputs would typically be money (cost), people (headcount) or time/effort. Outputs would typically be money (revenue, margin, cash), new customers,  customer loyalty , market differentiation, headcount productivity, innovation, quality, speed & agility, complexity or opportunities.
The terms "operational efficiency", " efficiency " and " productivity " are often used interchangeably. An explanation to the difference between efficiency and (total factor) productivity is found in "An Introduction to Efficiency and Productivity Analysis". [1]
In order to improve operational efficiency, one has to start by measuring it. Since operational efficiency is about the output to input ratio, it should be measured both on the input and the output side. Quite often, company management is measuring primarily on the input side, e.g. the unit production cost or the man hours required to produce one unit. Even though important, input indicators like the unit production cost should not be seen as sole indicators of operational efficiency. When measuring operational efficiency, a company should define, measure and track a number of  performance indicators  on both the input and output side. The exact definition of these performance indicators will vary from industry to industry, but typically these categories are covered:
· Input: Operational expenditure ( OPEX ),  capital expenditure  (CAPEX), headcount (including headcount of partners)
· Output: Revenue, customer numbers/distribution between segments, quality, growth,  customer satisfaction
Definition of 'Operational Efficiency'
A market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally-efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation, without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.
Also known as an "internally efficient market".
Investopedia Says
Investopedia explains 'Operational Efficiency'
Consider the hypothetical example where all brokers charged a minimum commission of $100 per trade. If you were a huge mutual fund trading 20,000 share blocks at a time, this fee may not limit your ability to be operationally efficient in your trading. But if you were a small investor looking to trade 10 or 20 shares, this fee would keep you from trading almost entirely, making the market (as you saw it) extremely inefficient.
In the case of trading costs, the advent of electronic trade and increased competition have pushed fees low enough to be fair to investors while still allowing brokers to earn a profit.
In other areas of the market, certain structural or regulatory changes can serve to make participation more operationally efficient. In 2000, the Commodity Futures Trading Commission (CFTC) passed a resolution allowing money market funds to be considered eligible margin requirements, where before only cash was eligible. This minor change reduced unnecessary costs of trading in and out of money market funds, making the futures markets much more operationally efficient.
10 Tips for Increasing Operational Efficiency
To remain competitive, businesses must boost operational efficiency wherever possible. It's particularly important for SMBs to operate efficiently, because they often have more limited resources than larger enterprises.
To remain competitive in an increasingly competitive world, businesses must boost operational efficiency wherever possible. "Sooner or later, any company not operating efficiently will be out of business," says Laurie McCabe, vice president of small and medium-sized business (SMB) insights and solutions for research firm AMI-Partners. It's particularly important for SMBs to operate efficiently, McCabe adds, because they often have more limited resources than larger enterprises.
The following are 10 tips for using network technology to help your business increase operational efficiency, reduce costs, improve customer satisfaction, and stay ahead of the competition.
1. Provide employees with secure, consistent access to information. One advantage of being an SMB is the ability to react more quickly than larger competitors. But if your company network is frequently down, sluggish, or unsecured, that competitive advantage is eroded. A secure, reliable, self-defending network based on intelligent routers and switches provides your business with maximum agility by providing reliable, secure access to business intelligence. What's more, a secure, reliable network infrastructure provides the necessary foundation for a number of efficiency-enhancing technologies and solutions, such as IP communications.
2. Deliver anytime, anywhere access to mobile employees. SMB employees are typically more mobile than those in larger enterprises, says Jan Dawson, research director of Ovum Research. "Ubiquitous access to people and information is particularly important for SMBs," in order to be productive while on the go, he adds. Technologies enabling ubiquitous access include virtual private networks (VPNs), which securely connect remote workers to the company network, and pervasive wireless networks, which enable workers to stay connected to the network while roaming about an office building or campus.
3. Create effective business processes with partners. Some large enterprises make efficient, secure business processes a prerequisite for doing business with them. To develop efficient business processes that meet the requirements of your partners, your business needs a secure, reliable network infrastructure.
4. Make it easy to collaborate. Effective, interactive collaboration between employees, partners, suppliers, and customers is a sure-fire way to boost efficiency while also reducing costs. Integrated voice, video, and data and wireless provides the kind of interactive calendaring, videoconferencing, IP communications, and other technologies your business needs to foster seamless, easy collaboration.
5. Enable employees to take their phone systems wherever they go. Missed calls create any number of business challenges, including operational inefficiencies (from trying to reach absent colleagues), project delays, missed opportunities and lost revenues. An IP communications solution enables your workforce to have one phone number that simultaneously rings on multiple devices, greatly increasing the chances of being reached on the first try. Workers can access their entire communications system wherever they go and can check e-mail, voice mail, fax and pages all in one inbox, among other benefits.
6. Streamline communications with customers. Interacting with customers efficiently and knowledgeably helps keep them satisfied—and few things are as important to your bottom line as satisfied customers. Linking an IP communications system to a customer relationship management (CRM) solution is one way to enhance customer communications. When a customer calls, a pop-up window of the customer contact record appears on an employee's IP phone screen, computer screen, or both. Before the second ring, the employee answering the call has access to information about the customer calling, such as orders pending and recent returns.
7. Reduce unproductive travel time. Any time spent traveling, particularly by airplane, can dramatically reduce operational efficiency. An IP communications solution that offers rich-media conferencing, such as videoconferencing, helps reduce the need to travel to offsite meetings and training sessions. The time saved from traveling can be better spent on more productive pursuits. Also, reducing travel saves money.
8. Outsource IT tasks. Is it the best use of an employee's time to manage your network security or IP communications system? Often, a more efficient option is to outsource such tasks to a managed service provider. A service provider has the expertise that your business needs but may lack, without the need to spend time or money developing that expertise in house. Also, outsourcing enables your employees to stay focused on productive activities related to your business's core competencies. And that helps keep your business competitive. Outsourcing tasks can help improve customer satisfaction and your competitiveness. "A lot of small businesses think it's cheaper to do everything themselves," says AMI-Partner's McCabe. "But employees can get overloaded, and they may not be in a good mood when interacting with your customers." McCabe adds that SMBs often don't do as good a job at an IT task, such as IP communications, as a managed service provider would do for them. "And if you're not doing a good job at something, your competition probably is," she adds.
9. Improve employee retention and satisfaction. When your business has inefficient processes, such as antiquated phone systems or a sluggish network, employees can get frustrated, because they can't get their jobs done with the tools provided. Customers may perceive that frustration and lose confidence in your business. Even worse, valued employees can become burned out and decide to move on. Not only have you lost a productive worker, you must spend time and money hiring a replacement. To help ensure employees are productive and satisfied, your business needs, at a minimum, a secure, reliable, always-available network.
10. Develop a long-term technology plan. Whenever you replace hardware that has become obsolete or ineffective, it's disruptive to workers—and that results in low productivity. You can minimize or eliminate such disruptions by carefully determining short- and long-term business objectives and the carefully mapping technology solutions to those objectives.
Media Industry
M&E’s decline in financial performance appears to be primarily the result of intensified competition, as with nearly all the industries discussed in this report. Competitive Intensity in the industry more than doubled in the 43-year time period we studied, as firms struggled to come to terms with new entrants, newly powerful consumers, and a wide range of online substitutes for traditional media and entertainment products. Customers benefited enormously from growing options at lower prices. Talented workers also made gains relative to firms.
Underlying these factors is the inexorable pace of technological change. Most recently, the rise of the Internet has posed a particularly tricky set of challenges for M&E companies. While the Internet at first seemed to provide an enticingly economical way of reaching consumers and marketing one’s wares, the Web soon evolved into a threatening means of exchanging pirated 28
goods, a free distribution channel over which M&E companies had no control, and a driver (or at least an enabler) of new consumer preferences (like downloaded individual songs, video on computers instead of TVs, and books read on screens as opposed to paper).
More recently, the Internet has evolved into a means for consumers to circumvent the broadcast networks and cable companies to quench their seemingly limitless thirst for video entertainment, and as a place where former consumers are now making and sharing their own entertainment. Customers now spend unprecedented amounts of time enjoying content that has been created by amateurs; perhaps just as important, they also spend large amounts of their time creating content of their own, in the form of videos, online reviews, blog entries or Facebook updates.
The pain is not limited to more mature sub-sectors like Publications & Print, Cable & Broadcasting, or Advertising. Even new forms such as interactive gaming are challenged by the Internet. The emergence of browser-based and cell phone-based gaming, for instance, threaten to make the expensive, fiercely fought battles over gaming console market share moot.
M&E companies face several major challenges going forward: dealing with a depressed global economy, managing business volatility, navigating new regulatory landscapes, meeting new consumer demands, accessing and developing talent, and effectively expanding their companies as global competition becomes more intense. We believe that there is a disproportionate focus on the cyclical challenge, and a lack of appreciation of the other more pervasive shifts. When the economic cycle improves, and consumers spend more freely and advertising revenues improve, the significant issues of managing volatility, navigating new regulatory systems and new consumer behaviors, developing talent and competing globally will emerge as the thorny issues demanding immediate attention. These issues are deep-rooted, fundamental forces that show no signs of abating. How M&E companies attack those remaining challenges will be what sets apart the winners from the rest.
“The divergence today between low-growth, low-multiple businesses and higher-growth businesses in media has never been greater,”
When the market crashed in 2008, media companies were hit particularly hard and needed more disciplined leadership
In many cases, what the slimmed-down media conglomerates are hanging on to is their cable-TV networks. After Time Warner spins out Time Inc, 80% of its operating profits will come from its networks (which include HBO), up from 32% in 2008. More than 90% of Viacom’s operating profits came from its networks in 2012. Discovery Communications, one of the best-performing media stocks over the past few years, specialises in building and expanding television networks, such as the Discovery Channel and Animal Planet.
For now investors like having exposure to this cash-rich, growing industry. The rise of Netflix, Hulu and other online-streaming services has so far caused little disruption to the pay-TV business model. But should this change, these firms’ lack of diversification could become a liability.
A few media firms are still bucking the trend and adding a bit of sprawl. In 2011 Comcast, an American cable operator, bought NBCUniversal, a film-and-TV content company with a broadcast arm, making it the largest media group in the world after Disney: its market capitalisation is now over $100 billion. As for Disney itself, besides buying Lucasfilm, the production company behind “Star Wars”, last year, it also bought control of UTV, a Bollywood-to-computer-games business in Mumbai.
In businesses that benefit from scale, such as cable and newspapers, there will be more consolidation. Time Warner Cable and Charter Communications, two American cable operators, are rumoured to be discussing a merger. Having recently bought Virgin Media, a British cable firm, Liberty Global of America—which already owns Germany’s second-largest cable operator—is now competing with Vodafone to buy Kabel Deutschland, Germany’s largest. On June 13th Gannett, a big American newspaper and local-TV chain, said it would merge with Belo, a smaller counterpart, to expand its market share in both businesses (while also, overall, making it less reliant on newspapers).
The media giants’ soaring share prices will make it easy for them to swallow smaller firms. “I think things are going to tend much more toward scale,” says James Murdoch, one of Rupert Murdoch’s sons. “Content groups are going to get much larger.” As long as they get bigger at what they do best, shareholders will be happy.
Entertainment and media businesses raise their game in agility and customer insight-as constant digital innovation becomes the new licence to operate
Entertainment and media (E&M) businesses are continuing to raise their game in operational agility and customer insight, as constant digital innovation becomes the industry’s new licence to operate. Across the world, consumers’ access to E&M content and experiences is being democratised globally by expanding access to the Internet and explosive growth in smart devices. And while traditional, non-digital media will continue to dominate overall E&M spending globally throughout the coming five years, the growth will be in digital.
To harness this growth and turn it into rising digital revenues, E&M companies of all types are evaluating their competitive advantages and seizing their positions in the evolving ecosystem—with the connected consumer at its core. To achieve this successfully, every industry participant will need to invest in constant innovation that encompasses its products and services, its operating and business models and—most importantly—its customer experience, understanding and engagement.
Connected consumers are driving companies to apply innovation and agility...
Connected consumers are driving companies to apply innovation and agility in order to understand and meet their needs
Consumers, who are increasingly connected and calling the shots but also increasingly confused by the blizzard of content offerings and models available to them both legally and sometimes illegally, are driving companies to apply accelerated innovation and agility to understand and meet their needs. Led by the burgeoning middle classes in emerging markets, consumers worldwide will continue to increase their spending on E&M as they migrate towards digital and, increasingly, mobile consumption across an expanding array of devices. The underlying journey is from ‘mass media’ to ‘my media,’ and the E&M companies that successfully accompany consumers along the way will be those that have the speed, flexibility and insight to engage and monetise an ever-more-diverse consumer base by delivering personalised, relevant and, ultimately, indispensable content experiences
Multi-platform analytics drive advertiser insights...
Multi-platform analytics drive advertiser insights into the connected consumer’s behaviour, expectations and buying intentions
Advertisers, which absolutely must keep pace with the irresistible consumer shift towards ‘my media’ and digital consumption behaviours, will increasingly harness big data to understand, target and engage consumers at an ever-more-personal level. This will require that they generate and apply multi-platform analytics-driven insights into connected consumers’ behaviour, expectations and buying intentions while they use new measurement techniques to ensure relevance and demonstrate returns on ad spend. Rather than enough big data, the biggest challenges will lie in collecting and extracting the small data—the kind that leads to true understanding of consumers’ future behaviour—and striking the right balance between consumers’ desire for relevance and their emotional and regulatory right to personal-data privacy.
To stay relevant, content creators will have to innovate...
To stay relevant, content creators will have to innovate both in their products and the ways they deliver them
Content creators, which are facing the same imperative as advertisers—by having to engage and stay relevant to connected consumers—will adapt to consumers’ changing needs by experimenting and then applying ongoing innovation to content itself and the ways it’s delivered. To understand what content people will pay for and how they want to consume it, content creators will get closer to consumers than ever before, including harnessing social media via the second screen and embracing new business models, windowing/bundling approaches and collaborative partnerships. With compelling content together with the user experience set to remain the key differentiator with consumers and with over-the-top (OTT) technology and telecom entrants racing to acquire the content they need to drive revenues, content companies that combine the right consumer insights, business models and partnerships will be well-placed in the new ecosystem.
Digital distributors need to deliver the right content...
Digital distributors need to deliver the right content at the right time, on the right platform, at the right price
Digital distributors, which must meet consumers’ demand for content across multiple devices—whenever and wherever those consumers choose—need the insight and the agility to deliver the right content at the right time, on the right platform and at the right price. Those that get the blend right will be able to resist the pressure towards being a dumb pipe while successfully both accelerating growth in digital revenues and deterring piracy. Of all of the participants in the ecosystem, it is arguably the distributors that face the most daunting array of challenges, such as a blurring of the traditional divide with technology companies, escalating OTT competition, the threat of cord cutting by consumers, intensifying and fragmented regulation, and pressure to invest in bandwidth without the certainty of returns. Again, the winners will be those that innovate and collaborate to deliver the consistent and compelling content experiences demanded by the connected consumer.
North Africa.
88% of E&M CEOs are making changes to their customer growth, retention or loyalty strategies in response to shifting consumer spending and behaviours.
E&M CEOs remain confident about revenue growth over the next three years and continue to focus on the consumer, recognising the need to meet their rapidly evolving demands. What else did they tell us?
Continuing focus on shifting consumer spending and behaviours
The impact of shifting consumer spending and behaviours on growth continues to be a key concern for E&M CEOs, with 75% concerned or extremely concerned, in line with last year’s survey – and higher than almost any other industry. And 88% anticipate changes to their customer growth, retention or loyalty strategies, in response to this.
Investments in technology and speed of technological change continues
73% of E&M CEOs expect to increase their investments in technology over the coming year, while 61% are concerned about the speed of technological change, 19% above the global cross-industry total – showing that technology remains a key enabler for E&M companies to keep apace with consumers’ rapidly evolving demands.
The power of customers, clients and social media users
Customers, clients and social media users are influencing business strategy and E&M CEOs are responding by strengthening their engagement programmes with these groups. 100% of E&M CEOs say customers and clients somewhat or significantly influence their business strategy, with 93% strengthening their engagement programmes with these two stakeholder groups. 70% report users of social media as being somewhat or significantly influential, with 95% of these CEOs strengthening their engagement programmes to this stakeholder group – 17% above the global cross-industry total.
Concerns over intellectual property and customer data remain
55% of E&M CEOs are concerned about a lack of trust in their industry, against a global cross-industry total of 37%, with 59% concerned about their inability to protect intellectual property and customer data, 25% above the global cross-industry total, reflecting continued concerns around piracy for the industry.
Talent management strategies likely to change
88% expect changes to their talent management strategies over the coming year, highlighting the continued focus on finding and retaining key talent – which remains a concern for 57% of E&M CEOs, against 65% last year and this year’s global cross-industry total of 58%.
Overall confidence in E&M revenue growth
E&M CEOs’ overall confidence in revenue growth over the next three years remains resilient with 80% feeling very or somewhat confident, with a year-on-year dip in confidence over the coming year, from 84% to 70% – reflecting a slight recalibration of expectations of the time that a return of investment will take.
The media and entertainment industry captures a wide variety of companies that serve to provide products and services that keep the everyday consumer engaged. There are a number of segments within the industry, each of which provides a different form of entertainment to consumers around the world. These segments include traditional print media, television, radio broadcasting, film entertainment, video games, advertising and perhaps most importantly, the manufacturers of the technology that the above segments rely on. The significance of these manufacturers cannot be overlooked when considering the industry as a whole; after all none of these segments has been around longer than the technology used for its distribution. Due to its dependancy on technological developments new segments of the media and entertainment industry are constantly up and coming. To that end, the most significant technological development (in recent years, at least) for the evolution of the media industry has been the rise of the internet. This technology alone has changed how media is consumed and furthermore has created entirely new sectors and platforms for mainstream entertainment that are still in the early stages of their development.
In 2007 the U.S. spent roughly $930 billion on the media industry as a whole, with advertising spending accounting for over $284 billion. [1]
Advertising
In 2007 U.S. advertising spending was about $284 billion, nearly 31% of total spending on the entire media industry. Advertising has long been the major revenue generator for media companies. [1]  The advertising industry utilizes nearly every communication channel available to make their clients' products and services known. Major mediums for advertising include  television , radio, print media, and to an increasingly large degree,  the internet . Other platforms for advertising include public advertisements like billboards (both traditional and  digital ) and city busses.
The development of  internet advertising  has had a very significant impact on the advertising industry and has created some trouble for many media companies that rely on traditional advertising platforms. With over 80 million broadband internet connections in the U.S. during 2007, advertising companies have found a new and very significant audience Major companies in the advertising industry include
You probably wont get any of this cause you dumb
Print Media
Companies that produce and distribute newspapers, magazines, and books are considered to be in the print media segment. Many of these companies use the subscription revenue model, which is very attractive as customers pay for product before receiving it, allowing the firm to invest the proceeds, earning a return even before delivering the product. Also, the cost structure of the publishing business is mostly fixed. The printing machinery and distribution network of a typical publisher can deliver 750,000 copies for only slightly more than the cost of delivering 500,000 copies, meaning higher volume falls directly to profits (also known as leveraging costs). This allows excellent return on capital for the larger publishers. Lastly, these firms have valuable intangible assets in the form of brands that protect their products from competition. Value Line, despite a complete lack of product innovation and no embrace of the internet, can still afford to charge a premium for their product because of it's long standing reputation with investors.
However, beware the internet. More than any other business sector, the internet has affected the business model of media companies drastically. Once upon a time, newspapers were an outstanding business. Many had a monopoly within their city, as few cities were large enough to support more than one. However, the internet allows anyone to read news from around the world, advertising has moved online (leading to falling print ad rates), and classified ads took a hit from  eBay (EBAY)  and Craigslist. Keep in mind how the internet can hurt (or help) your publisher of choice.
Since the  rise of the internet , print media companies have had a difficult time keeping up with the pace of the industry. Internet advertising has seen strong fast paced growth in recent years and as a result newspapers and magazines have had trouble attracting ad revenues. In 2006 there were 2,344 total daily and Sunday newspapers distributed throughout the U.S. and newspaper companies earned $49.3 in advertising revenue. U.S. Magazine advertising revenues for 2006 were $24.0 billion. [2]  Evidence of the print media industry's struggle against internet advertising  can be seen in decreasing ad revenue figures. The Newspaper Association of America reported that 2007 newspaper ad revenues were down 9.4% to $42 billion, the most significant percentage loss in the 50 years that the NAA has been reporting these figures. [3]  Companies that produce and distribute print media such as newspapers, magazines and books include
The television segment of the media and entertainment industry includes a large number of companies that compete directly and indirectly by offering various services to consumers. It has long been a traditional entertainment segment and has evolved in many directions since its beginning. Today there are various offerings for television users including network television channels, cable networks and satellite television services. The latter two options are generally subscription based services which offer programming not available to non-subscribers. In 2007 there were roughly 112 million U.S. households with televisions, or about one third of the entire population. [2]
As the technology supporting the media and entertainment industry evolves, television service providers are required to evolve their services in order to keep up. Television providers have had some success in keeping up with the fast paced and fiercely competitive industry though. Since the TiVo hit shelves in 1997 service providers like  Comcast and  DirecTV  have produced similar hardware and services for their subscribers. The popularity of the internet however, has not been such a quick fix for companies in this segment. As with print publishing, television broadcasting companies are now competing with the enormous advertising platform that is the internet. Furthermore, programming that was once exclusively available through television service subscriptions can be found (both legally and illegally) with the click of a mouse. Companies involved in television broadcasting include
Filmed Entertainment
1.45 billion movie tickets were sold in 2007 making filmed entertainment a $10.2 billion dollar segment of the industry.  [2]  Companies whose operations include the production or distribution of filmed entertainment include
Video Games
In 2007 the video game industry brought in $7.4 billion in U.S. revenues. [2]  Companies that produce and distribute video games, consoles and technologies include
Radio
9,163 stations [1] . The Radio is generally called the granddaddy of all broadcast media. It's also a business model that has taken serious hits over the past ten years, as satellite radio, digital music, and recorded audio programs ("podcasts") have increasingly become the preferred forms of audio entertainment. For example,  Westwood One (WON) , which has a stock price of $1.71 as of this writing. Compare this to a price near $40 in late 2003 and it's clear this is not an industry we want to be investing in. Companies that operate radio stations and services include
Internet based Media
Internet based media has seen significant growth in recent years. There were 80 million broadband internet connections in the U.S. during 2007 [2]  up from roughly 58 million in 2006. [4]  Broadband internet growth around the world can be seen in the chart below. This growth is allowing media and entertainment companies to market their content to a much larger group of consumers each year.
· 14. Cross-Industry Perspectives The forces of the Big Shift are affecting U.S. industries at to come, call into question the very rationale for today’s varying rates of speed. One set of industries has already companies. Do they exist simply to achieve ever-lower been severely disrupted, and is suffering the consequences: costs by getting bigger and bigger—“scalable efficiency”? declining return on assets (ROA) and increased Or can they turn the forces of the Big Shift to their Competitive Intensity. A second set, which includes the advantage by focusing instead on “scalable learning”—the bulk of U.S. industries, is currently midstream: some are ability to improve performance more rapidly and learn seeing declining ROA, and others are facing increases in faster by effectively integrating more and more participants Competitive Intensity, but none have yet encountered distributed across traditional institutional boundaries? both. A third, smaller set of as-yet-unaffected industries shows little change in performance. U.S. firms can learn two key lessons from the industries experiencing early disruption. First, the assumption that These findings—a follow-up to the macro-level study productivity improvement leads to higher returns is flawed: released in June 20092—reflect a U.S. corporate sector industries with higher productivity gains do not necessarily on a troubling trajectory. The difficulties are more visible experience improvement in ROA. This is the performance in some industries, but all industries will, to some degree, paradox mentioned earlier. Second, customers and eventually be subject to the forces of the Big Shift, which talented employees appear to be the primary beneficiaries represent a fundamental reordering of the economy driven of the value created by productivity improvements. Access by a new digital infrastructure3 and public policy changes. to information and a greater availability of alternatives have put customers squarely in the driver’s seat. Similarly, The industry-level findings are cause for some alarm. U.S. as talent becomes more central to strategic advantage and industries are currently more productive than ever, as as labor markets become more transparent, creative talent measured by improvements to Labor Productivity. Yet those has increased its bargaining position. improvements have not translated into financial returns. Underlying this performance paradox is the growing How, then, can firms also benefit from the Big Shift? The Competitive Intensity in most industries. Consolidation key is to not only create value but to capture the value has helped offset these effects in some cases, but it is a created. To do so, firms must learn how to participate in short-term solution. Likewise, firms in most industries are and harness knowledge flows and how to tap into the investing heavily in technology, but the benefits are short- passion of workers who will be a significant source of value lived as competing firms do the same. creation as companies shift away from accumulating and exploiting stocks of knowledge. This move from scalable The breadth and magnitude of disruption to U.S. efficiency to scalable learning will be a key to surviving, and industries, and a trajectory that suggests more disruption thriving, in the world of the Big Shift. 2 See John Hagel III, John Seely Brown, and Lang Davison, The 2009 Shift Index: Measuring the Forces of Long-Term Change (San Jose: Deloitte Development, June, 2009). 3 More than just bits and bytes, this digital infrastructure consists of the institutions, practices, and protocols that together organize and deliver the increasing power of digital technology to business and society. 2009 Shift Index—Industry Metrics and Perspectives 13
· 15. Cross-Industry Perspectives Most Industries are Feeling the Effects of tries have experienced declining ROA, but only four have the Big Shift also endured a significant increase in Competitive Intensity (see Exhibit 3). These industries include Technology, Media, The 2009 Shift Index highlighted trends at the economy- Telecommunications, and Automotive. They embody the wide level in the U.S.: declining ROA, increasing Competi- long term forces that are re-shaping the business environ- tive Intensity, increasing Labor Productivity. The industry- ment, and are thus harbingers of changes to come in other level findings are similar. With few exceptions, all U.S. industries. industries are being affected by the foundational forces of the Big Shift. In Technology, customers have gained power as open architectures and commoditization of components have One set of industries—most notably Technology, Media, intensified competitive pressure. As a result, the Technol- Telecommunications, and Automotive—is already being ogy industry has experienced a significant deterioration in affected by the Big Shift. These industries have experi- return on assets. enced significant increases in Competitive Intensity and corresponding declines in profitability. A middle tier of The Media industry has become more fragmented as forms industries, representing the majority of industries evaluated of content proliferate and the long tail becomes ever richer in this report, appears to be experiencing the initial effects with options. In a very real sense, customers—supported of the Big Shift. A third tier consists of two industries that by digital infrastructures that enable convenient, low-cost have, so far, been insulated from the forces of the Big Shift. production and distribution—are emerging as key competi- tors for traditional media companies, generating their own In the Middle of the Storm content and sharing it with friends and broader audiences. Industries that have experienced both increases in Com- petitive Intensity and declines in Asset Profitability are the The Telecommunications industry has experienced dramatic early entrants into the Big Shift. Ten of the fourteen indus- changes over the past two decades. Wireline service, the Exhibit 3: Changes in Competitive Intensity and ROA (1965-2008) 4 Competitive Intensity Decrease Static Increase Aerospace & Health Care Defense Increase 5 Consumer Static ROA Financial Services Products Aviation Energy Decrease Insurance Automotive Life Sciences Media 4 Static Competitive Intensity is Process & Industrial Technology defined as a change of less than Retail Prod. Telecom. .01(+/-) in the HHI. 5 Static ROA is defined as a change of less than 5 percent (+/-). Source: Compustat, Deloitte Analysis 14
· 16. Cross-Industry Perspectives former mainstay of the industry, is being supplanted by ing. As we will discuss, the metric for Competitive Intensity wireless and VOIP. A combination of regulatory changes does not capture competition from other parts of the value and increased Competitive Intensity has driven firms to im- chain. One of the pervasive themes of the Big Shift is the prove Labor Productivity, but has not resulted in improved growing power of customers and creative talent and the financial returns. pincer effect on firms’ profitability as these two constituen- cies capture more of the value being created. Many of the In the Automotive industry, Competitive Intensity has been firms in this tier are subject to greater competition from driven by greater global competition, supported both by these two groups. trade liberalization and more robust digital infrastructures that facilitate global production networks. This has resulted The Consumer Products and Retail industries both expe- in lower Asset Profitability as domestic firms have been rienced decreasing Competitive Intensity as measured by unable to quickly adjust their operations to meet chang- industry concentration, although Retail also experienced ing market demand and more aggressive international a decline in ROA.6 Both of these industries were highly competitors. competitive, historically, and both have experienced sig- nificant consolidation among large firms to combat margin Entering the Storm pressures driven in part by the growing power of custom- The industries in this tier have not yet felt the dual impact ers. The consolidation of these two industries is related. As of the Big Shift—intensifying competition and declin- retailers became more concentrated, consumer products ing ROA—but are likely to soon. These industries already companies began to consolidate as a defensive measure to exhibited a high level of Competitive Intensity in 1965 as preserve bargaining power with the retailers. Conversely, measured by industry concentration (see Exhibit 4), and it is as consumer products companies consolidated, retailers likely, therefore, that the initial fragmenting impact of the felt additional pressure to consolidate in order to preserve Big Shift may have been muted. On the other hand, many bargaining power relative to larger consumer products of these industries did experience erosion in ROA, suggest- companies. ing that other forms of Competitive Intensity were increas- Exhibit 4: Competitive Intensity as measured by HHI for All Industries, 1965, 20087 Industry 1965 Actual 2008 Actual Absolute change Process & Industrial Products 0.01 0.01 0 Industries that began Consumer Products 0.01 0.02 0.01 at higher levels of Competitive Intensity Financial Services 0.02 0.03 0.01 Aviation & Transport Services 0.03 0.03 0 Energy 0.03 0.03 0 Retail 0.03 0.06 0.02 Life Sciences 0.04 0.03 -0.01 Insurance 0.04 0.05 0.01 Aerospace & Defense 0.04 0.10 0.06 Media & Entertainment 0.07 0.03 -0.04 Technology 0.15 0.03 -0.12 6 Retail ROA data display some cycli- Automotive 0.17 0.08 -0.09 Industries that began cality. The decline discussed here is derived from a line fit. Health Care Services 0.32 0.08 -0.24 at lower levels of 7 Insurance and Health Care data is from 1972–2008. Data from Telecommunications 0.37 0.03 -0.34 Competitive Intensity 1965–1972 was from a very small number of companies for these industries and therefore not truly Source: Compustat, Deloitte analysis indicative of market dynamics. 2009 Shift Index—Industry Metrics and Perspectives 15
· 17. Cross-Industry Perspectives Financial Services experienced static ROA performance and The ability of companies in this industry to retain the sav- static Competitive Intensity. Financial Services is comprised ings from these initiatives and improve ROA has been sup- of two primary sub-sectors—Banking and Securities. ROA ported by the industry consolidation (leading to a decline increased marginally for Banking while it declined signifi- in one key measure of competitive intensity), reinforced cantly for Securities in the face of growing competition. by high barriers to entry, including investment in technol- As described in the Financial Services report, Banking has ogy and capital requirements. Subsidies to incumbents act benefited from public policy that has regulated prices for as a further barrier to entry, as do burdensome qualifying banks over time. Nonetheless, recent trends in Financial requirements for bidding on government contracts, which Services suggest that there has been further erosion of the require significant upfront investment by new players. Col- industry’s ROA in the past couple of years as a result of less lectively, these factors limit the effects on this industry of protection from public policy. We anticipate further disrup- broader public policy trends towards economic liberaliza- tion going forward.8 tion and enable the relatively small number of industry participants to achieve higher asset profitability. The Calm Before the Storm This last group is comprised of just two industries that The future is uncertain for these two industries. Of the have bucked the overall trend in ROA erosion, enjoying in- two, Health Care is perhaps more exposed to changes creased Asset Profitability.9 The Aerospace and Defense and that could dramatically reshape the industry: impending Health Care industries actually improved their ROA to 6.7 legislation, medical tourism, new provider delivery options percent and 3.6 percent respectively. As we will discuss, and alternative Health Care options are just a few looming regulation and public policy have played a significant role changes. In an intriguing parallel, the movement towards in shielding these two industries from the effects of the Big greater emphasis on prevention in both of these industries Shift. may represent a major catalyst for accelerated change. In the Aerospace and Defense industry, the rise of asymmetric For Health Care ROA increased while Competitive Intensity warfare driven by a new generation of “competitors” may was also increasing. As described in the Health Care in- also catalyze interesting i