The Failure of the Merger and Acquisition of AT & T and TCI - Case Study Example

The Failure of the Merger and Acquisition of AT & T and TCI Student Name: University: Subject: Instructor: December 14th, 2013. THE FAILURE OF THE MERGER & ACQUISITION OF AT &T AND TCI Introduction AT &T is a telecommunications firm, and in particular AT &T is the largest international and domestic long distance telephone carrier in the U.S. The companies offers telephony services to government, business and residential services and it operates in well over 250 territories and countries across the globe. In 1997, just the merger with TCI, its revenue from communications segment were summing up to $51.3 whereby $22.2 were generated from long distance business services and $23.9 were obtained from residential customers (Banerjee and Eckard, 2008). Banerjee and Eckard (2008), states that AT & T offers domestic exchange services to a comparatively small portion of consumers. The company specifically provides resold domestic exchange services to not more than one and a half percent of the sum residential customers. The firm also provides telephony services to business clients. The company acquired Teleport so as to expand its market presence for domestic exchange access provisions at a juncture when Teleport was the largest competitive domestic carrier in the nation and had strategized for the domestic telephone network development in approximately 83 metropolitan regions in 28 states across the United States. From this acquisition deal, Teleport received $494.3 in terms of revenues in 1997. TCI in principle is a cable firm and in particular TCI is a diversified company that has diverse interest through its other ventures or subsidiaries; TCI Communications, TCI Venture Group and Liberty Media Group. TCI is the biggest cable TV service providers within the US. TCI through its other ventures it provides a broad array of video programming, comprising local, regional and national cable programming services, pay per view channels, local broadcast stations and sports programming packages to business and homes nationwide. TCI runs several subsidiaries, which in total offer cable television service to nearly 13 million customers, crossing about 21 million homes. On 14th September, 1998, AT & T (AT &T Corporation) and TCI (Tele-Communications Inc submitted a joint application as stipulated within Section 310 (d) of the 47 U.S.C Section 310 (d) of the Communications Act, asking the commission to approve their request for the control transfer of the licenses of AT & T and authorizations controlled by Tele-Communications Inc or its subsidiaries or affiliates. The transfer for control was to be effected due to the planned merger of the two companies. After the planned merger, Tele-Communications Inc would wholly become a subsidiary of AT & T Corporation, and the authorizations and licenses that were then held by the subsidiaries or affiliates of TCI were to proceed being held by those entities (Mitchell and Mulherin, 1996). Accounting Methods Traditionally in the United States, two distinct accounting methods for business merger were allowed: pooling of interests and purchase. Although a number of mergers were established through purchase method, in instances whereby the stock of one firm would be exchanged for majority of the stock (90%) or for all the assets, companies in some instances went further to fulfill an elaborate pooling procedures outlined the U.S regulations. Presently, in the U.S all mergers have to be accounted for through the purchase method (Mitchell and Mulherin, 1996). Consequently, for the case of the merger of AT & T and TCI, FASB required the following disclosures regarding goodwill. The sum amount of goodwill acquired and the sum amount projected to be deductible for the purposes of tax, The reporting segment goodwill amount If impairment occurs, the SFAS schedule 142. Outlines the goodwill presentation on the income statement and balance sheet as follows: The goodwill aggregate amount is supposed to be a distinct line item within the balance sheet. The loss aggregate amount resulting from goodwill impairment is supposed to be reflected as a distinct line item in the income statement’s operating section unless certain impairment is linked to discontinued operations. Acquired intangible asset apart from goodwill is supposed to be amortized through its useful economic life, for assets with limited economic life. But if the acquired intangible asset a part from goodwill is established to posses indefinite life, it is not supposed to be amortized, until a finite life has been determined on it, or better still should be evaluated at least annually for impairment. Within the purchase accounting standards, each of the three classes of acquisition-associated expenses is differently treated; security issuance expenses, indirect expenses and direct expenses. The purchase cost comprises the direct expenses sustained in the business merger, for example consulting and accounting fees. The indirect expenses comprise the ongoing costs for example those sustained to maintain acquisition and merger department, nonetheless, are charged to costs as incurred. Indirect expenses also comprise secretarial or managerial time ad overhead assigned to the merger, however could have not existed if the merger was not there. Lastly, security issuance expenses are allocated to the security valuation in the purchase acquisition, hence minimizing extra capital for stock issues or adjusting the discount or premium over the bond issues. Assets obtained through issuing stock shares of the acquiring firm should be recorded at the fair values of the given stock or the received assets; depending on the one this is clearly more evident. In case the stock is aggressively traded, its market price quoted, after factoring market fluctuation allowance, issue costs and additional quantities issued is usually appropriate fair value evidence as opposed to the appraisal values of acquired firm’s net assets. Therefore, an adjusted share market price is usually used. In case the issued stock is a closely held or new company, the assets received fair values has to be used. It is important to note that any security issuance expenses, whether stocks or bonds sustained during the merger consummation are deducted from the value allocated to the equity or debt within the purchase accounting. Upon establishing the total cost, it has to be assigned to the acquired identifiable assets (comprising intangibles except for goodwill) and assumed liabilities, all of which has to be presented as their fair values at the acquisition date (Banerjee and Eckard, 2008). AT & T on March 9, 1999 finalized the acquisition of TCI (Tele-Communications Inc by way of merger. Based on the above accounting methods and standards AT & T during the merger issued, 0.775 common shares of AT & T for every TCI Group share tracking stock of Series A O.853 common shares of AT & T for every TCI Group share tracking stock of series B A share for newly established Liberty Media Group In lie cash payment for any fractional common share of AT & T During the merger, AT & T also exchanged AT & T common shares for TCI convertible preferred stock shares. AT & T in total issued an estimated 439 million common shares. Consolidation of Financial Information The unaudited consolidated pro forma financial information outlined below set forth below gave effect the merger between AT & T and TCI, specific merger-associated transfer of assets and the amendments of the charter concerning the combination of TCI ventures (the New Liberty Media Group) and the Liberty Media Group, as to when they were accomplished for income statement purposes on January 1, 1998 and for the purposes of balance sheet on 31st December, 1998. Since AT & T was not acquiring a controlling financial interest within the New Liberty Media Group, it has been presented as an equity investment method within the financial pro forma statements. Moreover, being a tracking stock all its losses and earnings were omitted from the available earnings to the AT &T common stock holders. Their selected unaudited pro forma financial information presents particular assumptions such as the following; 1) $9.5 billion of associated interest expenses and additional borrowings to cater for the merger-associated share repurchase and asset transfer program in a mix of 80% long term and 20% short term. 2) Purchase price preliminary allocation to TCI liabilities and assets. The allocation was pegged on the completion of research carried out by AT &T. The selected unaudited pro forma consolidated financial information had to be read in concurrence with the historical separate financial statements as well as with AT &T’s accompanying accounting notes. The financial pro forma information was developed based on the purchase accounting method whereby the AT &T being the acquiror. For functions of developing the consolidated financial statement for AT &T, AT &T were to structure a basis for TCI’s liabilities and assets based on the fair values and the purchase price of AT &T comprising the Merger costs. AT &T did the research to establish the fair value of particular liabilities and assets for TCI, and the final appropriate purchase price adjustments were established after the study. AT & T and TCI’s hefty $48 billion deal price tag comprises $32 billion in terms of stock and a whopping $16 billion in respect to the assumed debt. The transaction calls AT & T to issue 0.775 common stock shares for every TCI Group share. The deal would see the newly combined company trading as the tracking or letter stock on the NYSE and have a considerable public ownership (Manne, 2005). Reasons and Motivations for Merger and Acquisition (M&A) M & A occur for a number of strategic business purposes; however the very common reasons for companies’ merger tend to be economic at their heart. Below are some of the reasons and motivations for the AT & T and TCI merger. To improve capability: Improved capabilities can originate from robust R&D opportunities or more expanded productions operations (or any area of core competencies that a firm intends to improve. On the same note, the firm may have wanted to merge to leverage expensive networking operations. Capability at times may not just be a specific department; the capability could originate from obtaining a unique platform of technology as opposed to trying to establish it. Information and Telecommunication firms are hotbed for Merger and Acquisition activities as a result of the extreme capital investment required for successful research and development within the market. With this merger there are a number of new technologies, which can smooth the digital connections and of fundamental significance is the technology for offering telephone service via cable platform would be sufficiently developed to provide an economically viable and potentially a better alternative to the current copper wire (Manne, 2005). Acquiring a larger market share or competitive edge, The other important reason for the merger between AT & T and TCI was to acquire a better marketing and distribution network. The new AT & T would now be strategically positioned to be the first statewide communications firm, since it broke-up from the aged Bell business, which solved the problem of last mile. Due to the last mile holdup, virtually there has been no competition within the residential local phone provisions, innovation is nearly nonexistent and Internet connections have been devastatingly slow. AT & T intends to use TCI’s cable system and the set-up gadgets would be upgraded to carry a two-way flow, and AT & T will rely on the TCI’s coaxial cable connections to transmit long-distance and local internet traffic, voice calls as well the usable network fare. This merger was to help AT & T to expand to new and different markets where TCI (which is a similar firm) had been operating already as opposed to beginning from ground zero. This marketing and distribution network offers the company a broader customer base virtually overnight. TCI has approximately 13 million customers across the country, comprising markets such as St. Louis, Seattle, Salt Lake City, San Francisco, Pennsylvania, Pittsburgh, Portland, Dallas, Denver and Chicago (Andrade, Mitchell and Stafford, 2011). More significantly, TCI could have given AT & T what is commonly referred to as the last mile connectivity, offering domestic telephony services and cable TV to customers. Moreover, TCI controls a huge portion of @Home package that offers high-speed internet access using the cable networks. It has nearly 100,000 subscribers, a relatively lesser portion when you look at the potential market, however @Home with business arrangements with other companies offering cable, it offers distribution to nearly 50% of all households in North America passed by cable. Diversifying Services and products: Parker and Roller (2007) point out that another motivation for merger between companies would be to complement an existing service or product. Two companies can merge their services or products to acquire competitive edge their competitors within the marketplace. Even though the merger collapsed it attempted to accomplish the digital convergence concept, the idea that computers, television and telecommunications would come as one digitized process of electronic communication. By utilizing the cable system to offer high-speed home connections, which are about thirty times faster than what was provided by GTE and Baby Bells, AT &T anticipated to produce gigantic pipeline that would handle all forms of traffic at a considerably low cost. They hoped to provide a universal pipe within homes, which could hold all flavors of what would later become digital, comprising data, voice and video. Even though distribution networks or combining services and products is a strategic approach to improve revenue, this kind of acquisition or merger is thoroughly inspected by the federal regulatory organs for example the FTC (Federal Trade Commission to ensure that there are no chances of monopoly. Monopoly occurs when a firm controls a huge share of a service or product within single industry. AT &T consumer operations according to analysts projected that it could generate $33 billion in revenue and approximately $ 7 billion earnings and the merger is anticipated to lower and higher revenue, generating synergies of approximately $2 annually, three years following the completion of the deal. Cutting Costs: Andrade, Mitchell, and Stafford (2011) argues that two firms offering similar services and products such as AT &T and TCI, when they merge they establish a massive opportunity for cost reduction. If they merger would have been successful the new AT &T would have had an opportunity to reduce operating expenses and combine locations by streamlining and integrating support functions. This is an economic strategy that operates within the auspices of economies of scale, such that when the sum cost of production of products or services is lowered as the volume of production increases, the firm hence maximizes total revenue. The merger as was projected could have provided AT &T with a one-stop shop to offer Internet Access, cable TV and telephone. The idea was supposed to a telecommunication deregulation byproduct two years prior. The Failure of AT & T and TCI Merger The stock for Cable was on the rise, from hovering at about $16 by the close of 1996, the shares of TCI were heating $40 by 1998 summer (Parker and Roller, 2007). In spite of the recovery John Malone (the COE of TCI) wanted to get off the distribution business and return to his original area of programming. The issue as to whether the infrastructure of TCI could be relied upon to provide the convergence concept lingered and it was never apparent over what duration the opportunity window that the stock surge opened would last. Malone got the reason to quickly move to try once again to sell TCI. Malone did not succeed with Bell Atlantic; however AT & T then provided a fresh hope. According to Parker and Roller (2007) the interest of the Chairman of AT & T (Michael Armstrong) in TCI merger was drawn by the convergence concept or vision. Armstrong saw the coaxial cable last mile to the home as the domestic loop the company required to provide integrated long distance and local telephone service, alongside internet access and video. The company would utilize the promising; however the untested VoIp, in lieu of the switched traditional local phone service to counter competition from RBOCs, which themselves were rapidly gearing or an assault on their long distance business operations. Therefore, Armstrong and Malone quickly came to terms, and on 24th June, 1998, one of the state’s giant cable corporation announced its planned merger with the nation’s notable telephone giant. AT & T Corporation was acquiring Tele-Communications Inc for a whopping $48 billion in assumed debt, cash and stock, paying a premium of $50 per share and $55 per share for the super voting series B stock held by the Magness heirs and Malone. The acquisition left John Malone with 1.5% of the total stock of AT $ T, rendering him a single largest shareholder in the company. The deal also left him with being in control of the programming segment of the company while enabling him to abandon the distribution operations of the business, which was his original mission in the botched Bell Atlantic merger. In order to assist prevent the recurrence of the collapse of Bell Atlantic, the deal comprised of a clause that stated that AT &T would pay TCI $2 billion in case the merger deal was never consummated. According to Andrade, Mitchell and Stafford (2011) the acquisition of TCI never completed AT &T cable play, nevertheless. On March, the following year, just as the deal was about to be sealed, Comcast stated a bid to acquire MediaOne to a tune of $58 billion. Just in a matter of weeks, the deal was accepted. MediaOne for a longtime had looked to expand its market reach and because it failed to find huge cable corporation interested in selling, it instead opted to be to seller as opposed to be the buyer. In the 1990s, Comcast had been very acquisitive, and with the acquisition of MediaOne, it was poised to become the largest cable provider in the country and this was a scenario Armstrong did not anticipate and they had ruled out such a possibility, hence they decided to go for a counter deal. Malone concealed against the offer because he was afraid of huge debt load, which combined MedioOne and TCI purchase would reflect on the balance sheets. There was aggressive lobbied by MediaOne investors for the entry of AT &T with the hope that such a bidding war would increase their share prices. With the support of other AT & T executives, Armstrong decided that could not afford to be second place in cable industry in the country and bid a $62.5 billion deal for MedioOne, and this forced Comcast to abandon the deal, however received a breakup fee of $1.5 billion (Parker and Roller, 2007). It is also clear that AT & T did have regulatory pit holes, including federal and local challenges regarding the opening of its network to competitive ISPs. AT & T also required shedding certain systems in order to comply with the ownership caps of FCC. Judge Panner, in the legal suit AT&T Corporation v. City of Portland stated that the merger would considerably enhance the ability of AT &sT to restrict or and even cut off consumer from accessing internet-based competition on the cable’s main multichannel-market video delivery. References Andrade, G., Mitchell, M., and Stafford, E. (2011): “New Evidence and Perspectives on Mergers,” Journal of Economic Perspectives, 15(2), 103-120. Banerjee, A. and Eckard, E. (2008): “Are Mega-Mergers Anticompetitive? Evidence from the First Great Merger Wave,” RAND Journal of Economics, 29. Parker, P.M. and Roller, L-H (2007): “Collusive Conduct in Duopolies: Multimarket Contact and Cross-ownership in the Mobile Telephone Industry,” Journal of Economics, 28, 304. Manne, H. (2005): “Mergers and the Market for Corporate Control,” Journal of Political Economy, 73, 110. Mitchell, M. and Mulherin, H. (1996): “The Impact of Industry Shocks on Takeover and Restructuring Activity,” Journal of Finance, 41(2), 193-229. Read More