Wednesday, April 2, 2008

Viacom Empire

1. Introduction

Viacom, established by CBS Broadcasting as an independent company in 1970 has now become world’s second largest media conglomerate. Bought by visionary Sumner M. Redstone in 1986, Viacom gradually emerged as an “entertainment colossus” and expanded its empire through a number of mergers and acquisitions, timely strategic alliances and product diversification. Most notable among them were the merger with Blockbuster in January, 1994 and the acquisition of Paramount in July, 1994. However, this transformation into a media giant did not come without its toll. The company incurred huge debt, structure and management challenges loomed and the fast-changing entertainment and media industry posed new threats to the company. In a very risky movie industry where past successes are no indication of future success, Paramount’s share of the box office dropped from 14 percent in 1994 to 10 percent in 1995. To compound the problem, the Blockbuster division was also not doing well.

By applying Five-force model, SWOT, PEST and value chain analysis we explored internal and external environment; then we used M&A evaluation method to get an insight of the company’s relative value. We also analyzed synergy applying discounted cash flow NPV analysis. Finally, we analyzed the costs and benefits of the alternative solutions and came up with some recommendations and their implementation plans. We suggest the use of Balanced Scorecard to measure our solution with described criteria.

2. Internal Analysis

2.1 Corporate-level strategy: global expansion strategy

2.2 Business-level strategy company pursuing: product leadership strategy. (Appendix 1)

2.3 Distinctive competencies

Resource: syndication right for some popular TV programs like Cosby show; product line proliferation; brand name; strategic alliance; knowledge and experience in product development; state-of-art production capacity in Orlando, Florida; good network and connection with other companies like telephone companies, wireless companies; opening of new channels.

Capabilities: keeping cost under control; good functional structure that enables company to manage cost and create profit center.

2.4 Value chain analysis: (Appendix 2)

Viacom has outstanding value chain to transform inputs to outputs that continuously create value to its customers. It has capability to lever resources to design, create and deliver new products to its customers. It also has efficient supporting activities that enable primary activities to be taken easily and timely.

3. External Analysis Through Five-Force Model

Although the industry demand is growing steadily, the intensity of rivalry is high owing to high exit barriers and consolidated industry structure. Because of huge capital investment and high risk of failure (difficult to predict whether a program/movie/song will be popular or not), the entry barrier is high. The bargaining power is low to moderate because the company can make it content in house. Owing to low switching cost and low brand loyalty, the bargaining power is high. The large number of existing and emerging entertainment channels cause high substitute threat. Complementors may become substitutes and the threat of complements is moderate. The environment is in the favor of the company as explained in the Appendix 3.

4. SWOT Analysis

Internal analysis

Strength

Weakness

Clear mission and vision of future; brand name; management skills; scale and scope of business; copyrights; high market share in the US.

Huge debt; often changes of top management; lack of international experience of management team; weak cooperation among business units;

External analysis

Opportunity

Threats

Globalization and growing markets (Asia, Western Europe etc.); Prices liberalization in cable TV industry; Market consolidation (increasing bargaining power, and non-price competition); Technology advancement

Deregulation that lowers the entry barrier; fast changes in technologies that might lead to potential entry with lower costs or create new substitutes; piracy; low brand loyalty of customers

5. Key Issues To Address

- Poor performance of Paramount and Blockbuster;

- Heavy debt

- Global expansion

- Difficulties in realizing expected synergy

6. Cost/Benefit Analysis of Alternatives:

7. Recommendations : Based on above analysis, we recommend that Viacom should follow : first, restructuring organization; second, finding out possible acquisition & merger ; and third, following a global strategy.

8. Implementation plan (Appendix 4)

8.1. Restructuring: to lever the company’s resources to create value for its customers

- selling unprofitable business units such as Paramount Picture

- integrating properties to reduce cost by sharing resources of cross-business units

- combine value chain activities to achieve lower cost or collaborating to create new resource, strength and capabilities

- Cross functional team to lower cost and enhance productivity and efficiency

8.2. Acquisitions & Merger: Consider possible M&A that would benefit company with steps :

- Analyze the needs and right time

- Search for target companies

- Evaluate M&A by using the methods in Appendix 5

- Negotiation, deal execution

- Post-M&A restructuring

After restructuring and taking possible acquisition, Viacom will have better access to maintain a mixed strategy (combination of cost and differentiation strategy in the future (Appendix 6).

8.3. Global strategy: Move from multi-domestic strategy to transnational strategy (Appendix 7)

The choice of entry mode depends on different countries where it wants to enter because of some political reasons and responses from local communities. For example, in China, it should set up global strategy alliance with Chinese broadcasting partners since Chinese broadcast industry is under the control of the government.

9. Balanced Scorecard to Measure Performance


Restructuring

M&A

Global expansion

Financial

Cost structure

COGS % Revenue, GS&AE % Revenue

NPV, IRR, Free Cash flow, Financial ratios, Revenue, Profit and cash-flow growth rate

Revenue, Profit and cash-flow growth rate, Financial ratios

Customers

Market share (%), Response time, Service time, Customer satisfaction index, Customer retention rate,

Internal business process

Manufacturing cycle time reduction rate, New product development time reduction rate, Numbers of new products vs planned,

Learning and growth

Employment satisfaction index, Employee productivity (revenue/employee), Leadership development plan, Number of training for managers

Appendix 1: Value Proposition

Appendix 2: Value Chain Analysis

Appendix 3: PEST Analysis for the US Market

Appendix 4: Implementation Plan Chart

Appendix 5: Three M&A evaluation methods

1. Public comparables analysis examines how the investment community values a set of companies that are similar to the subject company. Looking at what an informed buyer is willing to pay for a share of a similar company's stock can provide insight into relative value for a middle-market private company and guidance for an expected valuation.


2. Analyze synergy_DCF NPV : Discounted Cash Flow analysis

Acquire only if synergy exceeds premium paid.


3. Acquisition comparables analysis. This method attempts to come up with a more relevant implied valuation range by using actual acquisition prices. Calculate Transaction Value (TV) and Offer Value (OV); normalize for non-recurring items; calculate relevant multiples (TV/Sales, TV/EBITDA, OV/Net Income, OV/Book Value; Offer Price per Share/EPS).

3 comments:

Dazed & Confused said...
This comment has been removed by the author.
Pallavi said...

where are the appendix???

Pallavi said...

oops...sorry...forgot to add 'thnx'...interesting stuff!

thnx...