The Time-Warner merger
Its goals were primarily media related, its requirement for enhancement existed in procurement of films, distribution networks and primarily cable content and business in order to utilize its existing channel HBO and also profit from the cable market which was opening up. Another issue of concern was the need for independence in publishing decisions.
From all these points, Warner is the best candidate, because (a) 11% of its business revenues are cable related (b) owner of Lorimar tele-pictures, producer of large quantities of cable content for HBO (c) a strong domestic and international theatrical and television distribution network, suited to Time’s long term media strategic goals (d) the existence of a music distribution network, also suited to Time’s media related goals and where Time had no standing at all (d) some presence in book publishing but not large enough to pose a challenge to Time’s independence (e) a sufficiently good position in the media market.
On the other hand, Paramount qualifies only on one count, i.e, that of a strong domestic and international theatrical distribution presence. Although it is part owner of USA Network, one of the largest cable networks, ownership is not independent but in partnership with MCA which poses management problems for Time. Paramount also has a significant volume of its business from publishing/information related activities, therefore there is a good possibility of interference with Time’s independence in publishing decisions. A significant part of Paramount’s revenues are generated from its finance divisions (40%) which is not related to Time’s media related goals and would represent a diversification and splitting of business goals. Therefore, a smoother long term merger can be achieved with Warner, while the Paramount merger may not have been successful due to disunity of purpose, potential management conflicts and a diversion from the projected long term strategic goals of Time.
The estimated values of Warner stock were indeed correct. The merger was announced in early 1989 (March) and the profits of 1988 were used as the basis to determine the free cash flows and EBIT, therefore the slightly higher amounts that have been assumed are quite reasonable and jsutified. Moreover, four different discount levels have been considered, which would provide a good indication of the level of fluctuations that could be expected through the daily changes in stock prices due to the vagaries of the market and hence represents the range within which the share price may be expected to vary. The Company values that have been derived also take into account terminal EBIT multiples. Thus the computed value of the Company that has been obtained is a realistic estimate, taking into account both market value as well as actual values, also factoring into the equation values of acquisitions, short and long term debts, depreciation percentages and even including corporate overheads that may be anticipated in the case of a merger where extra compensations may have to be made. The value of the Company equity that has been derived from the two way table of discounted cash flow valuation is therefore a realistic valuation of the Company value, which ahs then been subdivided into individual stock values taking into account the number of stock holders that currently exist. Thus the value of Warner stock that has been derived is an accurate estimate, taking into account all financial factors and also assessing the range of fluctuation that is possible.