Time Inc's Entry into the Entertainment Industry

1. The merger between Time and Warner is very attractive because it fit perfectly with Time's long run strategy of vertical integration with a focus on video programming. The need to expand vertically appealed to many companies in the entertainment industry. It not only helped to ensure access to outlets for their products but also to mitigate the increasing risk of failure at the box office. If a company could produce a film and then market the soundtrack, the video cassettes, play it overseas, etc. then the company could mitigate the potential losses from a film. From the perspective of Time, Warner had outstanding expertise in operating management, has a leadership position in film, records, home video, TV programming and cable operations. Warner also had a substantial international business in records and film and had a significant debt capacity. These attributes compliment Time's strengths in many key distribution channels such as magazines, books, cable television programming and local cable television franchises

2. The proposed exchange ratio of 0.465 per Warner share, after reviewing the facts, appears to be a reasonable proposition, assuming a synergy of $4.2 billion can be achieved. According to the valuation conducted by the investment bankers, the average price per share for Warner and Time are $69 and $201 per share, respectively (See Table 1). Factoring in the number of outstanding shares, we can calculate the value of each company before the merger and find the relative weight of each company which is 52% Warner and 48% Time (See Table 2). Given the proposed exchange ratio of 0.465, the weights of Warner and Time would shift to 59% and 41% respectively. In order for this merger to make sense, the value of the combined company's must increase such that the original ownership of Time, 48%, is equal to 41% of the newly merged company. After calculating the necessary figures (See Table 3) it can be seen that originally the companies were worth $23.7 billion combined and that after the merger they must be worth at least $27.9 billion in order for Time shareholders to retain their value. This is a synergy of $4.2 billion.

3. In terms of motivations, Time's management has strong incentives to merge with Warner for a number of reasons. First, of all the candidates, Warner was the most attractive because of its successful movie studio, Warner Brothers, its existing cable operations, its successful music business and its international distribution channels. Overall Warner's strengths compliment Time's strategic vision of the company. Also, Warner agreed to allow Time to maintain management control in order to preserve the editorial independence of Time's magazines. Warner was also very interested in supporting the merger because of a great valuation well above market price and the complementary strengths of the two companies.

Although Paramount does not fit into Time's long run strategy, Time is viewed as critical to Paramount's long run strategy. Paramount was in the process of remaking itself as a global entertainment and media company. This was nothing new for the CEO Martin S. Davis, who recast the former Gulf and Western into a media conglomerate. As part of this change, Paramount