Question Description
- What is the strategic rationale for Time’s proposed acquisition of Warner? What about Paramount’s bid for Time?
- What is the takeover premium that Time is implicitly offering to pay for Warner? (The takeover premium is the percentage by which the value of the consideration offered for each Warner share exceeds the pre-announcement market price.) Take the perspective of Warner’s Board at the time the offer was negotiated (but before it was announced). (this should be quantitative)
- What synergies must be realized to justify this premium from the point of view of Time’s stockholders? (For this and subsequent questions, define synergies as value created in the transaction in excess of the firms’ pre-announcement market values. In other words, synergies equal the value of the combined company post-transaction minus the sum of the two companies’ pre-announcement market values.) (quantitative)
- Based on the stock price changes, what is the amount of synergies that the market expects from a Time-Warner combination? Do you think this is an accurate estimate of the expected synergies? Why or why not?
- How much did Paramount bid? What synergy value must be realized from the merger with Warner for the stockholders of Time to be indifferent between the merger with Warner and Paramount’s bid? (Note: ignore any shareholder-level tax considerations.) Does this seem like a reasonable amount of synergies to expect? Why or why not?
- Critique the investment bankers’ DCF valuation of Warner. Do their assumptions seem reasonable? Do you see any problems with the key inputs to their analysis (i.e., discount rates, terminal values, cash flow projections, etc.)? If you see any problems, what is your estimate of a more reasonable valuation after correcting these problems? Given your findings, how do you think the strategic position of Time and its advisors may have affected their valuation analysis?
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