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Q1) How attractive is the merger of Time with Warner? Time’s merger with Warner is lucrative for both firms because of the following reasons:
Their assets are mutually complementary and synergistic: 1. Warner Brothers is a successful movie studio which adds to Time’s ability at content generation where it is relatively behind Warner. 2. Warner’s existing cable operations along with Time’s cable operations increase the size of a potential merged firm’s distribution network. 3. Warner has a prominent prescence in the Music business where Time had no prescence. This could allow Time to enter a new business where it can use its preexisting strengths in the TV and Movie business to flourish.
Favorable Financial terms i.e Stock Swap 1. Raising funds through a stock swap would require none of the partners to incur debt. 2. It would preserve Time’s capability to use its capital to use oppurtunities that arise in the future. 3. The merger would be Tax-free and will involve no Goodwill. 4. The combined company would be less sensitive to a poor spell at the box office because of having good cash reserves and having no debt.
It allows both firms to vertically integrate and consolidate their business within the industry.
Both firms benefit from Network effects and Economies of Scale.
Diversification of the business for both firms means that they will both be exposed to lesser risk.
The combined firm would be better able to tackle foreign competition by leveraging their control over the distribution network in the United States i.e they could potentially capture the industry.
Warner’s expertise at financial services and Operations management would positively rub upon Time.
Warner has a large theatrical distribution organisation, 60% of whose sales are international. By merging with Warner, Time can gain access to an entirely new market.
Q2) What prompted Paramount’s interest in Time? The following factors led to Paramount’s urgent actions to acquire Time. 1. Possibility of shift in the Industry’s Balance of Power if Time and Werner were to merge. The emergence of a large competitor in the form of Time-Warner would alter the industry’s share of power against Paramount. Present Total Assets of each firm: Firm Time Werner Paramount
Total Assets $4,913 Million $4,599 Million $5,378 Million
At Present Paramount has greater assets than either Time or Werner. However, if the two of them were to merge, their combined assets of 4913+4599=9512 Million would be much greater than Paramount’s assets. 2. Paramount is relatively lacking in distribution network for its content. Paramount’s expertise mainly lies in Content generation i.e production of TV shows and Movies. It is relatively lacking in distribution channels i.e TV channels, Cable networks in comparison to the joint strength of Time and Warner in these areas. If Time and Warner were to merge, Paramount’s would be somewhat dependent on its largest competitor for distribution. 3. Paramount recasting itself as a “Global” business. Paramount had in recent years been attempting to recast itself as a “Global” entertainment and media business. If it acquired Time, and through Time exercised control over Warner, it would have access to Warner’s huge international distribution network. 4. Access to vast financial resources. Paramount had access to vast financial resources through its subsidiary Associates Corp. which gave it the financial means to challenge Time. 5. If Paramount were to acquire Time now, it would later be able to exercise control over a much larger firm in the form of Time-Werner-Paramount after the merger of Werner also occurred as per pre-existing arrangements. 6. Similarities in Work culture Paramount’s culture is more similar to Time’s culture than Werner’s is.
7. The law favours Paramount’s bid to acquire Time. The “Business Judgement Rule” binds the managers of a firm that is about to be sold or broken up to act as auctioneers and realize the best price for its shareholders.
Q3) What would you do as Mr. Munro? If I were Mr. Munro, I would go for a merger with Warner paid with Cash and Stock combination, and simultaneously begin an internal marketing campaign to convince shareholders to not part with their shares for Paramount’s offer. I would do so for the following reasons: 1. The mutual complementarity between Time and Werner is greater than that between Time and Paramount. Time has a large network of Cable operations and TV channels, while Werner has expertise in Content generation. Werner has a large global network which Time can use to enter new markets. Werner’s music business will add to Time’s strengths and allow it to add a mutually compatible business to its portolio. 2. The financial terms of a merger between Time and Werner are more favorable than a merger with Paramount. A stock swap allows both Time and Werner to remain debt free and exposes them to lesser market risk. It also helps both firms avoid Goodwill accounting and saves on Taxes. A hostile takeover, on the other hand will not lead to the above benefits. 3. A cash and stock combination used to buy Werner would make it relatively unattractive and expensive for Paramount to launch a a hostile takeover bid for the merged Time-Werner in the future because of the greater size of the merged target firm, and also because paying for the merger with cash would raise the new firm’s debt levels.