Stock Market and Paramount

face Study Questions predominate Communications Inc. 1993- Why a paramount is a takeover target? Several St pasturegic Reasons Cost diminution by combinations of similar business and rescue of scales Sales increase a) cross-promotions of each telephoners brand and utilization of each familiaritys channels, and b) cooperation in transnational businesses. 2. Which of the two firms (Viacom or QVC) would make a better tantrum with prevailing? -Viacom Overlap in the business creates synergies regarding cost and revenue. However, cannibalisation may fall out in the near future. QVC Small rooms for synergies (cost reductions may be contain to non-business section. ). Volatility may high regarding the realisation of synergies (Most of sweet synergies come from new businesses. ). Therefore, Viacom is more likely to be a good fit with predominant. 3. study your valuation (stand-alone basis) with securities industry price. What makes the difference between two prices? locali se monetary value $26. 48 to 29. 41 trade Price $ 48. 88 to 55. 50 Market Price Multiples Multiples imply the current ancestry price is overvalued. PER 33. 46 X, PBR 1. 61 X, EV/EBITDA 13. 7X There is a big difference in our Target Price and Market Price.This may come from 1) Market expectation that the guild will generate more Free capital Flow growing in the next few years 2) Speculation regarding potential takeover 4. What effect would Viacom have on the costs at predominant if it bought the company? What effect would Viacom have on Paramounts reaping rate? What would happen to costs and sales growth if QVC bought Paramount instead? 1) Viacom reach on the cost and growth rate at Paramount -Cost reduction can be expected thorough combinations of similar business and economy of scales -Viacom will increase sales growth of Viacom by cross-selling and cooperation in international businesses. ) QVC impact on the costs and sales growth at Paramount -Though QVC expects , the cos t reduction will be limited as some(prenominal) companies share the kindred business area. In addition, sales growth of Paramount will be cut as QVC has intention of restructuring some of the Paramount businesses. 5. What is Paramount worth to Viacom? Theme park (cross-selling) photographic film Library/Film Distribution Business 6. What is Paramount worth to QVC? New business opportunities in Entertainment Film Library/Film Distribution Business 7. study your valuation with Smith Barneys.What assumptions do you have to make to get the termination value EBITDA multiples used by Smith Barney. Is there any take in of their method relative to FCF method? Smith Barney is using EBITDA of 14 to 16X. Since EBITDA multiple tends to revert to a certain level over the year, we require to draw that the market will keep pricing the company at the same level of 1993. The merits of EBITDA multiples -They dont need to assume the perpetual growth rate which is hard to calibrate but has substantial impact on pricing. -They can ignore the capital structure change Easier to understand (it is market consensus) 8. What doe 30% bountifulness suggest? Is it reasonable? 30% of premium over the market price may be reasonable stipulation a) visualize premium b) the nature of takeover (it can be considered as Insider Trading, and to avoid litigation by shareholders, an acquirer may need to pay premium) c) consideration of synergies through a takeover. 9. How should Redstone proceed? What price should he snap? Should the offer be a cash offer, a stock offer, or some combination? What should he do about the lock-out pickax and the termination fee?Should he bother trying to debase Paramount at all? -The price to offer $63. 00 (after aggressive synergies consideration) premium of 14. 55% over the current stock price ($55. 00) -The type of merger The arrive amount required will be From $63. 00 * 120 million shares * 50. 1% = $3,787. 6 million to $63. 00 * 120million share s * 100% = $7,560 million. Cash $3,783. 6million to $7,560 million was too much as Viacom has altogether $28. 7 million cash and most of cash is supposed to be kept for working capital (total current liabilities amount to $848. 3 million).Also, as the LBO is impossible either since Paramount has only around Free Cash Flow of around $300 million. Stock Offer Therefore, stock offer can be a more reasonable option. However, Redstones conquer over Viacom itself will decrease (see the table below). Lock-up and termination fee Redstone should dismiss the options first if he really wants to buy the company. Conclusion Redstone should not buy Paramount for the following reasons a) He will substantially lose his control over Viacom b) Current market price is overvalued compared to Paramounts essential value. c) Realisation of synergies on revenue side is still uncertain.