Stock Market and Paramount
Case Study Questions –Paramount Communications Inc. 1993-
Why a paramount is a takeover target?
Several Strategic Reasons
- Cost reduction: through combinations of similar business and economy of scales
- Sales increase: a) cross-promotions of each company’s brand and utilization of each company’s channels, and b) cooperation in international businesses.
2. Which of the two firms (Viacom or QVC) would make a better fit with Paramount?
-Viacom: Overlap in the business creates synergies regarding cost and revenue. However, cannibalisation may happen in the near future.
-QVC: Small rooms for synergies (cost reductions may be limited to non-business section.). Volatility may high regarding the realisation of synergies (Most of new synergies come from new businesses.).
Therefore, Viacom is more likely to be a good fit with Paramount.
3. Compare your valuation (stand-alone basis) with market price. What makes the difference between two prices?
Target Price: $26.48 to 29.41
Market Price: $ 48.88 to 55.50
Market Price Multiples: Multiples imply the current stock 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 company will generate more Free Cash Flow growth in the next few years
2) Speculation regarding potential takeover
4. What effect would Viacom have on the costs at Paramount if it bought the company? What effect would Viacom have on Paramount’s growth rate? What would happen to costs and sales growth if QVC bought Paramount instead?
1) Viacom impact 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.
2) QVC impact on the costs and sales growth at Paramount
-Though QVC
Why a paramount is a takeover target?
Several Strategic Reasons
- Cost reduction: through combinations of similar business and economy of scales
- Sales increase: a) cross-promotions of each company’s brand and utilization of each company’s channels, and b) cooperation in international businesses.
2. Which of the two firms (Viacom or QVC) would make a better fit with Paramount?
-Viacom: Overlap in the business creates synergies regarding cost and revenue. However, cannibalisation may happen in the near future.
-QVC: Small rooms for synergies (cost reductions may be limited to non-business section.). Volatility may high regarding the realisation of synergies (Most of new synergies come from new businesses.).
Therefore, Viacom is more likely to be a good fit with Paramount.
3. Compare your valuation (stand-alone basis) with market price. What makes the difference between two prices?
Target Price: $26.48 to 29.41
Market Price: $ 48.88 to 55.50
Market Price Multiples: Multiples imply the current stock 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 company will generate more Free Cash Flow growth in the next few years
2) Speculation regarding potential takeover
4. What effect would Viacom have on the costs at Paramount if it bought the company? What effect would Viacom have on Paramount’s growth rate? What would happen to costs and sales growth if QVC bought Paramount instead?
1) Viacom impact 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.
2) QVC impact on the costs and sales growth at Paramount
-Though QVC