At&T's Acquisition of Mccaw

2285 Words Mar 22nd, 2011 10 Pages
Introduction:
McCaw Cellular Communications is a cellular telephone pioneer in the United States is faced with a challenging decision regarding the future of the firm. The direction of the company will depend on whether CEOs of McCaw Cellular Communication and AT&T agree on an appropriate price of the company. In order to capture the value of McCaw Cellular Communications, three financial valuation models were developed while taking into account the trends in the industry and potential synergies from the take-over.
Valuation Model #1: Comparable Transactions: As mentioned in the business life cycle section( Exhibit A), cellular companies are in huge demand due to their outstanding growth potential. From the period of October 1989 and
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Calculating the As-Is multiple value is only the first in the valuation process. In order to calculate the appropriate multiple, improvements, synergies and future options have to be taken into account. The acquisition of McCaw by AT&T will create several hard synergies through cost savings of advertising, lower cost of debt through refinancing using AT&T favorable credit rating and lower SG&A through economies of scale. These hard synergies will increase the As-Is multiple by 1. Moreover, the acquisition of McCaw by AT&T will create soft revenue synergies through geographical expansion of AT&T to markets where McCaw is dominant and vice versa. Also, soft synergies can be capitalized through the cross selling of AT&T’s hardware products with the wireless services of McCaw ( Refer to Exhbit B for Marketing Mix Analysis). Due to their uncertainty, the soft synergy will only increase the As-Is multiple by 0.50. Lastly, Mr. Craig McCaw would require a premium for giving up control of the company which requires adding 0.25 to the As-Is multiple. The final multiple for McCaw Cellular will equal to 11.84+ 0.25+1+0.5 = 13.59. It is important to mention that incorporation of future options was ignored due to the lack of information in the case. The multiple is multiplied by the forward revenue (1314) in 1993 which yields a value of $17.857 billion.
Valuation Model#3: Discounted Cash Flow:
This model is more complicated compared to the previous two

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