Q1.How attractive is the merger of Time with Warner?
Warner has cable franchise networks ( around 11 % of revenue in it) where as other possible merger partners
like Columbia , Disney, 20th century fox ,MCA were having lack of cable franchise assets.
• Their Film distribution was worldwide.
• Buyout will be done through exchange of stocks and not the cash buyout where in the company has to take
debt to pay out for the transaction.
• Consistent growth in the operating income.
• Low debt ratio of 0.07.
Q1.a What are the value enhancement opportunities?
• Economies of scale, vertical integration, create market and disseminate its product worldwide.
• Opportunities to venture into music and entertainment.
Q1. b Is the proposed exchange ratio of 0.465 per Warner share attractive?
• Time shareholders offer a 59% stake in the merged firm to acquire Warner (through a stock swap)
• MVT = $109.125 * 57M shares = $6,220,125 M
• MVW = $45.875 * 178.5M shares = $8,188.6875 M
• Assumes share prices at the data of the announcement
• Completion of the acquisition requires shareholder approval; combined T-W value = $14.4B
• 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.
• For Warner :
Before merger:
45.875X178.5= $8179.5125m
After merger
82.9 X 103.5 = $8580.15m
• For Time:
Before Merger:
$109.125X57=$6220.125m
After Merger:
$103.5X57=$5899.5m
Q3. What promoted Paramount’s interest in Time?
• Times Distribution segment.
• If time and warner gets merged , paramount will loose market and also the T-W will gain higher market
power.
Q4. What legal, financial, and restructuring options does Time have to combat the Paramount bid? To
ensure that it is not a target in the future?
• Increase market cap to $24 billion
• Dividend policy
• Increase shares by acquisition—Defense strategy from acquisition
• Liquidation of non performing assets
• Poison pill
Q5.What would you do as Mr. Munro? How would you explain a decision to reject the Paramount offer at
the annual shareholders’ meeting?
• Debt will be 79 % for paramount after acquisition.
• P1 S1 –times
• P2 S2--- Warner
Defense strategies
• For defence time would buy paramount shares.
• Going private by private equity
• White Knight: Looking for someone to save you
• Poison Pill: Give paramount a challenge to acquire by increasing shares
and market capital.
• Unissued capital is only a token restriction. When a company is incorporated a maximum number of shares is specified in the
legal documentation. Most companies will make this an extremely large number so they never face that limitation.
• You wouldn't necessarily expect the stock price to change. The reason a company issues new stock is as a way to raise capital.
Although new stock is issued, the cash raised by the sale becomes an Asset on the company's balance sheet.
• How company is formed?
A Memorandum of Association (MOA) is a legal document prepared in the
formation and registration process of a limited liability company to define its
relationship with shareholders.
The articles of association is a governing document that outlines the purpose
of a company, the rights and responsibilities of its members and directors,
and the way in which the company must operate as a whole
This document binds the shareholders
Charter amendments
• Poison put: Eg If a company is acquiring adani ,lenders wont agree to that
and want their debt payment done to avoid the deal, coz the risk will go up.
• Lenders standard condition for Adani– If 51% of Adani shareholding isnot
there then the loan has to be repaid.
• Asset lockup
• Litigation: Legally challenging Poison pill issuing of shares and share
exchange agreement which would hamper competition
• Leverage recapitalization: issue debt and pay shareholders huge one time
dividend. Then Paramount would consider time to be a highly leveraged
company and will reconsider its acquisition.
• Share repurchase: levering the target firm and raising equity.
• Reverse LBOs
• Green Mail: The target buyback shares from the acquire at a premium to
the current asking price.
