Summary 663- In December 2005, Time Warner (TW) was the subject of two different
news stories. Its AOL division was pursuing an online advertising alliance
with Microsoft, while continuing to have discussions with its current
partner Google. It was also confronted by dissident shareholder Carl
Icahn who challenged management to break up TW.
a. TW’s board estimated that a 6-month continuing conflict with Icahn
would reduce TW’s value by $200 million on average. The cost to
Icahn and his backers of mounting a full challenge to the board would
be about $50 million. Some financial pundits believed that Icahn’s real
motive was to induce TW’s board to pay him greenmail, buying his stock
(about 3% of shares) at a premium to be rid of his challenge. Under
these circumstances, do you expect Icahn to go through with his
challenge? What if there is a provision in TW’s charter stating that any
price premium paid for a special purchase must also be extended to
any and all shareholders owning more than .1% of TW shares?
b. AOL and Google’s partnership at the time generated annual profits of
about $250 million and $70 million for the respective parties. Analysts
estimated that an AOL-Microsoft alliance would generate an annual total
profit of $500 million. Losing AOL as a partner would also undermine
Google’s competitive position meaning a reduction in its overall profit
of $50 million (on top of the foregone $70 million alliance profit).
In an efficientnegotiated agreement, should AOL partner with
Microsoft or with Google? Explain.
c. In the AOL-Microsoft negotiations, Microsoft believed that online ad
revenue was mainly driven by the overall number of site visitors and
users (an area where Microsoft’s MSN site is strong), while AOL
believed ad revenue would depend on customers undertaking
searches (Microsoft’s search engine is weak and less popular). How
might these different opinions affect how an agreement is structured
(and whether there is an agreement at all)?
*13. Firm A is attempting to acquire firm T but is uncertain about T’s value. It
judges that the firm’s value under current management (call this vT) is in
the range of $60 to $80 per share, with all values in between equally likely.
A estimates that, under its own management, T will be worth vA1.5vT
30. (Note that vAis strictly greater than vTexcept when vTequals 60.)
Firm A will make a price offer to purchase firm T, which T’s current
management (knowing vT) will accept or reject. Show that all possible
offers result in an expected lossfor firm A, even though T is always worth
more under A’s control than under T’s. (In this example, asymmetric
information implies an adverse selection problem similar to those
discussed in Chapter 14.) - Firm X can produce a necessary component in-house at a cost of 10 or
purchase it from one of three suppliers (A, B, or C) whose costs are 8, 7,
and 5, respectively. X can approach the firms in any order, attempt to
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