HORIZONTAL SCOPE:
Diversification at Time Inc.
Business Strategy
Marriott School of Management
Brigham Young University
©Copyright 1996, 1999, 2001
MOTIVATIONS FOR A MERGER AT
TIME INC.

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Slow growth in magazine division
Growth in cable networks
Time Inc.’s decision to enter the entertainment
industry is being driven primarily by deregulation
enabling vertical integration in media.
Vertical integration in being motivated by
– Increasing risk of holdup in acquiring programming and
outlets for Time’s HBO and Cinemax
– Reduced risk of losses from growing film production costs
due to guaranteed runs in self owned outlets
– Multipoint competition
TIME’S OFFER FOR WARNER
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
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.
EVALUATING THE PARAMOUNT OFFER
Is Warner worth giving up the Paramount Offer?

With Paramount’s 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
TimeWarner, T-W must have a value of $24.3 B.
$9.98B x 100% = VALUE (T-W) x 41%; VALUE (T-W) = $24.3B

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Time-Warner must create an additional $9.929B in
synergies for shareholders to justify spurning
Paramount’s offer.
This requires almost $1B in additional annual cash
flows.
Assuming a perpetuity with a 10% discount rate.
ANALYTICAL ISSUES
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Which 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?
TIME’S 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.

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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.
CORPORATE-LEVEL STRATEGY
The Scope of the Firm
Corporate-Level Strategy is action taken to gain a
competitive advantage through the selection and
management of a mix of business competing in
several industries or product markets.
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Vertical Integration
Diversification
1. Choose business areas to participate in
2. Choose strategies to enter/exit business areas
CREATING VALUE THROUGH
DIVERSIFICATION
Diversification is a strategy attempting to improve
long-run profitability by acquiring and managing new
business lines.
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Related diversification – value chain commonalities
Unrelated diversification – totally new business
activities
EVALUATING DIVERSIFICATION
How can diversification create value?

Acquiring and restructuring
 Transferring competencies
 Economies of scale
 Economies of scope
How can diversification dissipate value?

Bureaucratic Costs
– Information overload
– Coordination limitations
 Pooling Risk
 Managerial Opportunism (Agency Problems)
CREATING VALUES THROUGH ECONOMIES
OF SCALE
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Eliminate operational redundancies
– Reduce costs in common activities

Eliminate a competitor
– Reduce competition and rivalry; increase prices through
increased market power
CREATING VALUE THROUGH ECONOMIES
OF SCOPE

Operational Economies of Scope
– Shared activities
– Core competencies

Financial Economies of Scope
– Internal capital allocation
– Risk reduction
– Tax advantages

Anticompetitive Economies of Scope
– Multipoint competition
– Exploiting market power