AT&T Negotiation Strategy
SMGT 6050: Mergers, Acquisitions & Strategic
Ebube Anizor (209347741)
Appendix A: Valuation Using Comparable Companies2
INTRODUCTION AND OVERVIEW
“Anytime, Anywhere” communications surmises AT&T’s strategic vision and represents a clear departure from the firms local phone and long-distance service provider roots.
AT&T’s continued diversification into several high tech equipment and service business lines clearly signals the realization that while it’s certainly the largest long-distance provider in the US, growth is slow, market share is eroding and profit margins are poor.
It is within this context that the opportunity to enter the fledgling cellular communications industry via the acquisition of McCaw presents itself. McCaw’s cellular network is now national in footprint and has access to largest potential subscriber base amongst competing firms (see Table A1 in Appendix). Moving into cellular represents domestic top line growth opportunities and an avenue to grow internationally – helping to fulfill the mandate of the board. While potential revenue synergies are attractive, the savings in local access fees (enabled by using McCaw’s network) is itself worth hundreds of millions annually. Cellular could bind and enhance the potential of many of AT&T’s other endeavours and provide the infrastructure to achieve its vision.
However timing is of the essence. Recent M&A activity signals that local phone companies are moving into the cellular sector and the likelihood of further competition with the advent of PCS is looming. McCaw is currently highly leveraged – which may challenge its growth- and recent talks indicate that at the very least there is a cursory interest in partnering. Presented herein is a report to AT&T’s board that incorporates several approaches in arriving at a valuation of McCaw and a negotiation strategy that addresses both pricing strategy and deal structure.
While various assumptions in McCaw’s valuation are noted in the accompanying appendices, key assumptions worth highlighting are:
• The option to purchase the balance LIN shares will be exercised in 1995 (although some consideration in pricing is given to the possibility of McCaw selling its current shares). •
Only the cellular portion of the business is being modelled since that is of most importance to AT&T. McCaw cellular business represented 80% and 83% of total revenues in 1990 and 1991 respectively (according to the companies Annual Reports).
Appendix A: Valuation Using Comparable Companies3
VALUATION 1: COMPARABLE COMPANIES
When compared to firms in the broad telecommunications industry using primarily market value- based metrics (i.e. market capitalization against revenues, book value and net income)1 McCaw generates an average valuation of $4.76 billion. See Appendix A for full valuation details. Revenue from the top 7 cellular firms in the US in 1991 ranged from
Vanguard’s $89 million to British Telecom’s (BT) $23.2 billion2 . McCaw, Air Touch and LIN followed BT with revenues of $1.36 billion, $782 million and $468 million respectively. The performance of the aforementioned firms was used a benchmark in McCaw’s valuation; however the wide spread in firm size and negative earnings posted by both LIN and Contel
(making P/E ratios unusable) renders the resultant valuation of $7.1 billion as a loose guideline at best.
Given recent acquisitions by Bell Atlantic and BellSouth, and AT&T’s own interest in the cellular sector a valuation of McCaw was also generated using comparable local phone and long-distance companies. 3 Performing comparables with GTE, MCI and Sprint in addition to the above produced separate valuations of McCaw each nearing $3.8 billion.
The arguably low valuations are a result of using ratios from these mature sectors and applying it to a growth sector that requires high