Stock Market and Paramount

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Paramount Communications Inc.

Question 1 Paramount is a takeover target because other firms see synergy value associated with combining Paramount’s assets and operations with their own. Specifically, Paramount has several assets that complement other media companies. Value in the media is generated through several different channels. As a media company, Paramount has a presence in most of the entertainment sectors (see Exhibit 2). There seems to be a drive toward consolidation and several industry members are looking to diversify and round out their entertainment business portfolios. During this period Paramount was also experiencing increasing costs and continuous management turnover, which were starting to diminish financial performance. Viacom and QVC see this as an opportunity since they might be able to reduce certain costs through combined operations and improved distribution channels. Viacom and QVC, which are evaluating Paramount as an acquisition opportunity, see potential for further distribution of Paramount content (library, film, etc.) through channels such as cable networks. They also see opportunities to utilize Paramount’s film production competency as a potential growth opportunity.

Question 2 Both QVC and Viacom are interested in acquiring Paramount. Viacom is interested in Paramount because the two businesses are highly complementary and would create synergies. The combination would create opportunities for new businesses, reduce cost through economies of scale and removal of redundant functions, enhance distribution, and increase promotional potential. New business opportunities would be created by having a broader entertainment firm that can be present in more markets. Distribution and promotion of both Viacom and Paramount would be enhanced as each would be able to utilize the other’s content on their distribution channels. The company would be a comprehensive entertainment company that could compete in every entertainment sector.

On the other hand, what Paramount lacks is effective management at his movie studios. As evident from the case, Paramount’s immediate need is to have a stable management with clear vision and higher creativity and QVC has such management in Diller and his associates. This is the most needed and very apparent synergy for Paramount that makes QVC deal more desirable, if it happened! Also, Diller is good at producing successful movies at lower expenses. He is a proven talent in the industry and has turned-around Paramount Pictures successfully once before. Also, QVC has the support of a cable giant (~ 11 million subscribers) TCI that guarantees a formidable audience, direct distribution of programs and hence higher revenue. It also offers a good convergence of Film & TV media with the cable network in the form of more interactive and content-driven programming. By merging with (or getting acquired by) QVC, Paramount will be able to improve its management turnover problem, focus on its core operations, creativity, and direct distribution of its programs. It will be like an ideal marriage between hardware (TV+ Set top box) and software (Paramount).

Martin Davis would prefer Viacom to acquire Paramount for several reasons. First, his personal relationship with Berry Diller is poor due to prior conflicts while Diller was running Paramount. Davis’ relationship with Summer Redstone of Viacom is much friendlier. The second reason is that QVC would probably be more inclined to make significant changes to Paramount and its management. QVC would probably sell off some of Paramount’s assets and focus on content. This would probably be an issue for Davis. All of the main players (Davis, Diller, and Redstone) are highly attached to their businesses and have strong egos. The contrasting visions of the three create some issues.

Question 3 Valuing Paramount on a stand-alone basis using APV comes to $63.19 per share (Exhibit 18) and by using WACC comes to $63.54 per share...
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