CopyrightTime Inc.'s Entry into the Entertainment Industry (A)Harvard Business School Case #292040293117Case Software # XLS-849Copyright 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording or otherwisewithout the permission of Harvard Business School.

Exhibit 1 Exhibit 1 History of Selected Acquisitions of Time, Inc.Date AnnouncedCompany AcquiredBusinessPriceTimes Stock Price Near the Acquisition A nnouncementDay BeforeDay After5/22/78Inland Container Corp.Maker of containerboards, corrugated containers$272 million$47.750$44.886/18/82Great American Reserve Insurance Co.Life and health insurance; spun off with Inland Container in 1984$76 million$29.125$28.6252/21/85Southern Progress Corp.Magazine publisher, book marketer$480 million$49.625$48.50012/09/85Group W Cable Inc.Cable TV system; Time and Tele-Communications own 25%35% eachCash and assumption of debt; total of $1.75 billion$61.250$59.62510/14/86Scott, Foresman & Co.Textbook publisher$520 million$76.625$73.50010/20/88Whittle CommunicationsMagazine publishing, advertiser-supported TV$185 million$118.750$116.875Source: Compiled from Moodys Industrial Manual, The New York Times, Wall Street Journal, The Washington Post, Investment Dealers Digest, Inc., Interactive Data Corp., and CRSP daily stock files.

Exhibit 2Exhibit 2 Times Income Statement ($ millions)For Years Ended December 3119841985198619871988MagazinesaRevenues$1,321$1,482$1,576$1,621$1,752Operating income180155153276279Identifiable assets212582663694923ROIA (operating income/identifiable assets)0.850.270.230.40.3ROS (operating income/revenues)0.140.100.100.170.16BooksRevenues$491$552$663$954$891Operating income60837385100Identifiable assets2784681,1511,1561,225ROIA (operating income/identifiable assets)0.220.180.060.070.08ROS (operating income/revenues)0.120.150.110.090.11ProgrammingRevenues$810$854$952$971$1,122Operating income12411599116136Identifiable assets4816658241,0541,095ROIA (operating income/identifiable assets)0.260.170.120.110.12ROS (operating income/revenues)0.150.130.100.120.12Cable TelevisionRevenues$510$584$637$714$812Operating income$86$100$130$162$180Identifiable assets9761,0241,1071,1951,505ROIA (operating income/identifiable assets)0.090.100.120.110.12ROS (operating income/revenues)0.170.170.200.180.22ConsolidatedRevenuesb$3,067$3,404$3,762$4,193$4,507Operating incomec391388308582653Identifiable assets2,6153,0724,2304,4244,913ROIA (operating income/identifiable assets)0.150.130.070.130.13ROS (operating income/revenues)0.130.110.080.140.14Source: Compiled from SEC filings (Time, Inc. 10-Ks) and Time, Inc Annual Reports.aSegement operating income = Segment revenue - Operating expenses - Depreciation - Amortization.bConsolidated Revenue does not include intersegment sales from the programming segment to the cable TV segment.cConsolidated Operating Income = Segment Operating Income - Corporate Expense.

Exhibit 3AExhibit 3A Consolidated Balance Sheet as of December 31, 1988Time ($millions)Warner ($millions)Paramount ($ millions)AssetsCurrent assets:Cash and equivalents$121$229$616Receivables506940668Inventories299459416Prepaid programming190nanaPrepaid promotion205nanaOtherna141447Total Current Assets$1,321$1,769$2,147Investments740nanaNet property, plant, and equipment1,399999414Goodwill and intangible assets986nanaDeferred charges and other assetsna688naProgramming and other assets4671,1432,817Total Assets$4,913$4,599$5,378Liabilities and Shareholders EquityAccounts payable and accrued expenses$734$1,489$964Other17144117Total Current Liabilities$905$1,533$1,081Unearned portion of paid subscriptions424nanaLong-term debt1,4857211,390Deferred income taxes511nanaOther liabilities229na641Accounts payable due after one yearna552naTotal Shareholders Equity$1,359$1,793$2,266Total Liability and Shareholders Equity$4,913$4,599$5,378Source: Compiled from SEC filings (10-Ks) and company annual reports.

Exhibit 3B Exhibit 3B Consolidated Operating and Shareholder InformationTime 8.5WarnerParamountTimes interest earneda8.529.07.3Debt ratiob0.170.070.18Market-to-bookc5.35.22.8Market value of equityd725095796332Stock price:June 6, 1989126515452 weeks13593523256371.11.21.1Debt ratingAa3A3A2Sources: Compiled from Value Line, Moodys Industrial Manual, CRSP, 10-Ks, and annual reports.a(EBIT + Depreciation)/(Net Interest Expense) for fiscal year 1988.bLT Debt/(LT Debt + Market Equity); Debt from fiscal year 1988, market equity as of June 6, 1989.c(Stock price June 6, 1989)/(Book Value of Equity per Share 1988).dMarket Value of Equity = # Common Shares Outstanding 6/6/89 Stock Price.

Exhibit 4Exhibit 4 Attributes of Major Companies Involved in Entertainment IndustryCompanyFilm and TV ProductionSize of Film LibraryCable ProgrammingFilm DistributionTheatersHome VideoTV StationsCable SystemsOtherEntertainment Revenue FY 1988Market Value Debt + Equity (year end 1988)TimeHBO TBS 14% Cinemax, Movietime 22%ATC 82% 3.9 million subscribersMagazines, book publishing$1,934$8,081WarnerYes1,400TBS 11%WorldwideCinamerica 50%YesBHC 42.5%Warner Cable 1.5 million subscribersRecorded music, book publishing, comics$4,067$7,752ParamountYes820USA 50% MSGDomestic; international through United International Pictures, 33%Cinamerica 50% Cinema International Corp. 50%Yes5 TV stationsBook publishing Financial services$1,862$6,749MCAYes3,000+USA 50%Domestic; international through United International Pictures 33%Cineplex Odeon 50% Cinema International Corp. 49%YesWWOR-NYTheme parks, publishing, recorded music$2,290$5,274Columbia PicturesYes2,700WorldwideLoews, USARCA/Columbia$1,146$3,054DisneyYes610Disney Sky 50%WorldwideKHJ-TV in Los AngelesTheme parks, consumer products$3,438$10,608News Corp.20th Century Fox2500Sky 50%WorldwideYes7 TV stations Fox NetworkBooks, magazines, and newspapers Aircraft Finance Co. 49%$1,265$6,579MGM/UAYes1034Domestic international through United International Pictures 33%Yes$675$1,516GETV onlyCNBC 50% after 4/89NBC 7 affiliates$3,638$44,121Capital Cities/ABCTV onlyESPN other interestsABC 8 affiliates$3,750$7,770CBS, Inc.TV onlyCBS 5 affiliates$2,778$4,997Tele-Communications, Inc.InterestsYes8 million subscribers$2,143$10,085Orion PicturesYesLarge$395$680Turner BroadcastingNoOwns MGM libraryCNN, TBS, TNTWTBS$807$3,384ViacomNTV, Nick, other interestsLarge in TV distributionYes4Large$1,259$4,813Source: Compiled from analyst reports (Baliz and Zorn Inc. Report on Time Inc., 11/21/88, Wertheim Schroder & Co. Industry Report, 3/1/89, Drexel Industry Report, 10/17/89), S.E.C. filings (10-Ks).

Exhibit 5Exhibit 5 Warner Communications Income Statement ($ millions)For Years Ended December 3119841985198619871988FILMED ENTERTAINMENTRevenues$1,090$1,201$1,251$1,355$1,571Operating income150160172176207Identifiable assets779950107711931536ROIA (operating income/identifiable assets)0.190.170.160.150.13ROS (operating income/revenue)0.140.130.140.130.13MUSICRevenues$818$912$1,139$1,530$2,040Operating income90112151213319Identifiable assets3843984539981,290ROIA (operating income/identifiable assets)0.230.280.330.210.25ROS (operating income/revenue)0.110.120.130.140.16CABLE TVRevenues$363$296$326$387$456Operating income(106)(9)164272Identifiable assets213300753794994ROIA (operating income/identifiable assets)-0.50-0.030.020.050.07ROS (operating income/revenue)-0.29-0.030.050.110.16PUBLISHINGRevenues$115$122$133$130$139Operating income1114121111Identifiable assets2750555998ROIA (operating income/identifiable assets)0.410.280.220.190.11ROS (operating income/revenue)0.100.110.090.080.08LORIMARaRevenues$334$466$571$637$525Operating income1506736(39)(362)ROS (operating income/revenue)0.450.14.06(.06)(.69)CONSOLIDATEDbRevenues$2,023$2,235$2,848$3,404$4,206EBIT208252312399531Interest expense, net13959552026Gain on sale of subs.(611)208624035Profit before tax69401319419541Profit after tax(590)195252328423Source: Compiled from SEC filings (Warner Communications 10Ks), annual reports, and Paramount Communications, Inc. and KDS Acquisition Corp. v. Time, Inc. Consolidated Civil Action No. 10670. Finkelstein Exhibit 7.aWarner acquired Lorimar-Telepictures in January 1989. We anticipate that in the near future, Lorimar in particular will make major earnings contributions . . . as the demand for worldwide TV programming increases dramatically. (Warner 1988 Annual Report.)bDoes not include Lorimar.

Exhibit 6 Exhibit 6 Paramount Communicationsa Income Statement ($ millions)For Years Ended December 3119841985198619871988ENTERTAINMENTRevenues$1,266$1,063$1,154$1,850$1,862Operating income10969129297252ROS (operating income/revenue)0.090.060.110.160.14PUBLISHING/INFORMATIONRevenues$ 317$ 798$ 949$1,074$1,194Operating income44104141162180ROS (operating income/revenue)0.140.130.150.150.15CONSUMER/COMMERCIAL FINANCERevenues$1,236$1,460$1,687$1,778$2,052Operating income188251290324372ROS (operating income/revenue)0.150.170.170.180.18CONSOLIDATEDRevenues$2,819$3,321$3,790$4,702$5,108Operating income283358496722748Interest and other(68)(122)(110)(114)(107)Earnings before income taxes215236386608641Provision for income tax7684158253256Earnings before extraordinary items139152228355385Extraordinary items003900Earnings from discontinued operations9996000Net earnings$238$248$267$355$385ROS (operating income/revenue)0.100.110.130.150.15Identifiable assets4,2034,0644,2434,9285,378ROIA (operating income/identifiable assets)0.070.090.120.150.14Source: Compiled from SEC filings (Gulf & Western 10-Ks) and annual reports. aFormerly Gulf & Western.

Exhibit 8AExhibit 8A Warner Pro Forma Free Cash Flow by Segment ($ million)a1989199019911992199319941995199619971998Filmed entertainment104.00118.60139.70164.80180.10196.20213.70232.90253.80276.50Music/music publishing307.50307.60324.20343.20354.40392.70432.50475.10522.00573.50Cable TV42.10151.50181.50205.80233.70266.70298.80327.60355.70386.00Publishing15.208.808.909.5010.1010.8011.6012.4013.3014.20Lorimar14.0067.5085.00124.70137.20137.4096.50106.20116.80128.50Total482.80654.00739.30848.00915.501,003.801,053.101,154.201,261.601,378.70aFree Cash Flow = Sales - Operating expenses - taxes + depreciation and amortization + deferred taxes - capital expenditures - increase in film inventory - increase in working capital.

Exhibit 8BExhibit 8B Discounted Cash Flow Valuation of Warner Communications ($ millions)Terminal EBIT MultiplesbDiscount Rate9x10x11x12x10%5,9345,9345,9345,934Present value of cash flowsa8,4089,34210,27611,210Present value of terminal value14,34215,27616,21017,14411%5,6965,6965,6965,696Present value of cash flows7,6808,53310,27610,240Present value of terminal value13,37614,23015,97215,93612%5,4735,4735,4735,473Present value of cash flows7,0217,8018,5829,362Present value of terminal value12,49513,27514,05514,83513%5,2655,2655,2655,265Present value of cash flows6,4247,1387,8528,565Present value of terminal value11,68912,40213,11613,830aCasewriters note: present value of Exhibit 8A free cash flows.bCasewriters note: terminal value apparently based on multiples of 1998 EBIT, not 1998 free cash flow.Source: Compiled from Wasserstein Perella & Co, Inc. and Shearson Lehman Hutton, Inc. presentation at the March 3, 1989, Time Board of Directors Meeting. Presentation obtained from Paramount Communications, Inc. and KDS Acquisition Corp. v. Time, Inc. Consolidated Civil Action No. 10670. Finkelstein Exhibit 7.

Exhibit 9 Exhibit 9 Discounted Cash Flow Valuation of Warner Communications ($ millions)Value of the firma$11,689-$13,116Adjustments:Add:Investments1,337.50Cash and equivalents320.3Overfunded pensions26.3Less:Short-term debt32.2Long-term debt1,230.3Corporate overhead350Total net adjustments71.6Value of equity$11,760-$13,188Share of outstanding (fully diluted)183.5MMValue per share$64.08-$71.86Source: Compiled from Wasserstein Perella & Co, Inc. and Shearson Lehman Hutton, Inc. presentation at the March 3, 1989, Time Board of Directors meeting. Presentation obtained from Paramount Communications Inc. and KDS Acquisition Corp. v. Time Inc. Consolidated Civil Action No. 10670. Finkelstein Exhibit 7.aCasewriters note: based on 13% discount rate.

Sheet10Exhibit 10 Comparable Transaction Acquisition Analysis: Premiums Paid in Recent Acquisitions by IndustryaIndustryNumber of AcquisitionsAverage EBIT Multiple PaidCable programming1Film519Music110Book publishing915Magazine publishing913Source: Compiled from Wasserstein Perella & Co., Inc. and Shearson Lehman Hutton, Inc. presentation at the March 3, 1989 Time Board of Directors meeting. Presentation obtained from Paramount Communications Inc. and KDS Acquisition Corp. v. Time Inc. Consolidated Civil Action No. 10670. Finkelstein Exhibit 7.aCable systems typically valued as multiple of number of subscribers instead of EBIT. In 1989 the average value was $2,209 per subscriber.

Exhibit 12Exhibit 12 Terms of Paramount Communications Offer for Time Inc., June 7, 1989ParamountBefore AcquisitionPayment in AcquisitionAfter AcquisitionAfter Debt Reduction from Asset Salesa($ bil.)(%)($ bil.)($ bil.)(%)($ bil.)(%)All borrowed money1.74310.712.4848.979Owners equity2.3572.3162.3214.014.711.2Sources: Compiled from WSJ Index, Paramount SEC filings, Time/Warner/Paramount Battlecompany report by E.A. Fruelich, June 22, 1989.aAssumes sale of The Associates for 3.5 billion, net of taxes.

Exhibit 14Exhibit 14 Market Interest RatesYield Curve March 19891-year Treasury Bills9.43%7-year Treasury Bonds9.3010-year Treasury Bonds8.9130-year Treasury Bonds8.91Corporate Bond Rates March 1989 (industrial average)10-year AAA9.81%10-year AA10.1810-year A10.5910-year BBB10.9610-year B12.0110-year B12.79Source: Compiled from S&P Security Price Record (aka S&P Statistical Service), 1992, and Interactive Data Service.