Radio One Essay

Radio One, Inc.

Acquiring 12 new stations will give Radio One an even broader national presence in a market that has a high growth potential. The population growth rate as well as the income rate are increasing at a much faster rate for African Americans than for any other ethnic group within the U.S. An opportunity for the Radio Industry is the deregulations that have taken effect through the Telecommunications Act of 1996. Companies can now grow exponentially because they are able to consolidate and take advantage of operating efficiencies and synergies.

Technology is evolving at an ever faster rate, so radios could become obsolete at some point. Deregulation can be reversed with a new political administration. With 2000 being an election

Their plan is to acquire 12 new radio stations from its direct competitors, meaning a 36% increase of their total number of stations. Such a big increase could destabilize the way Radio One operates. The synergies, if not well implemented could threaten the entire company and its culture. Radio One has to take into account the fact that their centralized finance, legal, HR, IT, and overall program management could be problematic if the company acquires all the stations. As we know the deal stipulates that the new radio stations will be sold without any working capital, therefore the increase in costs generated from the deal could put the company in jeopardy if the cash flows are not generating money fast enough after the acquisition. Also, the financing costs and agreements that Radio One beneficiates as of right now could change if the acquisition goes through because the structure of the company would become much different. After the acquisition, the company size will increase tremendously; therefore, their cost of borrowing could increase if they are perceived as a riskier company. Usually though, bigger companies tend to borrow at cheaper

First, the revenue growth used in the case appears slightly optimistic. Therefore, looking at the yearly growth in population (1.4%), as well as the growth in income (1.3%), and the growth share of ad spending (less than 1% on average over the last 10 years); we believe that the real growth rate of revenue for the acquisition should be closer to 8%. Since 1997 they have had negative earnings; therefore, the company has unused tax benefit that they can take advantage of. However, we have used statutory rate because we believe that over the long run they’ll become profitable and use up their tax benefit. The risk free rate that we used for our valuation is 6.35% which was 30-year treasury in 1999. We chose it because we are valuing the acquisition at perpetuity and the 30-year treasury best matches with this time period. For the debt portion we are going to issue 10-year corporate bond which has the rating of AA and yield of 7.18%. In order to find the discount rate or WACC to use in our DCF analysis we assumed market premium of 7% because it is the long-term premium that the market returned