Comcast Corporation Case Analysis - Report Example

Comcast Corporation Case Analysis Report Q1) What is the strategic rationale for Comcast acquiring AT&T Broadband? Comcast Corporation has been adopting the strategy of inorganic growth through a series of acquisitions since the 1986, and the decision to acquire AT&T Broadband was in line with this strategy of Comcast. More specifically, several factors prevailing in the industry, as well as developments at AT&T Broadband in 2000-01 have influenced the approach taken by Comcast management in the acquisition of AT&T Broadband. With the enactment of the Congress legislation in 1996 allowing competitive distribution technologies such as wire-based, wireless telephony and wireless cable to compete with traditional cable and direct satellite broadcast, the industry had started witnessing significant investments and consolidation. However, with new value-added services gaining popularity in 2000, the costs associated with the technology upgrades to meet these requirements became prohibitively high and hence operators were finding it difficult to deploy them to the consumers. Thus with a series of acquisitions and the resultant consolidation in the industry, nearly 79% of the industry was controlled by the top eight cable and satellite providers in 2001. Thus the climate was ripe for more acquisitions, and added to this, Comcast had a lurking fear of itself being acquired by a larger player. From a marketing perspective, it was clear that within three years after entering the cable industry in 1998 AT&T Broadband moved up to the number one slot in terms of subscriber base in 2001 with the acquisition of TCI and MediaOne. In fact AT&T Broadband commanded nearly 15% share in the total market with 13.8 million subscribers in 2001, and Comcast ranked fourth with a subscriber base of 8.5 million. Thus the prime strategic rationale behind Comcast’s bid to acquire AT&T Broadband was to move to the arguably unassailable number one slot in the industry with a combined cable subscriber base of over 22 million, far ahead of Time Warner Cable and DirecTV with 12.7m and 10.5m subscribers respectively. Additionally the merger would result in 6 million digital cable subscribers, 3.5 million high-speed data subscribers and over 1 million cable telephony subscribers. Added to all these reasons was the financial muddle that AT&T Broadband found itself in by the end of 2000, and hence became an excellent candidate for acquisition, given its significant market presence. The Company had already spent over $100 billion to assemble the cable business with the acquisition of TCI and MediaOne at $4,100 per subscriber. Between January and October 2000, AT&T had lost $70 billion in market value and AT&T’s debt had gone up from $6 billion in 1998 to $36.5 billion in 2000. Added to the above reasons was the possibility of negotiating better rates with Programmers such as Disney, Viacom, New Corp etc…, once Comcast achieves comparable reach and scale after the acquisition. Additionally, Comcast was aware that Cox Communications was planning an acquisition offer to AT&T. Thus the strategic rationale for Comcast acquiring AT&T Broadband included a combination of factors including the industry meltdown in 2000, multiple acquisitions after the Congress legislation opening up the market, long-distance price war, slow adoption of technologies and the dry up of capital markets, AT&T’s financial debacle, and the potential to increase market share post-merger, besides other market factors. Q2) Make a case for Comcast not going forward with the acquisition Some of the reasons why Comcast should have desisted from going forward with the acquisition are: a) The market value of AT&T had dropped from $150 billion in 1998 to $60 billion in October 2000, which possible indicated that the investors did not see much value in AT&T’s move to acquire TCI and MediaOne. This lower valuation would also have implied that Comcast would have to offer a higher swap ratio to AT&T for the merger. b) AT&T’s balance sheet was not at all healthy, with debts having gone up from $6 billion in 1998 to $36.5 billion in 2000, indicating the difficulties faced by AT&T in funding the outdated assets acquired from TCI and MediaOne. c) Operationally again, AT&T Broadband unit was underperforming the industry, with operating margins being only 20% as compared to the industry average of 40-42%. Thus the costs in the merged entity will also be skewed badly. d) The cost of acquisition of $4,300 per subscriber was prohibitively high Q3) How would you gauge the success of this acquisition? Comcast was focused on long-term competitive advantage and they wanted to expand on their market share and acquire more experienced people and offer more services to customers. On this count, the acquisition was a clear success since it resulted in over 22 million cable subscribers spread across 40 States, and resulted in 6 million digital cable subscribers, 3.5 million high-speed data subscribers and over 1 million cable telephony subscribers.. Comcast also clearly achieved the necessary scale and leverage to compete in an industry that was facing increasing programming fees and higher capital expenditures. The companies expected to achieve significant cost savings as the larger platform would allow AT&T Comcast to capture pricing concessions from programmers and vendors. Comcast believed that nearly $2 billion of annual operating synergies could be extracted from the renegotiation of programming contracts, reduced overhead, and a reduction in costs associated with telephony and hardware. Comcast’s acquisition price was $72 billion in December 2001. Comcast acquired AT&T’s 13.8 million wholly-owned subscribers, its other cable joint ventures, and companies, and 25.5 percent stake in Time Warner Entertainment (TWE) valued at approximately $9 billion. Comcast had assumed $5billion convertible preferred security held by Microsoft as part of the negotiations. Later on Microsoft agreed to convert this security into 115 million new AT&T Comcast shares, which turned out to be a blessing in disguise, with the relationship with Microsoft becoming stronger. Q4) List the integration issues facing Comcast and prioritize them Priority Integration Issue 1 Get all the stakeholders to understand the rationale for the merger and its business goals and get them excited about the new AT&T Comcast 2 Assemble the new Leadership team 3 Communicate with employees, customers and shareholders 4 Reduce workforce, while keeping the remaining employees focused and motivated 5 Maintain family-like culture stressing the importance of values, respect and integrity Q5) Draw the organizational structure of the merged company and assign the senior management positions. Q6) Where (at what location) should you start integration activities? Why? What are the possible consequences? The key integration activities relating to assembling the Management team, dissemination of information to the stakeholders, and communicating with the employees etc… should be started at the proposed headquarters of AT&T Comcast (Philadelphia), so that any eventualities can be readily addressed by the corporate management team immediately. This location would necessarily also be the easiest to handle. So far as setting up the Marketing teams is concerned, it is proposed that AT&T Comcast be geographically organized into Divisions covering the West, East and South, as per the States. Since the Eastern Region (covering NY/NJ, Boston, Philadelphia, Baltimore, Harrisburg, Detroit, Chicago, Nashville and Atlanta) accounts for the highest density of subscribers, it would be prudent to start the integration activities here, followed by West and the South.. The possible consequences will primarily relate to employee morale problems, and some resistance to change, especially after workforce reduction, and these issues will need to be addressed very sensitively with the involvement of Top management. Read More