Times Mirror: A Largely Traditional Business Model
Tribune Company Profile: The Face of New Media?
Anticipated Synergy
Cost Savings: Opportunities Abound
Cost savings are expected because of the closing of selected foreign and domestic news bureaus, a reduction in the
cost of newsprint through greater volume purchases, the closing of the Times Mirror corporate headquarters, and
elimination of corporate staff. Such savings are expected to reach $200 million per year (Table 2).
Table 2. Annual Merger-Related Cost Savings
Source of Value Annual Savings
Bureau Closings1 $73,000,000
Newsprint Savings2 $93,000,000
Other Office Closings (e.g., Corporate Office in Los Angeles)3 $34,000,000
Total Annual Savings $200,000,000
1Assumes Tribune will close overlapping bureaus in United States (9) and most of the Times Mirror’s foreign
bureaus (21 abroad).
2As a result of bulk purchasing and more favorable terms with different suppliers, 15% of the newsprint expense of
the combined companies is expected to be saved.
3Layoffs of 120 L.A. Times Mirror Corporate Office personnel at an average salary of $125,000 and benefits equal
to 30% of base salaries. Total payroll expenses equal $19,500,000 (i.e., $125,000 1.3 120). Lease, travel and
entertainment, and other support expenses added another $14.5 million.
Source: Moore, Kathryn, Tim Schnabel, and Mark Yemma, “A Media Marriage,” paper prepared for Chapman
University, EMBA 696, May 18, 2000, p. 9.
Revenue: Great Potential . . . But Is It Achievable?
Integration Challenges: Cultural Warfare?
Financial Analysis
Table 3. Merger Evaluation
1997 1998 1999 2000 2001 2002 2003
2004 2005
Tribune ($ Millions)
Sales 2891.5 2980.9 3221.9 3261.5 3473.5 3699.3
3939.7 4195.8 4468.5
Operating Expenses 2232.5 2279.0 2451.0 2283.1 2431.4 2589.5
2757.8 2937.1 3128.0
EBIT 559.0 701.9 770.9 978.5 1042.0 1109.8
1181.9 1258.7 1340.6
EBIT(1 – t) 395.4 421.1 462.5 587.1 625.2 665.9 709.2
755.2 804.3
Depreciation 172.5 195.5 221.1 212.0 225.8 240.5
Operating Expenses 2337.0 2380.5 2558.7 2449.2 2571.7 2700.2
2835.3 2977.0 3125.9
EBIT 391.2 403.4 470.5 690.8 725.3 761.6
799.7 839.7 881.7
EBIT(1 – t) 234.7 242.0 282.3 414.5 435.2 457.0
479.8 503.8 529.0
Depreciation 133.4 152.1 166.4 188.4 197.8 207.7
218.1 229.0 240.5
Gross Plant & Equipment 173.4 131.5 113.0 125.6 131.9 138.5
145.4 152.7 160.3
Change in Working Capital 199.2 551.1 -791.1 251.2 257.2 270.0
283.5 297.7 312.6
Free Cash Flow to Firm -4.5 –288.5 1126.8 226.1 244.0 256.2
269.0 282.4 296.6
Gross Plant & Equipment 277.2 271.2 247.7 288.7 305.6 323.4 342.4
362.5 383.7
Change in Working Capital 151.5 600.1 315.9 512.1 500.3 529.0 559.3 591.4
625.4
Free Cash Flow to Firm 507.3 139.5 568.7 616.2 738.2 838.6 881.5
926.9 975.1
PV (2001–2005) @ 9.5% 88.1
Table 4. Offer Price Determination
Tribune Times Mirror Combined Incl. Synergy Value of Synergy
Equity Valuations 8501.5 2375.0 16443.7
5567.3
Minimum Offer Price1 2805.9
Epilogue
Only time will tell if actual returns to shareholders in the combined Tribune and Times Mirror company exceed the
expected financial returns provided in the valuation models in this case study. Times Mirror shareholders earned a
substantial 102% purchase price premium over the value of their shares on the day the merger was announced. Some
portion of those undoubtedly “cashed out” of their investment following receipt of the new Tribune shares.
However, for those former Times Mirror shareholders continuing to hold their Tribune stock and for Tribune
shareholders of record on the day the transaction closed, it is unclear if the transaction made good economic sense.
Discussion Questions:
1. In your judgment, did it make good strategic sense to combine the Tribune and Times Mirror
corporations? Why? / Why not?
2. Using the Merger Evaluation table given in the case, determine the estimated equity values of Tribune,
Times Mirror and the combined firms. Why is long-term debt deducted from the total present value
estimates in order to obtain equity value?
3. Despite the merger having closed in mid-2000, the full effects of synergy are not expected until 2002.
Why? What factors could account for the delay?
4. The estimated equity value for the Times Mirror Corporation on the day the merger was announced was
about $2.8 billion. Moreover, as shown in the offer price evaluation table, the equity value estimated using
discounted cash flow analysis is given has $2.4 billion. Why is the minimum offer price shown as $2.8
billion rather than the lower $2.4 billion figure? How is the maximum offer price determined in the Offer
Price Evaluation Table? How much of the estimated synergy value generated by combining the two
businesses is being transferred to the Times Mirror shareholders? Why?
5. Does the Times Mirror-Tribune Corporation merger create value? If so, how much? What percentage of
this value goes to Times Mirror shareholders and what percentage to Tribune shareholders? Why?
Ford Acquires Volvo’s Passenger Car Operations
This case illustrates how the dynamically changing worldwide automotive market is spurring a move toward
consolidation among automotive manufacturers. The Volvo financials used in the valuation are for illustration
only— they include revenue and costs for all of the firm’s product lines. For purposes of exposition, we shall
assume that Ford’s acquisition strategy with respect to Volvo was to acquire all of Volvo’s operations and later to
divest all but the passenger car and possibly the truck operations. Note that synergy in this business case is
determined by valuing projected cash flows generated by combining the Ford and Volvo businesses rather than by
subtracting the standalone values for the Ford and Volvo passenger car operations from their combined value
including the effects of synergy. This was done because of the difficulty in obtaining sufficient data on the Ford
passenger car operations.
Background
By the late 1990s, excess global automotive production capacity totaled 20 million vehicles, and three-fourths of the
auto manufacturers worldwide were losing money. Consumers continued to demand more technological
innovations, while expecting to pay lower prices. Continuing mandates from regulators for new, cleaner engines and
more safety measures added to manufacturing costs. With the cost of designing a new car estimated at $1.5 billion to
$3 billion, companies were finding mergers and joint ventures an attractive means to distribute risk and maintain
market share in this highly competitive environment.
By acquiring Volvo, Ford hoped to expand its 10% worldwide market share with a broader line of near-luxury
Volvo sedans and station wagons as well as to strengthen its presence in Europe. Ford saw Volvo as a means of
improving its product weaknesses, expanding distribution channels, entering new markets, reducing development
and vehicle production costs, and capturing premiums from niche markets. Volvo Cars is now part of Ford’s Premier
Automotive Group, which also includes Aston Martin, Jaguar, and Lincoln. Between 1987 and 1998, Volvo posted
operating profits amounting to 3.7% of sales. Excluding the passenger car group, operating margins would have
been 5.3%. To stay competitive, Volvo would have to introduce a variety of new passenger cars over the next
decade. Volvo viewed the capital expenditures required to develop new cars as overwhelming for a company its
size.
Historical and Projected Data
The initial review of Volvo’s historical data suggests that cash flow is highly volatile. However, by removing
nonrecurring events, it is apparent that Volvo’s cash flow is steadily trending downward from its high in 1997. Table
9-10 displays a common-sized, normalized income statement, balance sheet, and cash-flow statement for Volvo,
including both the historical period from 1993 through 1999 and a forecast period from 2000 through 2004.
Although Volvo has managed to stabilize its cost of goods sold as a percentage of net sales, operating expenses as a
percentage of net revenue have escalated in recent years. Operating margins have been declining since 1996. To
regain market share in the passenger car market, Volvo would have to increase substantially its capital outlays. The
primary reason valuation cash flow turns negative by 2004 is the sharp increase in capital outlays during the forecast
period. Ford’s acquisition of Volvo will enable volume discounts from vendors, reduced development costs as a
result of platform sharing, access to wider distribution networks, and increased penetration in selected market niches
because of the Volvo brand name. Savings from synergies are phased in slowly over time, and they will not be fully
realized until 2004. There is no attempt to quantify the increased cash flow that might result from increased market
penetration.
<A>Table 9-10. Volvo Common-Size Normalized Income Statement, Balance Sheet, and Cash-Flow Statement (Percentage of Net Sales)<A>
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Income Statement
Net Sales 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Cost of Goods Sold .772 .738 .749 .777 .757 .757 .757 .757 .757 .757 .757 .757
Operation Expense .167 .101 .120 .077 .119 .133 .132 .131 .129 .128 .127 .126
Depreciation .034 .033 .033 .034 .029 .038 .038 .039 .040 .040 .041 .042
EBIT .027 .128 .098 .112 .088 .073 .073 .074 .074 .074 .075 .075
Interest on Debt .050 .023 .022 .021 .015 .023 .023 .022 .021 .021 .020 .020
Earnings Before Taxes .024 .017 .076 .091 .072 .049 .051 .052 .053 .054 .055 .056
Income Taxes .004 .018 .022 .012 .015 .014 .014 .015 .015 .015 .015 .016
Net Income .028 .087 .054 .079 .057 .035 .036 .037 .038 .039 .040 .040
Determining the Initial Offer Price
Volvo’s estimated value on a standalone basis is $15 billion. The present value of anticipated synergy is $1.1 billion, suggesting that
the purchase price for Volvo should lie within a range of $15 million to about $16 billion. Although potential synergies appear to be
substantial, savings due to synergies will be phased in gradually between 2000 and 2004. The absence of other current bidders for the
entire company and Volvo’s urgent need to fund future capital expenditures in the passenger car business enabled Ford to set the
Determining the Appropriate Financing Structure
Ford had $23 billion in cash and marketable securities on hand at the end of 1998 (Naughton, 1999). This amount of cash is well in
excess of its normal cash operating requirements. The opportunity cost associated with this excess cash is equal to Ford’s cost of
Epilogue
Seven months after the megamerger between Chrysler and Daimler-Benz in 1998, Ford Motor Company announced that it was
Discussion Questions and Answers:
1. What is the purpose of the common-size financial statements developed for Volvo (see Table 8-8 in the textbook)? What
insights does this table provide about the historical trend in Volvo’s historical performance? Based on past performance,
how realistic do you think the projections are for 2000-2004?
2. Ford anticipates substantial synergies from acquiring Volvo. What are these potential synergies? As a consultant hired to
value Volvo, what additional information would you need to estimate the value of potential synergy from each of these areas?
3. How was the initial offer price determined according to this case study? Do you find the logic underlying the initial offer
price compelling? Explain your answer.
4. What was the composition of the purchase price? Why was this composition selected according to this case study?