Att and McCaw merger
...h SG&A consolidation • McCaw would benefit from the use of the well-recognized AT&T name, marketing and global presence and the ability to refinance company debt at AT&T’s more favorable “AA” credit rating • The merger would allow AT&T to fulfill its plan to create “Anytime, Anywhere” communications by improving its domestic operations and growing its international market share. • AT&T could greatly enhance McCaw’s customer marketing and provide a global presence that could help McCaw enter emerging foreign markets where poor infrastructure and strong population growth combined to create a great demand for wireless communications services • The merger would allow AT&T to acquire a significant share in the wireless market without having to build a completely new wireless infrastructure, which could cost significantly more than purchasing McCaw Cellular outright. The estimated cost of a basket of wireless licenses would be equal to $7 – $10 billion. Customer acquisition costs could range from $0.7 – $1.7 billion with a on-going investment in capital expenditures • AT&T acquisition of McCaw would diversify AT&T’s domestic revenue source and counter its declining domestic market share. AT&T may also be able to acquire McCaw at a relative discount since merger activity has slowed down in the recent quarter • AT&T could benefit from local access fee reductions and instant access to state-of-the-art technology without directly confronting the RBOC’s or having to infuse capital to build an independent AT&T cellular network • If regulations changed the combined company would also preempt other competitors like BT or BellSouth from coming into the market and effectively compete with them in the telecommunications industry Disadvantages of a combination between McCaw and AT&T: • Execution risk • The combined company may attract FCC monopoly investigation because of the size of combined operations • The mentioned combined size of the company can lead to bureaucracy • Good credit ratings of AT&T may suffer which will lead to limited access to working capital • AT&T’s earnings in the first years after the merger could get diluted • Merger’s success is questionable because of the strong presence of McCaw family members and their desire for control. If they keep their place in BOD after the merger, management conflicts may occur Best alternatives: • Create own wireless network in PCS sector and start competing with other cellular companies • Merge with another company which would offer the same growth perspectives in the wireless communication market • To structure deal as joint venture, which would be an economical approach to entering the market with the access to the technology, cross-marketing and profits. May bring, however, the lack of control to achieving “Anywhere, Anytime” vision. 3. What risks do AT&T and McCaw face in this proposed merger? Consider a range of transactional, financial and operating risks. What effect do these risk factors have on the value of McCaw? Transactional Risk: • Other bidders can come in the play to preempt the merger • AT&T should take advantage from slowing down in the merger activity and lower premiums. If negotiations take a long time, situation can reverse, driving the costs of acquisition up • To be able to merge, companies need approval from BT which may not want to share the cellular network and lose its chances to capture the US cellular market itself • To ensure healthy competition, FCC may delay or prevent the transaction Financial Risks: • The merger can be dilutive for AT&T if it acquires McCaw with stock, which can drive the stock price down • AT&T also acquires McCaw’s debt, which exposes AT&T to the risk of the debt downgrading or refinancing at higher rate Operating Risks: • All projected synergies might not be realized if companies do not integrate successfully or face severe competition from PCS • Integration of the management structure is a potential problem in the merger because of control ambitions of Craig McCa...