Question 1

Empirical studies show that the business alliance announcements seldom have any impact on the market value of their parent firms.

Accepted Answer

A) True 
 B)False

Question 2

General Electric and Comcast Join Forces

Joint ventures are sometimes created if a business cannot be sold outright.
Such JVs are viewed as a way of improving a firm’s operations enabling the parent to exit the business eventually at a higher value.

In an effort to shore up its big finance business, severely weakened during the 2008 financial crisis, and to focus more on its manufacturing and infrastructure operations, General Electric (GE) sought to sell its media and entertainment business, NBCUniversal. GE’s decision to sell also reflected the deteriorating state of the broadcast television industry and a desire to exit a business that never quite fit with its industrial side. NBC has been mired in fourth place among the major broadcast networks, and the economics of the broadcast television industry have deteriorated in recent years amid declining overall ratings and a reduction in advertising. In contrast, cable channels have continued to thrive because they rely on a steady stream of subscriber fees from cable companies such as Comcast. Moreover, while NBCUniversal was profitable in 2009, it was expected to go into the red in subsequent years.

Unable to find a buyer for the entire business at what GE believed was a reasonable price, GE sought other options, including combining the operation with another media business. After extended discussions, GE and Comcast announced a deal on December 2, 2009, to form a joint venture consisting of NBCUniversal and selected Comcast assets. Comcast is primarily a cable company and provider of programming content, with 24.3 million cable customers, 16.1 million high-speed Internet customers, and 7.8 million voice customers. Comcast hopes to diversify its holdings as it faces encroaching threats from online video and more aggressive competition from satellite and phone companies that offer subscription TV services, by adding more content on its video-on-demand offerings. Furthermore, by having an interest in NBCUniversal’s digital properties, such as Hulu.com, Comcast expects to capitalize on any shift of its cable customers to viewing their favorite TV programs online by owning the program content.

Comcast’s strategy is to integrate vertically by owning the content it distributes through its cable operations. Previous attempts to do this, such as AOL’s acquisition of Time Warner in 2001, have ended in failure, largely because the cultures of the two firms did not mesh. Some media companies have merged successfully —for example, Time Warner’s merger with Turner Broadcasting. Having learned from AOL’s rush to achieve synergy, Comcast is allowing the NBCUniversal JV to operate independent of the parents and is sharing the risk with GE.

This joint venture transaction is noteworthy for its potential impact on limiting competition in the entertainment industry, its complex financial engineering, and its multifaceted organizational structure and as an exit strategy for GE from the media and entertainment business. Each of these considerations is discussed next.

The announcement raised significant concerns within the media and entertainment industry about the potential for limiting access to both content and distribution by increasing industry concentration. After receiving significant concessions, regulators approved the creation of the joint venture media giant on January 17, 2011. The U.S. Federal Communications Commission and the Department of Justice required Comcast and NBCUniversal to relinquish voting rights and board representation to Hulu, although they could continue to remain part owners. Furthermore, Comcast has to ensure what the FCC called “reasonable access” to its programming for its competitors, and the firm may not discriminate against programming that competes with its own offerings.

The deal reflected complicated financial engineering, involving both parties contributing assets to create a joint venture, agreeing on the total value of the endeavor, determining the value of each party’s contributed assets to determine ownership distribution, and finally determining how GE would be compensated. The joint venture transaction based on the value of the assets contributed by both parties was valued at $37.25 billion, consisting of GE’s contribution of NBCUniversal, valued at $30 billion, and Comcast’s contribution of cable network assets valued at $7.25 billion. The ownership interests were determined based on the value of the contributed assets and cash payments made to GE as described in Figure 15.1.

In exchange for contributing NBCUniversal operations valued at $30 billion to the JV, GE received $15.6 billion in cash ($6.5 billion from Comcast + $9.1 billion borrowed by the NBCUniversal JV) + a 49% ownership interest in the NBCUniversal JV).
In exchange for contributing $7.5 billion in cable network assets to the JV and paying GE $6.5 billion in cash, Comcast received a 51% interest in the NBCUniversal JV.

NBCUniversal Joint Venture at Closing.

Organizationally, the two parties own NBCUniversal indirectly through their ownership in a holding company (see Figure 15.2). As part of the deal, NBCUniversal Inc. was converted to a limited liability company (NBCUniversal Media LLC), which is a wholly owned subsidiary of NBCUniversal Holdings Inc., a corporation in which Comcast owns 51% of the outstanding shares and GE the remainder. NBCUniversal Holdings is the sole member (owner) in NBCUniversal Media LLC. By having the right to designate the majority of the board members of NBCUniversal Holdings, Comcast effectively controls the holding company and, in turn, NBCUniversal Media LLC. To maintain its status as a pass-through organization for tax purposes, NBCUniversal Media makes quarterly distributions to the holding company, which has no independent source of income, to meet its cash requirements. Among other things, these obligations include making cash distributions to Comcast and GE so that they can pay taxes due on the income generated by NBCUniversal Media. As long as GE retains at least a 20% ownership interest in the combined firms, it has certain approval rights over acquisitions, mergers, dissolution, bankruptcy, material expansion of the business, dividend payouts, new equity issues or repurchase, additional borrowing in excess of working capital requirements, loan guarantees, and other actions that could affect the value of its investment.

NBCUniversal Postclosing Organization

Finally, the deal enables General Electric to pursue a staged exit of NBCUniversal over a number of years. In doing so, GE hopes that the potential synergy with Comcast will increase substantially the value of its share of the joint venture. GE has redemption rights (a put option) during the six months beginning January 28, 2014, to redeem one-half of its interest in NBCUniversal Holdings. In the six months beginning on January 28, 2018, GE can redeem its remaining interest. Comcast is committed to funding $2.9 billion for each of the two redemptions, payable in cash and stock up to $5.8 billion to the extent NBCUniversal Media cannot fund the redemptions. The purchase price to be paid with any redemption by GE will be 120% of the “public market trading value” of NBCUniversal Holding, to be determined by an appraisal if the business is not yet publicly traded, less 50% of the “public market trading value” greater than $28.4 billion. After January 28, 2014, GE may transfer its interest to a third party, subject to Comcast’s having the right of first offer (first refusal). Comcast has a call option to buy out GE after the same dates designated for GE’s put option at the same price required under the put option.
In 2011, NBCUniversal Media had revenue of $19.3 billion, earnings before interest and taxes of $2.3 billion, and net income of $1.7 billion. While the financial outlook for the business has stabilized, the deal continues to be subject to the criticism that there is little overlap between Comcast and NBCUniversal Media’s businesses to provide significant cost savings. Moreover, big media deals have a poor track record, as illustrated by the AOL Time Warner debacle. Comcast is placing a big bet that it will be able to combine content and distribution successfully and to grow the value of the consolidated businesses. In contrast, General Electric may be more intent on exercising its option to sell its interests unless the fortunes of NBCUniversal Media improve dramatically in the coming years.
-Speculate as to the potential circumstances in which either Comcast or GE would be likely to exercise their call or put options? Which party do you believe is likely to exercise their options first and why?

Accepted Answer

The answer of 
General Electric and Comcast Join Forces

Joint ventures...

Question 3

JV and alliance agreements often limit how and to whom parties to the agreement can transfer their interests. These limitations include which of the following mechanisms?

Accepted Answer

A)  Tag-along provisions 
B)  Drag-along provisions 
C)  Put provisions 
D)  A, B, and C 
E)  A and B only

Question 4

The desire to share risk is a common motive for a business alliance.

Accepted Answer

A) True 
 B)False

Question 5

Microsoft Partners with Yahoo!-An Alternative to Takeover?
Business alliances sometimes represent a less expensive alternative to mergers and acquisitions. This notion may have motivated Microsoft when the firm first approached Yahoo! about a potential partnership in November 2006 and again in mid-2007. Frustrated with their inability to partner with Yahoo!, Microsoft initiated a hostile takeover bid in 2008 valued at almost $48 billion or $33 per share, only to be spurned by Yahoo!. Following the withdrawal of Microsoft's offer, Yahoo!'s share price fell into the low to mid-teens and remained in that range throughout 2010.
Reflecting the slumping share price and a failed effort to create a search partnership with Google, Yahoo!'s cofounder, Jerry Yang, was replaced by Carol Bartz in early 2009. The U.S. Justice Department had threatened to sue to block the proposed partnership between Yahoo! and Google on antitrust grounds.
Microsoft again approached Yahoo! with a partnering proposal in mid-2009, which resulted in an announcement on February 18, 2010, of an Internet search agreement between the two firms. As a result of the agreement, Yahoo! transferred control of its Internet search technology to Microsoft. Microsoft is relying on a ten-year arrangement with Yahoo! to help counter the dominance of Google in the Internet search market. By gaining access to each other's Internet users, both firms hope to be able to attract more advertising dollars from companies willing to pay for links on Microsoft's and Yahoo!'s websites. With Microsoft's search technology believed to be superior to Yahoo!'s, users requesting searches through Yahoo!'s site will be implemented using Microsoft's search software.
Regulatory agencies in both the United States and the European Union had no trouble approving the proposal because the combined Yahoo! and Microsoft Internet search market share is dwarfed by Google's. Google is estimated to have about two-thirds of the search market, followed by Yahoo! at 7% and Microsoft with about 3%.
Yahoo! could profit handsomely from the deal, since it will retain 88% of the revenue from search ads on its website during the first five years of the ten-year contract. Microsoft will pay for most of the costs of implementing the partnership by giving Yahoo! $150 million to defray its expenses. Microsoft also agreed to absorb about 400 of Yahoo!'s nearly 14,000 employees. Ironically, Microsoft may get much of what it wanted (namely Yahoo!'s user base) at a fraction of the cost it would have paid to acquire the entire company.
Garmin Utilizes Supply Agreement as Alternative to Acquiring Tele Atlas
Following an aggressive bidding process, Garmin Ltd., the largest U.S. maker of car-navigation devices, withdrew its bid for the Netherlands-based Tele Atlas NV on November 16, 2007. Tele Atlas provides maps of 12 million miles of roads in 200 countries. The move cleared the way for TomTom NV to buy the mapmaker for $4.25 billion. Both Garmin and TomTom are leading manufacturers of global positioning systems (GPSs), which enable users to navigate more easily through unfamiliar territory. The most critical component of such navigation systems is the map.
In lieu of acquiring Tele Atlas, Garmin entered into a six-year deal with an option to extend for an additional four years to obtain maps from Tele Atlas's competitor Navteq Corp. In doing so, Garmin avoided the EPS-dilutive effects of owning money-losing Tele Atlas. Garmin can focus on building traffic information and business listings into its products without having to own the underlying maps. An acquisition would have diluted Garmin's profit until 2010. Building maps comparable to those owned by Tele Atlas could take up to 10 years and cost $1 billion.
By owning the maps, TomTom is seeking to become more of a service provider than simply a manufacturer of GPS devices. Such devices are widely used in the automotive industry, as well as aviation and boating. The biggest growth opportunity is the increased use of GPS tracking capabilities in the market for mobile phones. This application is expected to dwarf the transportation and sports markets for GPS devices.
Because it will own the underlying maps, TomTom may be able to more easily combine the data with navigation devices and add traffic, gas station, and restaurant information. In contrast, Garmin will have to obtain proprietary data from others. Garmin may also have to pay more for maps or even lose access after the contract (including the option to extend) expires.
-Describe the advantages of the supply agreement to Garmin compared to outright acquisition of Tele Atlas?

Accepted Answer

The answer of Microsoft Partners with Yahoo!-An Alternative to Takeover?
Business...

Question 6

In what way can the Comcast/GE JV created in 2011 be viewed as a phased entry strategy into owning content for Comcast and as a phased exit strategy for GE?

Accepted Answer

The answer of In what way can the Comcast/GE JV...

Question 7