LaLa Media

Our client is a leading film and television studio. They have an in-house postproduction division which performs several services in support of their production of movies and television programs. This division has been consistently unprofitable for several quarters. The CFO has hired us to determine their strategic options for the division.

Our client is a leading film and television studio. They have an in-house postproduction division which performs several services in support of their production of movies and television programs. This division has been consistently unprofitable for several quarters. The CFO has hired us to determine their strategic options for the division.

Question 1: What information and data must be considered in evaluating the studio’s options? A strong answer would include the following: • Consider if a function could cost-effectively displace outsourcers • Whether excess capacity can be used to drive new revenue sources • Consider evaluating performance, profitability, and volume by segment Question 2: Given the information provided in Exhibit 2, what can you determine regarding the relative profitability of each service? A strong answer would include the following: • The decrease in revenue is primarily due to a drop-off in HEM – the largest but least profitable segment of the business • Restoration, while small, is much more profitable than other services • The services vary in the revenue generated by each job and their profitability • Revenue, profit, and margin can be calculated for each segment • Restoration: $400K revenue/job, $220K profit/job, 55% margin • HEM: $125K revenue/job, $12.5K profit/job, 10% margin • New Theatrical Mastering: $300K revenue/job, $70K profit/job, 23% margin • Dailies: $200K revenue/job, $80K profit/job, 40% margin Question 3: What approach would you take to evaluate the post-production services? Simply providing a list of options is insufficient; the candidate should evaluate the alternatives and have a recommended path forward. A strong response would: • Identify the profitable growth areas for the division and then assess the opportunities and challenges of shifting the focus of the business • The division’s reputation for quality work may allow for differentiation in the Restoration segment. However, growing this segment will require new costs that most be considered • Another option would be to divest the business, but the client would need a method for valuing the division and identifying and vetting potential buyers. Question 4: What additional factors should be considered in a turnaround decision? A divest decision? This question tests a candidate’s ability to consider a broad set of implications and think about how each option may affect the client’s business as a whole and the broader market. A strong answer may address: Turnaround and grow the postproduction business: 1. 2. Identify causes of drop-off in HEM (e.g., DVD market may be flat, or there may internal factors) Pursue new customers outside the studio: compete with 3rd party vendors for other studios’ work; focus on growing the Restoration business (the group could return to profitability with only two additional Restoration jobs); develop a television business (currently only focused on movies) 3. Cut costs: examine both fixed and variable costs to restore profitability Divest the business: 1. Business could be valued through either a DCF or a multiples-approach (e.g., EBITDA), based on sale of similar businesses 2. The client would also need to consider what constitutes an appropriate buyer. Would selling to another film studio give a strategic advantage to a competitor? What impact would a divestiture have on the operations of the studio? Would exclusive use of outside vendors negatively affect quality or speed or postproduction activities?