Planet–Gazette Case: Merger Negotiations
The New Haven Planet and the Hartford Gazette are contemplating a merger. Roughly speaking,
newspapers are valued on a per-reader basis. The Planet has 100,000 subscribers, while the Gazette is
twice as large with 200,000 readers. Currently, the Planet has a market cap of $10m, while the Gazette
has a market cap of $22m.*
The reasons for a merger are as follows:
1. By combining their joint purchasing, the two papers expect to reduce paper and printing costs
by 2.3%. The present discounted value of this cost savings is $2m to the Planet and $4m to the
Gazette.
2. The Gazette is starting from a position with lower production costs than the Planet. The cost
advantages of the Gazette can all be transferred to the Planet’s operation. The projected
savings are $125k annually to the Planet, which adds $1 million to the company's current value
(or market cap).
3. The merger will allow the two papers to cut overhead. The reduction in headcount is worth a
total of $150k annually, or $1.2m in present discounted value.
4. There is a possibility of expanding readership through joint subscription offers. It is thought that
5% of Planet readers will start subscribing to the Gazette and 5% of Gazette readers will start
subscribing to the Planet.
a. The value of the new 5,000 Gazette readers is worth $550k (at current market prices),
and the value of the new 10,000 Planet readers is worth $1m (at current market prices).
b. If we assume the Planet will have the same profitability as the Gazette post-merger,
then the new Planet readers will be worth $1.1m.
5. In addition, there is a reduced need for working capital, synergies in selling ads, and in building
the online paper. These synergies have not been quantified.
As a result of the merger discussions, both parties have all the information above. These two papers
have agreed on how the editorial side of the business will combine operations. The major sticking point
is the financial terms for the merger. The two sides agree the new combined entity will have a market
cap of $41.85 million.
Based on the relatively small size of these two papers, you should assume that there are:
1. No other potential merger partners. No joint ventures are possible.
2. Either the Planet and the Gazette reach a deal, or they don’t.
3. If no deal is reached, both sides continue their business as usual, and none of the synergies are
achieved.
IF YOUR BIRTHDAY IS BETWEEN JANUARY 1 & JUNE 30 THEN:
You are representing the Hartford Gazette in the merger. Your job is to make the best case for paying a
low price. What is the lowest purchase price you can justify, and how do you justify it? What do you
think is the fair outcome?
IF YOUR BIRTHDAY IS BETWEEN JULY 1 & DECEMBER 31 THEN:
You are representing the New Haven Planet in the merger. Your job is to make the best case for getting
a high price. What is the highest purchase price you can justify, and how do you justify it? What do you
think is the fair outcome?
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* The Gazette is more profitable on a per-reader basis and thus has a higher market cap per reader.