Daily Bulletin


Daily Bulletin

The Conversation

  • Written by Mark Humphery-Jenner, Associate Professor of Finance, UNSW Australia

Those who don’t learn from history are doomed to repeat it. So it is with a sense of familiarity that we greet AT&T’s proposed acquisition of Time Warner.

In early 2000, AOL acquired Time Warner for US$164 billion. Broadly, like AT&T’s acquisition, AOL’s involved a sausage maker acquiring something to put in those sausages. The AOL takeover was variously described as a “calamity”, and a “text book case” of deal failure. AT&T’s proposed acquisition seems also to be faring poorly.

AT&T’s acquisition does not suffer the same problems as AOL’s acquisition, and comes at a time of industry consolidation.

But already the market has sent AT&T’s share price down, reflecting the likely premium it’s expected to pay for Time Warner. Indeed, the decline occurred even before the takeover was officially announced, on the back of rumours. Between 19 October and 26 October, AT&T’s market capitalisation had declined by nearly US$20 billion.

image AT&T’s share price at the close of trade. Google Finance

Before drawing any conclusions though, it’s important to consider pre-takeover deal anticipation, and (where possible) longer post-announcement returns to give the market time to fully digest the takeover. Also to look at what else the takeover might signal about the firm’s internal growth prospects, expansion plans, and stock price valuation.

Understanding ‘abnormal returns’

Some firms have the [mis]fortune of announcing takeovers on the day of other major events. These could include interest rate decisions, severe commodity fluctuations, and “flash crashes”. This is why it’s worth looking at the firm’s “abnormal return,” which is the firm’s return less that of some relevant benchmark (i.e. the stock market index).

Of course, not all firms are equally sensitive to market movements. One way to reflect this is to multiply the market return by the firm’s “beta,” which represents its sensitivity and responsiveness to market movements. This is commonly available via Bloomberg and online (via Google Finance).

Google Finance reports that AT&T has a beta of around 0.3. Though, given that the market returns around the announcement are small, whether or not we beta-adjust the market return makes little difference.

We can see that AT&T’s raw returns and abnormal returns have been consistently negative leading up to and following the takeover announcement. In fact, AT&T’s returns from 20 October onwards were negative, coinciding with the aforementioned rumours of the deal. From the time the deal was rumoured, the market discounted AT&T.

image AT&T’s returns Google Finance

But it gets worse over time

The market’s reaction on the day of the announcement is illustrative, but can paint an incomplete picture. It ignores that the market might anticipate an announcement. More importantly, the market needs some time to fully process the deal.

So, it is best to look at returns several days after the announcement to get a full picture. After getting these abnormal returns, you can then sum them over an event period surrounding the takeover announcement, giving cumulative abnormal returns (or CARs). You can also multiply them to give buy-and-hold abnormal returns (or BHARs).

AT&T’s returns illustrate the usefulness of looking at returns in the days after the takeover. The buy and hold return (i.e. from just buying and holding AT&T’s stock and not adjusting for other market movements) was nearly 7%. The abnormal returns are similarly negative and are in the below graph. The cumulative and buy-and-hold abnormal returns following the announcement are strongly negative. Indeed, the negative return had nearly doubled in magnitude between October 20 and October 25. By October 25, the BHARs and CARs were nearly -7%.

image Google Finance What’s really going on and why the negative reaction? The market’s negative reaction to the deal clearly indicates some trepidation about whether it will create value. This reflects several underlying concerns. Overpayment: There is the fear that AT&T will over pay. Comcast’s acquisition of NBCUniversal appears to have fared well. However, CNN reports that AT&T will pay over 12 times Time Warner’s forecast EBITDA, whereas Comcast paid only 9 times in its similar acquisition of NBCUniversal. Paying an excessive takeover premium could undermine shareholder wealth even if the deal might itself create value. Debt: The amount of debt is also a concern. The deal will involve “mega debt” to pay for Time Warner. This involves around US$40 billion in additional debt. That debt load is, in isolation, sustainable. However, it is in addition to the debt assumed for the acquisition of DirecTV and AT&T’s other financial commitments. It takes AT&T’s total debt to around US$175 billion, making AT&T one of the largest non-bank borrowers. This increases financial risk, especially if and when interest rates increase. Integration: The deal also raises integration issues. This debt, and the deal, also come at a time when AT&T is already attempting to integrate DirecTV, which it acquired for nearly US$50 billion (nearly 25% of AT&T’s 26 October market capitalisation). The Time Warner acquisition is around US$80 billion (around one third of AT&T’s market capitalization). Large acquisitions pose integration difficulties when executed in isolation. The need to integrate two large additional units simultaneously can pose barriers to achieving synergies in the acquisition. Signaling: The takeover announcement itself can also signal other information about the bidder. For example, the need to do a takeover can provide a signal to the market about the bidder’s standalone value. Such diversification can be beneficial, as was arguably the case with Comcast’s acquisition of NBCUniversal. However, the need to do such an acquisition can itself be a signal that AT&T is “trying to compensate for slowing growth in its own core businesses”, causing the market to discount AT&T’s standalone value. The fall in AT&T’s share price reflects beliefs that AT&T might overpay, assume too much debt, and have difficulty integrating the new unit. Indeed, shareholders might end up thankful if the regulators end up blocking the deal.

Authors: Mark Humphery-Jenner, Associate Professor of Finance, UNSW Australia

Read more http://theconversation.com/the-problems-with-atandts-bid-for-time-warner-67648

Writers Wanted

$7.6 billion and 11% of researchers: our estimate of how much Australian university research stands to lose by 2024

arrow_forward

Trump's TikTok deal explained: who is Oracle? Why Walmart? And what does it mean for our data?

arrow_forward

What Australian Casinos Can Learn from Online Casinos in New Zealand

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

Did BLM Really Change the US Police Work?

The Black Lives Matter (BLM) movement has proven that the power of the state rests in the hands of the people it governs. Following the death of 46-year-old black American George Floyd in a case of ...

a Guest Writer - avatar a Guest Writer

Scott Morrison: the right man at the right time

Australia is not at war with another nation or ideology in August 2020 but the nation is in conflict. There are serious threats from China and there are many challenges flowing from the pandemic tha...

Greg Rogers - avatar Greg Rogers

Prime Minister National Cabinet Statement

The National Cabinet met today to discuss Australia’s COVID-19 response, the Victoria outbreak, easing restrictions, helping Australians prepare to go back to work in a COVID-safe environment an...

Scott Morrison - avatar Scott Morrison

Business News

How To Remove Rubbish More Effectively

It can be a big task to remove household rubbish. The hardest part is finding the best way to get rid of your junk. It can be very overwhelming to know exactly where to start with so many option...

News Company - avatar News Company

4 Tips To Pass Skills Certifications Tests

Developing the right set of skills is valuable not only to your career, but for life in general. You can get certified in these skills through obtaining a license. Without a certified license, y...

News Company - avatar News Company

How to Secure Home-Based Entrepreneurs from Cyber Threats

Small businesses are becoming a trend nowadays. The people with entrepreneurial skills and minds are adopting home-based businesses because of their advantage and ease of working from home. But...

News Company - avatar News Company



News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion