Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 24 pages in length and its case teaching package is 20 pages.

Abstract

This case, along with Paramount Communications, Inc. 1994, studies the takeover contest between Viacom and QVC for Paramount Communications. The Paramount 1993 case focuses on the events and situation leading up to the initial bid for Paramount by Viacom in September of 1993. Paramount 1994 focuses on the events from the first bid in September 1993 to the end of the contest in February 1994.

Linkages to Textbook Chapters or Journal Articles/Fit Within a Course

Most instructors will have their own preferences for material on valuation methods. Many of them will want to teach Paramount 1993 with materials from Chapter 19 of Brealey and Myers (1991). Because some instructors will find that Brealey and Myers does not go into sufficient detail, they also may find it useful to assign "A Note on Valuation Methods" by Steven N. Kaplan. Students also find it interesting to read "The Valuation of Cash Flow Forecasts", by Steven N. Kaplan and Richard S. Ruback, Journal of Finance, September 1995 which reports how the different valuation methods work in practice.

Study Questions

1. Why do you think Paramount is a takeover target?
2. Which of the two firms - Viacom or QVC - would make a better fit with Paramount? Which would Paramount management, i.e., Martin Davis, prefer, if he had to choose?
3. 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?
4. What is Paramount worth as is? to Viacom? to QVC? In class, I will expect you to argue for the particular cost savings and/or synergy's that Viacom and QVC will be able to achieve.
5. How should Redstone proceed?
   • What price should he offer?
   • Should the offer be a cash offer, a stock offer, or some combination?
   • What should he do about the lock-out option and the termination fees?
   • Should he bother trying to buy Paramount at all?

Assume:

• Paramount's marginal tax rate is 37%
• Expected inflation is 4%

Keywords

finance, corporate finance, acquisitions, valuation, entertainment, management behavior, benefits of control, takeovers, and mergers.

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