Since the case asked us to evaluate this from Munro's point of view, it is
his
job to examine the potential the deals in the best interest of Time's
shareholders. Therefore, in my opinion we will have to incorporate the
after-tax value to the Time shareholder as one piece of the puzzle. The
difficulty with the tax implications to the shareholder is that we do not
know
the average shareholder's cost basis. It should just be a mention in our
memo.


As I mention in a previous e-mail, there is no tax implication to the
corporation except for the leverage and tax shield. Unless we completely
recreate the DCF I don't think we can accurately quantify the tax shield
advantage especially since we don't know how the additional leverage will
alter
the WACC, i.e. what is the optimal WACC of the combined company. Another
complication is the difficulty in recreating the DCF is the timing and tax
implications of the asset sales which we know to be around $3.5 billion.

Our professor doesn't seem to require any advanced calculations. We are
probably all right with some approximations.
**********************************************
Mark D. Guinney, CFA
Consultant
Watson Wyatt Investment Consulting
345 California Street, Ste. 1400
San Francisco, CA 94104
(415) 733-4487 ph.
(415) 733-4190 fax


____________________Reply Separator____________________
Subject: Re: Time Warner
Author: "Dylan Windham" <SMTP:dwindham@uclink4.berkeley.edu<
Date: 04/29/2001 12:29 AM

Jeff:

I have been looking at your numbers and I have a few questions.

1). If we look at this from the stand point of the Time shareholder's,
we do not really need to worry about the make-up of Time-Paramount after
the merger. Since this is an all cash deal, the purchase price will be
given to Time's shareholders. This amount needs to be above the DCF of the
Time-Warner deal for us to suggest it.

2). As for the taxes maybe Mark can shed some light on the
issue. During the acquisition phase the only taxes that will be paid will
be the capital gains paid by Time Shareholders. Paramount will not pay
taxes on the purchase. Paramount's tax position will improve due to the
increased debt payments. Looking at it from Time shareholder's we really
don't care do we? Maybe I am wrong.

Otherwise everything looked good. I like the common sized balance
sheet. I should be home all day tomorrow. Call me at 925-362-0210 and let
me know how I can pitch in.

Dylan







At 08:55 PM 4/28/01 -0500, Jeff.Dasovich@enron.com wrote:


<OK Gang:
<
<Well, I've been crunching numbers all day, and haven't yet gotten to the
<writing. I've attached Dylan's original responses for reference. Figure
<it'll be a memo from Time's CEO to the Time Board.
<
<I've leaving now for Mendocino, but will be back early tomorrow to finish
<this up. Please check out the spreadsheet.
<
<The case is sort of confusing?how do Time's analysts value Time at
<$189-212, when they're trading at 109 the day before the announcement of
<the deal with Warner. That doesn't jive. Are they saying that, absent
<synergies, the combined Time/Warner is worth the enterprise value of Time
<at 189-212 plus the enterprise value of Warner at $63-71 (again, the
<analysts valuation)? That just seems ridiculous, give where they're
<trading.
<
<Anyway, here's where my analysis is heading----tell me if I'm smoking
<crack.
<
<The deal isn't really $175 per share. It's $175 LESS the taxes that will
<have to paid (since it's a purchase deal) PLUS the value of the tax shield
<created by the net increase of $8.9B in new debt that Paramount will take
<on. Does this seem right? Could folks look at my spreadsheet? I've got
<it conceptually set up, but I'm not quite sure how to calculate the taxes
<paid under the purchase method or the value of the tax shield (assuming
<that this is correct. If I'm just completely out of it with this angle,
<just let me know. In any case, seems that there's some value in the
<tax-free (Time-Warner) versus the taxable (Time-Paramount) deals.
<Presumably, we could take the total enterprise value of Time-Warner
<(nontaxed) and compared it to the total enterprise of Paramount-Time
<(taxed) and compare the two. I've got a hunch that the Time-Warner number
<may win the day, but I haven't gotten that far in the crunching yet.
<
<In any case, I'll be back around Noon tomorrow and will crank the puppy
<out.
<
<Best,
<Jeff
<
<(See attached file: Timewar_Jeff Calculations.xls)(See attached file:
<TimeWarner.doc)