Paramount Target Analysis - Essay Example

Paramount is a takeover target because,  when two companies merge or an acquisition occurs, synergy will result. Viacom and QVC are engaged in the same businesses.

Takeover is good because based on Excel Sheet 1, The current assets of paramount are 2.77 times bigger than the current liabilities. The market price is 33.5 per cent higher than the earnings of Paramount. Synergy means that the sum of the combined force of two or more companies that merge is more than when the companies had not merged at all. The exchange of technology and expansion to each other’s territory plus the lesser costs and expenses that will be incurred when the actual merger takes place are the main reasons why many companies, including Viacom, QVC and Paramount, want to join forces. Based on the financial statements, the EBITDA, and other indicators the investment in Paramount is a very lucrative investment decision. Refer to Excel Sheets Q1 to Q7.

Based on question 5 sheet of the Excel file, The merger between Paramount and Viacom will result in total combined sales of $ 6,697. Both companies cater to the same industry like entertainment, networks & broadcasting. The merger will result in the cost of sales reduction and expenses of 30%. Please refer to the question 5 Excel sheet attached for a deeper analysis. EBITDA  contribution by Viacom will be from ($134 in 1994 to $223 in 1998) (Please refer to question 9 sheet of the Excel file attached ).

If the Paramount and QVC merger will occur (refer to question 5 below), then the total combined sales will only be $ 5,925. This is lesser by $772 than Viacom’s earlier combined sales data of  $6,697.

The only similar business they serve is the networks business. Therefore the estimated cost of sales and expenses reduction will only be an estimated 10% because the other business lines are disadvantageously unique to one company. These are the entertainment, broadcasting, live entertainment & publishing sectors.

The cost will be reduced by 30% because they engage in the same business lines. Computations are shown in the question 5 sheet of the Excel file attached.

The growth rate of Paramount will be increased by the entrance of Viacom because EBITDA will be increased as shown in the Excel computations attached. This can be explained by looking at the question 12 sheet of the Excel file attached.

The market value of the combined synergy between Viacom and Paramount is $ 42,105.30 (refer to question 9 sheet of the Excel file. Whereas, the market value where Paramount is not combined with Viacom is only $ 28,056.30 as computed in the Excel file question 8 sheet.

Paramount is worth $ 28, 056.30 as shown in Question No. 9 sheet in the Excel file below. When Viacom joins Paramount the additional earnings before taxes, deprecation and amortization generated for Viacom is from $134 in 1994 to $223 in 1998. Paramount is worth  $7,595.75 when multiple values are used. Paramount will be very happy when Viacom joins Paramount because now Paramount can use the facilities of Viacom to enter into territories where Viacom is having a good business. Viacom in return can use the facilities of Paramount to enter into territories dominated by Paramount.

Redstone should continue with the offer price based on the Excel computations. The $63 per share cost to Viacom is lower than the Smith Barney Analysis of $73.76. The offer should be in stock. The total acquisition price will be ($63 x 120,000 shares x 20%) $1,512,000. This can be demonstrated better in the question 11 sheet in the Excel file attached. Viacom presently has a $4,317.10 net worth as shown in Exhibit 7.

The balance sheet of Viacom indicates that they have only $65 cash on hand therefore the cash investment for the twenty percent paramount share is out of the question. Regarding the long-term loan alternative, Viacom has to pass thru a long process of presenting for Approval for their loan application.

 In loan applications, there has to be a collateral attached which the case study does not indicate that Viacom can come up with the collateral. This will be a longer process.

The 20 % lockout options must be pushed thru but the termination fees can be removed. Since this is one of the stumbling blocks why Paramount is not eager enough to pursue the merger, then Viacom can drop this one request. But regarding the lock-up, Viacom must insist that the compulsory twenty per cent must push through. One of the major reasons for Viacom’s insistence is that they give more votes in the decision-making policies of the board of directors.

The Excel files from Q1 to Q12 and the question 5 Excel sheet will clarify any doubts about the feasibility of a Paramount and Viacom merger because ACCOUNTING IS THE LANGUAGE OF BUSINESS.