SOLUTION: FIN 423 San Diego State University At&t and Time Warner Case Study
W19651 THE $85.4 BILLION MERGER OF AT&T AND TIME WARNER: VALUATION ANALYSIS1 Professors Xiaokang Zhao and Frank Li wrote this predicament singly to furnish esthetic for adjust discourse. The authors do not indicate to illustrate either efficient or inefficient handling of a overseerial generally-knownity. The authors may feel surreptitious infallible names and other identifying advice to preserve confidentiality. This promulgation may not be catching, photocopied, digitized, or incorrectly representd in any produce or by any resources outside the leave of the copyright holder. Swarming of this esthetic is not ripe lower authorization by any swarming rights organization. To adjust copies or beg leave to represent esthetics, contiguity Ivey Publishing, Ivey Concern School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) email@example.com; www.iveycases.com. Our goal is to proclaim materials of the imported quality; resign any errata to firstname.lastname@example.org. i1v2e5y5pubs Copyright © 2019, Ivey Concern School Foundation Version: 2019-11-26 On October 22, 2016, Janey Frank, a portfolio overseer at Uria Investment, was shocked by an announcement made in a convocation circumvent by Jeff Bewkes, the chairperson and ocean supporter dignitary (CEO) of US television resources hercules Age Warner Group (Time Warner). Bewkes established that Age Warner would soon attach forthcoming a time the telecommunications (telecom) operator AT&T Inc. (AT&T), produceerly American Telephone and Telegraph Company. AT&T would attain Age Warner for US$107.502 per portion-out, half in capital and half in accumulation.3 In a ment Age Warner filed, as required by the US Securities and Exchange Commission (SEC), Bewkes made the forthcoming propoundment: This proceeding is an justifiable outcome for our portion-outholders and it’s an justifiable opening to drive long-term prize into the advenient. We prize combining forthcoming a time AT&T is the true proximate march in the evolvement of our concern and it is one that avows us to significantly expedite our most deep strategies. We prize that putting these complementary concernes unitedly succeed drive innovation and expedite the transition of the ecosystem to further and meliorate choices for consumers.4 Time Warner to-boot announced that the two companies had launched produceal negotiations as coming as August 2016 and were expected to perfect the dispense in 2017. The attachr betwixt one of the extensivest distributors of full and one of the biggest producers of full, if beloved in the antitrust trials that followed, would be the extensivest global merit during the year.5 AT&T agreed to buy Age Warner’s completion equity of 783.8 favorite ungathered portion-outs for $85.4 billion. Together forthcoming a time Age Warner’s net debit, this would absorb AT&T $108.7 billion, the completion execution prize. Before the attachr was announced, Age Warner’s accumulation appraisement was $79.50 per portion-out; the merit appraisement 1 This predicament has been written on the plea of proclaimed sources barely. Consequently, the version and perspectives presented in this predicament are not necessarily those of AT&T Inc. or Age Warner Group, or any of the employees. 2 All exotericity totalitys are in US$ regular incorrectly ascertained. 3 “AT&T to Attain Age Warner,” tidings untrammelled, AT&T, October 22, 2016, advanceed March 27, 2019, http://about.att.com/story/att_to_acquire_time_warner.html. 4 Time Warner Inc., “Form 425, Pursuant to Administration 425 lower the Securities Act of 1933 and Deemed Filed Pursuant to Rule 14a-12 lower the Securities Modify Act of 1934,” US Securities and Modify Commission, 2016, advanceed February 26, 2019, www.sec.gov/Archives/edgar/data/1105705/000110570516000031/form425.htm. 5 Roger Yu, “AT&T Agrees to Buy Age Warner for Further than $80B,” USA Today, October 22, 2016, advanceed June 25, 2019. www.usatoday.com/story/money/2016/10/22/reports-t-agrees-buy-time-warner-more-than-80b/92589816/. This instrument is identified for use barely in Yaoyi Xi's John Savage at San Diego Propound University from Mar 2020 to Sep 2020. Page 2 9B19N022 of $107.50 complicated a 35 per cent douceur.6 If Age Warner were to subdue the dispense and avow other companies to befit complicated in the precept, it would feel to pay AT&T $1.725 billion. On the other hand, if the antitrust exercise were not to avoid the dispense, causing the effect of the buyout, then AT&T would feel to pay Age Warner $500 favorite.7 Frank was unamenable to apprehend the advenient of the attachd attached, as AT&T equity represented a significant portion of her bombardment portfolios. She wondered if the attachr would be absorbly or problematic for the acquirer’s investors. In 2016, so far, bulky merits had extremely benefited portion-outholders of the habitual attached at the payment of the attainr’s investors, including the $3.8 billion merit of DreamWorks Animation by Comcast Corporation (Comcast) and the $2.8 billion merit of Demandware Inc. by Salesforce.com Inc.8 Investors had already launched contiguitying Frank environing the advenient of the fraternity and the propound of their bombardments. She needed to act reckcease to console any virtual forfeiture of prize for her investors, so she resolute to compel a thoroughgoinggoing valuation segregation. DEAL STRUCTURE In the attachr, all of Age Warner’s portion-outholders would hold $107.5 per portion-out—$53.75 per portion-out in capital and $53.75 per portion-out in AT&T accumulation. If AT&T’s medium portion-out appraisement was cease than $37.411 at the cease of the proceeding, Age Warner’s portion-outholders would hold a urban appraisement of 1.437 AT&T portion-outs per portion-out. If AT&T’s medium portion-out appraisement was in the class of $37.411 and $41.349, then the modify relevancy would be an totality correspondent to the quotient obtained by dividing $53.75 by the medium AT&T accumulation appraisement. If AT&T’s portion-out appraisement was surpassing than $41.349 per portion-out, Age Warner’s portion-outholders would hold AT&T portion-outs at a urban appraisement of 1.300 per portion-out.9 To train the capital needed to investment half of the $85.4 billion dispense, AT&T purposed to devote for bridge loans of $25 billion and $15 billion, respectively, from JPMorgan Chase & Co. and Bank of America Merrill Lynch.10 THE ACQUIRER: AT&T Headquartered in Dallas, Texas, AT&T had previously been disclosed as the American Bell Telephone Company and moderate the Bell Telephone Fraternity founded by telephone creator Alexander Graham Bell in 1880. In 1984, AT&T spun off its generally-known telephone employment and kept equipment manufacturing enterprises Western Electric and Bell Laboratories, as polite as the most productive long-distance employments; Southwestern Bell Communications (SBC) had its origins in this reorganization.11 The United States 6 Time Warner Inc., op. cit. Todd Spangler, “Time Warner Would Pay AT&T $1.73 Billion Breakup Fee if Merger Is Pulled,” Variety, October 24, 2016, accessed March 27, 2019, https://variety.com/2016/biz/news/time-warner-att-breakup-fee-merger-1201898492. 8 David Trainer, “AT&T Age Warner Merit a Rare Dispense that Makes Economic Sense,” Forbes, November, 15, 2016, accessed June 25, 2019, www.forbes.com/sites/greatspeculations/2016/11/15/att-time-warner-acquisition-a-rare-deal-thatmakes-economic-sense/#7e7270cb11fa. 9 Time Warner Inc., “Form 8-k, Pursuant to Section 13 or 15(d) of the Securities Modify Act of 1934,” US Securities and Exchange Commission, October 22, 2016, accessed June 25, 2019, www.sec.gov/Archives/edgar/data/1105705/000095015716002366/form8k.htm. 10 Thomas Gryta, Keach Hagey, Dana Cimilluca, and Dana Mattioli, “AT&T: Reaches Dispense to Buy Age Warner for Further than $80 Billion—3rd Update,” Marketscreener， October 22，2016， advanceed June 26, 2019, www.marketscreener.com/AT-T-INC14324/news/AT-T-Reaches-Deal-to-Buy-Time-Warner-for-More-Than-80-Billion-3rd-Update-23257264/. 11 AT&T, “Brand-Licensing, Evolution and Doman Names,” accessed June 25, 2019, https://about.att.com/innovation/ip/brands/history 7 This instrument is identified for use barely in Yaoyi Xi's John Savage at San Diego Propound University from Mar 2020 to Sep 2020. Page 3 9B19N022 telecommunications law of 1996 led to a ocean shift in the competitive vision.12 SBC spacious its operations in the United States through a train of merits, including the merit of Pacific Telesis Group in 1997 and the merit of Ameritech Corporation in 1999. In 2005, SBC purchased AT&T and took on its branding, forthcoming a time the attachd existence naming itself AT&T Inc. and using its iconic logo and accumulationtrading species.13 AT&T was the extensivest telecom fraternity and urban-line telephone employment furnishr in the United States, as polite as the extensivest ductile phone employment furnishr in the United States and the avoid-largest ductile employment provider in the cosmos-people. The fraternity’s concernes moderate wirecease despatchs; generally-known modify services; unconnected employments; basis, broadband, and Internet employments; video employments; telecommunications equipment; network management; negotiateable employments; and schedule advertising and proclaiming employments. AT&T to-boot furnishd broadband and shadow television (TV) employments, and had environing 135 favorite wireless subscribers in the United States in 2016, which made it the cosmos-people’s extensivest telecom fraternity.14 AT&T operated in indecent ocean concern sectors (see Exhibit 1). In execution solutions, its ocean concernes were wirecease employments, strategic employments, oral language and basis employments, and wirecease devices. In consumer ductile employments, it furnishd consumer employment and equipment. In regalement and Internet services, it offered video regalement, high-speed Internet, and oral basis employments. Finally, its intergenerally-known concern limb furnishd video and wirecease employments in Latin American countries such as Brazil and Argentina. AT&T was committed to expanding its ductile Internet concern through a train of attachrs and acquisitions. It had purchased the compute-three Mexican conveyance Iusacell for $2.5 billion in past 2014, and two months pastr, it purchased the Mexican telecom operator Nextel Mexico for $1.88 billion.15 The two habitual companies produceed AT&T Mexico and helped AT&T invade the Latin American negotiate. Forthcoming a time the product of ductile Internet and collective resources, as polite as shifts in consumers’ video-watching habits, AT&T had to-boot launched to invade the video ground. In 2014, AT&T and the Chernin Group jointly purchased Fullscreen, YouTube’s premier full furnishr.16 In 2015, AT&T attaind DIRECTV, the extensivest US shadow TV furnishr, for $48.5 billion and became the nation’s extensivest pay-TV fraternity, generating significant repay product for its regalement concern.17 THE TARGET: TIME WARNER Founded in 1990, Age Warner was headquartered in New York. Originally a store proclaimer, it had confirmed to befit one of the cosmos-people’s top regalement resources companies forthcoming a compute of attachrs and acquisitions. The Warner brothers—Harry, Albert, Sam, and Jack Warner—launched the primary Warner Brothers Studio in 1918 on Sunset Boulevard in Hollywood. In 1923, they produceally established Warner Bros. 12 Staff component of Generally-known Telecommunications and Advice Administration (NTIA), “The United States Telecommunications Act of 1996, Global Communications Interactive ‘98,” advanceed July 11, 2019, www.ntia.doc.gov/legacy/opadhome/overview.htm. 13 “SBC Completes Purchase of AT&T”, NBC News, advanceed August 22, 2019, www.nbcnews.com/id/10100350/ns/businessus_business/t/sbc-completes-purchase-att/#.XV7ulehKg0I. 14 AT&T Inc., AT&T Inc. Financial Review 2016, accessed July 11, 2019, www.att.com/Investor/ATT_Annual/2016/downloads/att_ar2016_mda_consolidatedtables.pdf. 15 “NII Holdings agrees to dispose-of operations in Mexico to AT&T for $1.88 billion” Washington Post, advanceed August 22, 2019, www.washingtonpost.com/business/capitalbusiness/nii-holdings-agrees-to-sell-operations-in-mexico-to-atandt-for-188-b/2015/01/ 26/eb68ab00-a574-11e4-a7c2-03d37af98440_story.html?noredirect=on. 16 “AT&T-Chernin J.V. Otter Resources Buys Out Remaining Fullscreen, Crunchyroll Owners,” Variety, advanceed July 11, 2019, https://variety.com/2018/digital/news/att-chernin-j-v-otter-media-buys-out-remaining-fullscreen-crunchyroll-owners-1202675621/. 17 “AT&T to Buy DirecTV for $48.5 Billion in Move to Expand Clout,” New York Times, advanceed July 11, 2019, https://dealbook.nytimes.com/2014/05/18/att-to-buy-directv-for-48-5-billion/. This instrument is identified for use barely in Yaoyi Xi's John Savage at San Diego Propound University from Mar 2020 to Sep 2020. Page 4 9B19N022 Entertainment Inc. (Warner Bros.) In the corresponding year, Henry Luce and his Yale schoolmate Briton Hadden founded Age Inc. to proclaim the primary weekly tidings store in the United States, Age store. Since the 1950s, Age Inc. had spacious into other grounds, investing in the unsparingly TV and cable TV networks Home Box Office (HBO) and Cinemax. In 1990, Age Inc. attaind Warner Communications Inc. for $14 billion to besides produce Age Warner.18 Age Warner had a narrative of expanding and adapting through attachrs and merit. In 1996, Age Warner attachd forthcoming a time Turner Broadcasting System Inc., the extensivest cable television fraternity at that age, and befit a imported player in the television arrangement diligence.19 At the age, Age Warner was the cosmos-people’s third-largest regalement fraternity, forthcoming The Walt Disney Company and Comcast. Age Warner operated the forthcoming companies (see Exhibit 2 for their portion-outs): (1) HBO, an American douceur cable and shadow television network forthcoming a time auxiliaries employments and full authorization as its ocean sources of repay; (2) Turner Broadcasting System, a resources network that generated repay through auxiliaries, advertising, and full authorization employments and moderate brands such as CNN, HLN, TNT, TBS, Cartoon Network, Turner Classic Movies, truTV, and Turner Sports; and (3) Warner Bros., which holdd repay oceanly from copyrights for the evolution and arrangement of movies, television, video games, sales of peripheral products, and abode regalement on insist. Amid the dot-com froth of 2000, and in pursuit of opportunities for Internet product, Age Warner merged forthcoming a time AOL (formerly, America Online), the cosmos-people’s extensivest Internet employment furnishr. However, the merger ended forthcoming a time a vast forfeiture, and AOL forthcoming a timedrew in 2009. In 2014, Age Warner sold its Age Warner Cable limb to Comcast, then the nation’s extensivest cable television fraternity, for $45 billion.20 Time Warner subsequently convergenceed on its film, television evolution, and cable TV channels. In July of the corresponding year, 21st Century Fox Inc. offered $80 billion to attain Age Warner, but Age Warner uncommon this bid.21 In new years, Age Warner’s financial total had been relatively perpetual (see Exhibits 3–5). INDUSTRY BACKGROUND The narrative of the telecommunications diligence in the United States dated end to 1876, when Bell applied for the primary telephone questionable. Forthcoming further than 120 years of product, it had befit an deep pillar of the American generally-known administration. The coming telecom diligence had familiar periods of questionable monopoly, regulatory impropriation, and untrammelled emulation, one forthcoming the other. In 2016, the US telecom diligence became a extensively competitive negotiate represented by telecommunications companies such as Verizon Communications Inc. (Verizon), AT&T, DIRECTV, Comcast, and Age Warner Cable. The telecom diligence was to-boot expanding into new concern lines: from the coming telephone and telegraph services, it had confirmed to comprise wirecease despatchs, shadow despatch employments, radio and TV transmission concernes, cellular despatchs, and basis despatch employments. However, by the 21st century, the negotiates for cell phone employment, abode Internet advance, and cable TV employments had befit increasingly saturated in the United States. Further inhabitants were choosing to observe online video programs 18 Steven Mufson, “Time Buys Warner for $14 Billion,” Washington Post, July 25, 1989, advanceed July 11, 2019, www.washingtonpost.com/archive/politics/1989/07/25/time-buys-warner-for-14-billion/3db3e59f-4e1d-4000-aa2b-33e12d97 d027/?noredirect=on; Age Warner Inc., “Company Profile, Information, Concern Description, History, Background Information on Age Warner Inc.,” advanceed July 11, 2019, www.referenceforbusiness.com/history2/83/Time-Warner-Inc.html; Warner Bros., “Company History,” advanceed July 11, 2019, www.warnerbros.com/studio/about-studio/company-history. 19 Thomas S. Mulligan, “Turner-Time Warner Merger Beloved by Shareholder,” Los Angeles Times, October 11, 1996, accessed July 11, 2019, www.latimes.com/archives/la-xpm-1996-10-11-fi-52676-story.html. 20 Sam Gustin, “Comcast Set to Buy Age Warner Cable for $45 Billion,” Time, February 12, 2014, advanceed July 11, 2019, http://business.time.com/2014/02/12/comcast-time-warner-cable/. 21 Andrew Ross Sorkin, “Time Warner Uncommon $80 Billion Offer from 21st Century Fox: Sources,” CNBC, July 16, 2014, accessed July 11, 2019, www.cnbc.com/2014/07/16/time-warner-rejected-80b-offer-from-21st-century-fox-sources.html. This instrument is identified for use barely in Yaoyi Xi's John Savage at San Diego Propound University from Mar 2020 to Sep 2020. Page 5 9B19N022 and, therefore, auxiliariess to cable TV employments were decreasing. Given this scenario, oral telecom operators were unwilling to act as conduits to avow customers to advance the Internet; they hoped to compel further advertising pay and auxiliaries repay through digital full. Therefore, attachrs and acquisitions of resources companies that moderate twain full and bestowal had befit a new bear in the diligence (see Exhibit 6).22 For illustration, AT&T’s ocean rival, Verizon, was at the age heavily chosen in the merit of Internet companies. In 2015, Verizon spent $4.4 billion to attain AOL. In February 2017, Verizon signed an concurrence forthcoming a time Yahoo! Inc. that saw it attain Yahoo!’s nucleus gate and pursuit engine concernes for $4.8 billion. Verizon supporters had made it manifest that, as the telecom negotiate became increasingly saturated and fiercely competitive, Verizon expected further repay from Internet full and online advertising.23 Similarly, the US resources diligence had lowergone ocean shifts in new years. Its convergence had spacious from oral resources such as tidingspapers, TV and radio unsparinglying, tome and store proclaiming, and film to comprise new resources such as Internet- and ductile-based collective resources and online video. In the texture of the rapid product of the Internet, the birth of oral resources outlets was increasingly circumvented into question, and the product of new resources seemed irresistible. In provisions of advertising repay, new, online resources in the US advertising negotiate continued to compel negotiate portion-out in 2016, time that of oral resources such as TV and tidingspapers was ahead dowdy (see Exhibit 7).24 CONTROVERSIES ABOUT THE MERGER As the extensivest attachrs and merits predicament in 2016, the AT&T–Time Warner dispense attracted observation as soon as it was announced. To lighten the concerns of the exoteric and some investors, AT&T’s CEO, Randall Stephenson, and Age Warner’s Bewkes held a weigh convocation to furnish further advice and further absolve the resolution.25 According to Bloomberg, AT&T already had a extensive compute of abode TV subscribers and multifarious ductile and broadband subscribers through urban telecommunications networks and DIRECTV. Through this attachr forthcoming a time the top full furnishr, AT&T hoped to bear further high-quality video full to these subscribers.26 However, at an estimated appraisement of $85.4 billion, the dispense was seen by multifarious in the diligence as too expensive and prompted comparisons forthcoming a time the failed proceeding betwixt Age Warner and AOL, which had been priced at up to $160 billion. A Fortune store proviso mocked the dispense directly: “The primary administration of attachrs is don’t do a dispense forthcoming a time Age Warner. The avoid administration, as they say, is that there is barely one r ...
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