Radio One, Inc. Harvard Case Solution & Analysis

Radio One, Inc. Case Solution


The case discusses the importance of merger and acquisition of different radio stations where Radio One was considered to be an acquirer of the particular stations. In a particular industry of America, the two largest owners of radio stations were Clear Channel Communication and AMFM Inc.

However, sudden changes in 1999 required the CCC to divest some of the radio stations into the different market. This would be an opportunity for Radio One to acquire the top 12 stations from 50 different markets.

As the core activities of Radio One were coming from the urban side station, so in order to achieve the high growth margins, it would acquire the top selected stations who could provide urban facilities to the people and the economy and could boost the reputation of the market. From the assumptions made by Liggins (Owner of Radio One), it has been determined that the expected net revenue would tend to increase due to a high demand of the US market.

It was also expected to increase the sales volume by 51% over the next three years if the acquisition of the selected stations would take place. However, the net results show that the industry would continuously improve the performance of high revenues with the cutting cost of expenses by merger and acquisition.

Now from the following analysis, it would be an opportunity for Radio One to step up for the new acquisitions of 21 stations because the expected growth would be enormous and allow to cut the huge corporate expenses for Radio One in order to generate higher cash flows and develop the acquired stations for increasing the value in the future if the stations would sell.

Financial Analysis

From the following information provided in the financial results of existing as well as potential markets for Radio One, it has been determined that the consolidated value of all the stations is identified through the combined free cash flow statements. It is also analysed the potential benefit or loss of acquiring the huge amount of stations at the same time.

FCF Valuation (For existing market)

After the critical evaluation of the particular stations in the existing market, it is determined that the net earnings before interest and tax would tend to increase the number of selected years. Which shows that the total combined value of all the stations would increase by 40% at the end of the period.

Depreciation has been calculated through the average value consumed by Radio and is applied to the operating expenses of all existing markets. Whereas the terminal value at the year of the period would be 4% due to high consumptions of the particular assets in the industry level.Radio One Inc Case Solution

Weighted average cost of capital is calculated through the consideration of market risk premium, and a risk-free rate of the government bonds, The average Beta in the case is assumed to be 0.75 as compared to the under industry.

Therefore excluding the level of debt in the acquisition, the total WACC would purely base on the cost of equity and estimated to be 13.6% annually throughout the number of selected years. Thus, the total value of existing markets would be 2.11 billion at the end of last year (2004 in the case)...............

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