The Risk Behind AT&T's Acquisition of Time Warner

Background

In October 2016, AT&T discussed the topic of acquiring Time Warner. AT&T is the second larger provider of wireless telecoms within the US, owning mobile, broadband and satellite TV which by merging will promote the entertainment of Time Warner. This is a merger that would combine one of the biggest phone companies whom first started building which is also a global leader within the media entertainment industry and Time Warner Inc who also owns HBO, CNN, Turner and Warner Bros. This is a ‘vertical merger as it’s a distributer buying a producer, both being in content. The acquisition was to take place for $85.4 billion, in the form of a half cash and half stock deal (with no further conditions imposed). However, this rose to $108.7 billion when including the assumed Time Warner Debt. The deal took place to completely change the media and telecoms landscape, providing greater content for millions of consumers. During the time that this deal was taking place in October, Time Warner’s shares rose by 7.3% to $89.48 per share, meaning that the company valued $73 billion. However, shares in AT&T fell by 3% to $37.49%. 

However, despite all this Time warner is still $22 billion in debt during this time period. This deal can be an intelligent move for AT&T itself because owning Time warner makes the company more as it gives then content that can make them it more competitive against its rivals such as Virgin media, T-Mobile etc. It could further help the competitiveness against such companies such as Netflix and Amazon, which would be a huge turn around in the entertainment industry as these are known as monopolies in this industry. This merger also allowed customers to substitute the use of cable and satellite television to using mobile and online alternatives, making it more convenient for consumers themselves. However, this deal was initially appealed in October 2016, due to the opposition from the US government and President Donald Trump, with the issue of a lawsuit against AT&T and Time Warner. This was filed due to the fact, it can have a negative impact on consumer choice, as well as costing the consumer more and being a huge threat to media. However, despite the president himself urging economic advisors and issuing this lawsuit to make sure this deal was blocked, it was disapproved on June 12th, 2018, by the US justice department, allowing the completion of the AT&T and Time Warner Acquisition. This was a huge point in history as it was one of the largest deals made and as a result of this there was so much coverage on it, to the point that there was political involvement. However, despite the successful completion of this acquisition, there merger still faced so many re-appeals for it to be ‘unmerged’ as so many people were against it.

The General Role of the Investment Banks in the Deal

As this was a large merger, there was several investment banks involved. This included banks such as: JP Morgan, Bank of America Merrill Lynch and Perella Weinberg which were advising AT&T to buy Time Warner and JP Morgan and Merrill Lynch provided a “$40 billion bridge loan” to AT&T in order to complete this acquisition. However, in comparison Allen and Co, City group and Morgan Stanley advised Time Warner to sell. However, as AT&T did choose to acquire Time Warner, the advisory groups earned between $90 million to $120 million. This was stated by Freeman and Company which is a merger advisory and consulting firm. In order to analyse the general role of the investment banks involved, we can look at it from a theoretical perspective. Looking at it from before the acquisition occurred, the investment banks involved would work closely to the companies in order to develop a rationale underlining the costs and benefits of pursuing the acquisition. The investment banks would then propose this rationale to the board of directors of the company, highlighting the key strategic ways to pursue this merger and acquisition to achieve the proposed aim. Investment banks also play a huge role in advising the acquiring company on the best way to finance the deal they’re about to pursue. Within this merger and acquisition, it is stated within an articled that it was in fact a “half cash and half share” deal meaning that stock investors would receive $53.75 in cash and $53.75 in stock for each share. This is very different in comparison to a regular deal which would usually occur in either full cash or full shares. In this case, the cash proportion of the finance towards the deal is $42.7bn. Furthermore, after the deal is completed it means that Time Warner, will own a percentage of AT&T’s shares (14.4%-15.7%). It is key to understand that in doing this it allows Time Warner to attain a proportion of their ownership in this conglomerate, therefore, allowing their shareholders to enhance the benefits of merging with AT&T. 

Alternatively, it can be inferred that in fact by doing this it was a clever manoeuvre from AT&T’s investment banks, as it shifts part of the risks that can be encountered within this deal onto Time Warner’s Shareholders rather than fully encountering the risks themselves. AT&T’s investment banks would then need to perform a ‘valuation analysis’ which is where they will produce valuation models such as a cash flow sheet (which includes the companies forecasts, both future and historic in order to predict the performance of the company) which will allow them to decide a specific sustainable acquisition target, therefore enabling the investment bank to propose a reasonable offer. In doing this they can decide the amount of equity they need to issue in order to decide the valuation target. In this case, the offer was $85.4bn without debt and $108.7bn when the assumed debt was included. However, although there was great scrutiny towards this deal at the beginning and it was appealed as stated above, once it finally accepted the deal remained and investment banks were firm in the valuation they had initially made. The final steps that investment banks must take part in is proceeding with the proposed deal which finalises the agreement whilst underlining the terms of the transaction and addressing the finalised deal.

It should be noted however, that Goldman Sachs unfortunately lost out incredibly in this deal. They were originally at the top of the investment banking league tables. However, after the deal took place, both Morgan Stanley and JP Morgan overtook Goldman Sachs. Mergers and Acquisitions can result in great issues for investment banks (internal and external) that can take a great length of time to solve. For example, one of the issues that mergers and acquisitions can cause and has been demonstrated within this deal itself is to destroy competition. In this case, one of the criticisms about this deal that arose was the fact that there were pricing problems. This is because it is believed that the merger it more advantageous to themselves in the ability to sell an entertainment service, such as providing movies to a wireless phone customer and this in general will lower costs. 

Therefore, the ability to deliver content more efficiently being able to charge a lower price in comparison to other companies, makes it harder for other companies to compete. For example, AT&T provide ‘Direct TV’ which is known to be cheaper than using other services, and this can be streamed on mobile devices as well as tablets. Therefore, due this innovation and low price it makes it difficult for other companies to compete, giving the conglomerate an unfair advantage. In this case, the investment banks would have to highlight the benefits of this merger and the propose the positive wider implications to the Competition and Markets Authority. Their role is to review potential impacts of deals on markets and the wider economy and then finalise a decision in whether a merger and acquisition should occur.

Another risk that had occurred as a result of this acquisition is not meeting the targets which the investment bank proposes to reach. This can occur if investment banks are ‘overly optimistic’ when calculating any future forecasts of the company. This can be a huge issue for both companies as if they are unable to generate figures which they initially set out to meet, it could mean they are underperforming and cause serious issues. Investment banks in this case need to ensure they’re speculative when mathematically calculating the future of this acquisition, ensuring they’re not exaggerating such figures.

Conflicts Concerning the Deal

One major concern that related to this deal was the Justice Department who in fact sued AT&T in order to block the deal. This was the first suit issued by the president himself. This is because, as stated above the competition issues that will occur as a result of this acquisition as they believe AT&T will have a ‘greater bargaining leverage.’ As well as, the fact it was believed that they were going to ‘black out’ Time warner. However, the company argued in return stating there was no proposed intention to do such activities such as ‘black out’ as they rely on the fees from subscribers in order to fund themselves. They were in trial for six weeks after it was released that the merger was going to take place. However, after this time period it was ruled that the merger could take place, with no conditions imposed. This in fact created great controversy and scrutiny as expected because of the impact this acquisition would have on consumers. Another conflict which arose due to this acquisition was causing major judgement within the media and raised questions on why there was political involvement within this acquisition. As stated above his was mainly from the president Donald Trump himself, who was determined to get this acquisition blocked for the sole purpose of his hatred towards CNN. A component company owned by Time Warner. The deal which he proposed was unfortunately rejected due to the fact the justice department refused any involvement of politics within this deal. Due to this, further controversy was caused and more political tension during this time occurred.

Another conflict concerning the deal is the fact that if it doesn’t go through it can in fact give the government greater power. This is because big companies including Apple and Google itself will think twice when performing a merger and buying out competition themselves as they know that the governments involvement may disallow them to complete this practice. Furthermore, companies will also evaluate which companies are worthwhile merging with before they spend excess amounts on money on legal expenses and therefore analyse which companies would not harm consumers whilst benefiting the company themselves too.