A. Was Paramount’s above-market offer for Time, Inc. consistent with the notion that the prevailing market price for common stock is an accurate reflection of the discounted net present value of future cash flows? Was management’s rejection of Paramount’s above-market offer for Time, Inc. consistent with the value-maximization concept?

B. Assume that a Time Warner shareholder could buy additional shares at a market price of $90 or participate in the company’s rights offering. Construct the payoff matrix that correspond to a $90 per share purchase decision versus a decision to participate in the rights offering with subsequent 100%, 80%, and 60% participation by all Time Warner shareholders.

C. Describe the secure game theory strategy for Time Warner shareholders. Was there a dominant strategy?

D. Explain why the price of Time Warner common stock fell following the announcement of the company’s controversial rights offering. Is such an offering in the best interests of shareholders?

Time Warner, Inc., the world’s largest media and entertainment company, is best known as the publisher of magazines such as Fortune, Time, People, and Sports Illustrated. The Company is a media powerhouse comprised of Internet technologies and electronic commerce (America Online), cable television systems, filmed entertainment and television production, cable and broadcast television, recorded music and music publishing, magazine publishing, book publishing and direct marketing. Time Warner has the potential to profit whether people go to theaters, buy or rent videos, watch cable or broadcast TV, or listen to records.

Just as impressive as Time Warner’s commanding presence in the entertainment field is its potential for capitalizing on its recognized strengths during coming years. Time Warner is a leader in terms of embracing new entertainment-field technology. The company’s state-of-the-art cable systems allow subscribers to rent movies, purchase a wide array of goods and services, and participate in game shows and consumer surveys--all within the privacy of their own homes. Wide channel flexibility also gives the company the opportunity to expand pay-per-view TV offerings to meet demand from specialized market niches. In areas where cable systems have sufficient capacity, HBO subscribers are now offered a choice of programming on different channels. Time Warner also has specialized networks, like TVKO, to offer special events on a regular pay-per-view basis.

Time Warner is also famous for introducing common stockholders to the practical use of game theory concepts. In 1991, the company introduced a controversial plan to raise new equity capital through use of a complex “contingent” rights offering. After months of assuring Wall Street that it was close to raising new equity from other firms through strategic alliances, Time Warner instead asked its shareholders to ante up more cash. Under the plan, the company granted holders of its 57.8 million shares of common stock the rights to 34.5 million shares of new common, or 0.6 rights per share. Each right enabled a shareholder to pay Time Warner $105 for an unspecified number of new common shares. Because the number of new shares that might be purchased for $105 was unspecified, so too was the price per share. Time Warner’s Wall Street advisers structured the offer so that the new stock would be offered at cheaper prices if fewer shareholders chose to exercise their rights.