You are on page 1of 35

Time Incs Entry into Entertainment Industry

Irfan Neha Sandya Vidya

Key Issue

Contents
Time Inc.

Industry Analysis

Possible Merger Partners

Warner Communications
Detailed Analysis

Paramount

Managements Decisions
Valuation

Paramount's offer

Conclusion

Time Inc
Formed in 1924 by Henry Luce and Briton Hadden (New magazine) Over 35 yrs, Time grew by introducing new magazines and acquiring publications

Time Inc
Magazines :
Time was the largest publisher of general Local circulation magazines in the Cable United States, with 15 titles, TV Magazi including Sports Illustrated, Franchi People, Fortune, and Money, nes ses as well as Time and Life. 43% 25% Times magazines accounted for more than Books 20% of advertising in U.S. 15% consumer magazines each year. Cable Foreign editions of Time and TV Fortune were published progra through joint ventures.
mming 17%

Time Inc.

Time Inc
Books:
Time distributed books through five publishing organizations. Time-Life Books was the largest direct-mail publisher of general interest books in series, and Book-of-the-Month Club operated the largest general-circulation book club and several other book clubs. Little, Brown and Company published trade and professional books, and Oxmoor House published how-to and illustrated books on a variety of subjects. In 1986, Time acquired Scott, Foresman and Company, publisher and distributor of elementary, high school, and college textbooks.

Time Inc.

Local Cable TV Franchises 25% Cable TV programming 17% Books 15%

Magazines 43%

Time Inc
Cable TV Programming: Time invested in a cable television network in 1972. In 1989, Time operated both the Home Box Office (HBO) and Cinemax networks. Only consumers with hookups to local cable franchises were eligible to subscribe to these networks. Subscribers paid monthly fees for access to programming on HBO or Cinemax. HBOs programming included feature-length films, sporting events, special entertainment events, and movies commissioned by HBO. Cinemax offered a broad range of movies and special entertainment events. Experience had shown that consumers did not often cancel their subscriptions to cable-television networks. Most programming on HBO and Cinemax consisted of recently released feature-length films. HBO acquired programming through licensing agreements with film producers and film distributors. HBO Video distributed films and other programming on home videocassettes in the United States and Canada. Time also had a 14% ownership interest in Turner Broadcasting System, Inc., a broadcast network.

Time Inc.

Local Cable TV Franchises 25% Cable TV programming 17% Books 15%

Magazines 43%

Time Inc
Local Cable TV franchises
American Television and Communications Corporation (ATC), an 82%owned subsidiary of Time, was the second-largest cable television franchise in the United States, with 3.9 million Subscribers. Local municipalities awarded franchises an exclusive license to distribute cable programming, such as HBO to subscribers television sets through a network of cables
Time Inc.

Local Cable TV Franchises 25% Cable TV programming 17% Books 15%

Magazines 43%

Industry Analysis

Industry Analysis

Times Strategy for 1990


1983 and 1984 Management reviewing Long term goals Magazine business though profitable did not assure enough growth(Almost Matured) Fastest growing - HBO and cable side of business(Half of Times earnings) Ended in decision to Expand its position in ownership and creation of video programming Vertical Integration

POSSIBLE MERGER PARTNERS


Warner Paramount Columbia Disney Twentieth Century-Fox MCA

Less attractive

CLOSE PROBABILITY

Warner Communications
Warner
Publishing and related distribution 4% Filmed entertaineme nt 40%

Cable and broadcasting 11%

Music recording and publishing 45%

Warner Brothers subsidiary Warner produced ,financed and distributed to theaters feature motion pictures distributed feature films to television stations, networks, and pay television systems and distributed prerecorded videocassettes and videodiscs. Warner Brothers operated a worldwide theatrical distribution organization through which it distributed its own films, as well as films produced by others. sixty percent of its sales were international.

Warner Communications
With 1.4 million subscribers, Warner was the sixth-largest cable operator The investment bankers presentation to the board emphasized Warners outstanding expertise in operating management

Another Warner subsidiary, Warner Cable, operated its cable television business, which comprised primarily the distribution of broadcast television signals and satellite programming to television subscribers. Warner Publishing published comic books (e.g., Superman, Batman) and hardcover books and distributed magazines and books through wholesalers in the United States and Canada.

Paramount
Paramount

Consumer/Co mmercial finance 38%


Publishing/Inf ormation 23%

Entertainmen t 39%

Formerly Gulf and Western The entertainment operations produced, financed, and distributed motion pictures, television programming, and prerecorded videocassettes and operated movie theaters in the United States and Canada. Paramount and MCA jointly owned USA Network, a national advertiser-supported basic cable television network, one of the largest of its kind in the United States

Paramount

Paramount also produced and distributed series and made-fortelevision movies for network television, pay and basic cable, and videocassettes. In addition to distributing its own product, Paramount distributed to the foreign market television products acquired from independent producers. published hardcover and paperback books for the general published textbooks for elementary schools, high schools, and colleges.

Paramounts subsidiary, Associates Corporation of North America, provided consumer finance, specialized commercial finance and related insurance services in US, Canada , U K and Japan. Associates Corp. was the 3rd largest independent finance company in the United States Shearson and Wasserstein noted that Paramount would noted provide major cable assets, and the finance subsidiary, which represented 41% of total operating profit, did not fit with Times entertainment strategy.

The need for TIME Inc. To Merge


Time Inc. was faced with the following problems
No major copyright in video Time was neither too diversified nor global Time`s stock not valued correctly
Too expensive in the open market Only owned entertainment distribution channels

Lacked a separate class of non voting stock Lacked vertical integration

Traded at a fraction of its theoretical breakup value

Managements viewpoint
Address all three problems via a merger or acquisition
creating value through diversification creating values through economies of scale
Eliminate operational redundancies Eliminate a competitor

creating values through economies of scope

Vertical integration Motto: To eat and avoid being eaten Diversification of business with international avenues for profits Paramount and Warner Bros represented the best options in terms of:
Size Strategic fit Management

Vertical Integration
Times decision to enter the entertainment industry is driven by deregulation enabling vertical integration in media Vertical Integration is being motivated by
Increasing risk of holdup if acquiring programming and outlets for Times HBO and Cinemax Reduced risk of losses from growing film production costs due to guaranteed returns in self owned outlets Multipoint competition

Warner vs. Time vs. Paramount

Overseas Revenues - 40%

Overseas Revenues - 10%

Overseas Revenues - 16%

Ownership of Distribution Channel


- 100% Corporate Culture More of a partnership style Autonomy to division heads. High creative independence

Ownership of Distribution Channel


>100% Corporate Culture Church-State separation concept. High creative independence

Ownership of Distribution Channel


>100% Corporate Culture

The Merger Deal


Time wanted to go for a cash buyout of Warners shares However Steve Ross of Warner wanted simply to merge the hard assets of both companies through a stock deal Deciding on the ratio of stock exchange was in Warners favour as
Warner had higher earnings after taxes in 1988 of $423 million as opposed to $289 million albeit Time had higher sales Warners lower tax rate due to higher accumulated tax credits Wall street favoured Warners business mix Time had supported its own stock price 10% buyback Warner was deserving of a premium its stock was about 35% of Times in 1988. Time wanted to negotiate about 43%-45%, while Warner was negotiating for 50%.

Times Offer for Warner


Times shareholders offered a 59% stake in the merged firm to acquire Warner through a stock swap MV (Time: 109.125*57m shares=$6220.125 m MV (Warner): 45.875*178.5 m shares=$8188.6875m Completion of the acquisition requires shareholder approval; combined T-W value = 14.48Billion

Evaluating the Warner Offer


Is Warner worth giving up 59% of Time Warner?

Market value of T-W is $14.4B Time 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.

Paramounts Offer
Launched a cash bid for Time for $175 a share Times stock price rose from $44 to $170 per share, Paramounts rose from $0.75 to $54.75 Conditioned its tender offer on the termination of Time Warner merger and share exchange agreement

Reasons for Paramount Offer


Preserve their empire they were clubbing with other competitors to stop the Time Warner merger deal To not allow Time to gain merger cheaply without any debt or tax liability wanted to saddle the company with debt to make it less competitive and make its prices go down so the high bid by Paramount would prove more attractive and acceptable

Paramount's Offer
With Paramounts 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 Time Warner, T-W must have a value of $24.3 B.

$9.98B x 100% = VALUE (T-W) x 41%; VALUE (T-W) = $24.3B

Time-Warner must create an additional $9.929B in synergies for shareholders to justify spurning Paramounts offer.

This requires almost $1B in additional annual cash flows.

Assuming a perpetuity with a 10% discount rate.

Reaction of Time to Paramounts Offer


Time looked at Paramounts bid as short term gain since diversified fields in the industry wasnt a match But to discount Paramounts deal and to justify to its shareholders Time required to earn a rate of greater than 12% Paramounts hike in offer to $200, would easily take Time Warner more than 7years of combined synergy to reach that level But to go ahead with Warner deal they acquired it for cash swap so as to avoid including shareholders point

Analytical Issues
stakeholder interests should be served? Which interests are being served? (agency problems) How do we value the options? Where do we find the potential synergies?

Times Decision
Time dropped its stock offer for Warner and paid a higher price ($13.1B; $72/share) for Warner with cash. This avoided the need for shareholder approval of the
merger that surely would have failed given the Paramount offer.

Paramount boosted its offer to $200 per share and indicated a willingness to go higher.

Paramount sued based on the business judgment rule and lost.

Conclusion Is bigger the better?


Times decision to eventually go ahead with Warner was viewed as the most viable long term solution Evan though Paramount had quoted a figure of $200 per share, Time had never wanted to be acquired. Warner represented the best strategic fit for Time Although initial decision was a stock swap, Paramounts Davis made sure that the tax benefits that Time would have benefitted from, would be lost through their intervention, eventually making Time go against their shareholders interests

Conclusion
At a discount rate of 12%, Time Warner would have been able to reach a share price of $200 only after 7 and a half years. However the synergies realized over a long term proved to be much higher. Time Warner had become the largest media empire on earth Also, Times shares in 5 years was anticipated to be $352 and $621 in 10 years. Thus their decision in the long term was a success in spite of the leveraged acquisition

References
http://hbr.org/product/time-inc-sentry-into-the-entertainmentindustry-b/an/293133-PDF-ENG http://money.cnn.com/magazines/fort une/fortune_archive/1989/11/20/727 69/ http://law.wustl.edu/courses/lehrer/s pring2006/CourseMat/2006/Paramo untvTime571_A_2d_1140.pdf

You might also like