On March 5, 2006, AT&T published a news release on their website stating that they would be merging with BellSouth. The combination of both companies would create a more effective and efficient provider in the wireless, broadband, video, voice and data markets. AT&T and BellSouth merged before merging with Cingular Wireless. This move was one of the first mergers to take place in the telecommunications industry.
AT&T went as far as defending their decision before critics could attack their move. They state that the combination would speed innovation, competition and convergence. (AT&T) Critics would now say what competition? AT&T merged with Cingular Wireless, Yellowpages.com and now BellSouth. This is not exactly helping competition in the eyes of the consumer. In order to win over some critics, they stated that there would be “Substantial financial benefits for stockholders of both companies; an expected net present value of $18 billion in synergies resulting from a more than $2 billion annual run rate in synergies expected in 2008, growing to $3 billion in 2010.” (AT&T) Their statement helped prove that they had a financial plan in place through the year 2010.
Lester Electronics, Inc. is in the same scenario as was the BellSouth. It is safe to assume that BellSouth knew it would be more profitable to merge with AT&T than to compete against them. The marketing tools were in place at AT&T and ready for BellSouth to utilize. Lester Electronics, Inc. is faced with losing 43% of their revenue if Shang-wa Electronics merges with Transnational Electronics Corporation. For this reason, Lester Electronics, Inc. should consider merging with Silver Socks Company. BellSouth knew that the combined company will be better able to serve their customers and, at the time, embrace the industry’s shift to Internet Protocol network-based technologies. (AT;T)
Upper management did a great job in reaching out to their customers. “This merger is a logical next step that creates substantial value for customers and stockholders of both AT&T and BellSouth,” said AT;T Chairman and CEO Edward E. Whitacre Jr., they appealed to their customers by making the merger about them and not the profitability of both companies. (AT;T) Identification of Key Course Concepts: Our companies dealt with mergers, acquisitions and consolidations.
A merger is when two or more companies are combined into one company. Mergers are different than a consolidation. With a consolidation, no new company is created from a merger. Mergers can be structured two different ways. “Mergers are structured either as cash-for-stock transactions or as stock-for-stock transactions.” (Ross, 645) The selling stockholders receive cash from the buyer through a cash-for-stock transaction and receive stock in the buying company in the stock-for-stock transaction. (Ross, 645)
Mergers and acquisitions are not always as easy as businessmen and women would like them to be. Sometimes they involve unfriendly transactions. When one firm attempts to acquire another, it does not always involve quiet, gentlemanly negotiations. (Ross, 645) This creates the other company to become defensive. As with any business transaction a merger has its advantages and disadvantages. “A merger is legally straightforward and does not cost as much as other forms of acquisition. It avoids the necessity of transferring title of each individual asset of the acquired firm to the acquiring firm.” (Ross, 797) The stockholders have a say with mergers. “A merger must be approved by a vote of the stockholders of each firm.” (Ross, 797) The more shareholders the more opinions about the transaction. “Often the acquiring firm and the dissenting shareholders of the acquired firm cannot agree on a fair value, which results in expensive legal proceedings.” (Ross, 797)
Although there may be several negative effects of mergers and acquisitions, there are still are benefits. These benefits are called synergies. An example of synergies is, “Suppose firm A and firm B have values as separate entities of $500 and $100, respectively. They are both all-equity firms. If firm A acquires firm B, the merged firm AB will have a combined value of $700 due to synergies of $100. The board of firm B has indicated that it will sell firm B if it is offered $150 in cash.” (Ross, 812) There are many potential synergies during merger and acquisition transaction.
Comparison and Contrast of Companies: While looking at XM-Sirius, AT;T, BellSouth, CNET, Beeyu Overseas, Ltd., BHP Billiton, and Schwarz Pharma Ag, LEI has realized there are a few similarities to their very own situation. Before the mergers of these organizations several concepts were compared and contrasted. Prior to the decision of a merger, a company must assess financing needs for wealth maximization, such as financial planning, a planning model, analyze long term financing such as stock and different types of dividends.
Before deciding to merge the organization should consider the company’s financial planning. The financial planning establishes guidelines for change in the company. As in the Schwarz Pharma Ag merger, UCB reviewed all of Schwarz guidelines which include an identification of the firm’s financial goals, an analysis of the differences between these goals and the current financial status of the firm, and a statement of the actions needed for the firm to achieve its financial goals. (Ross, 2005) All companies researched conducted their own research of the company’s financial planning. All the companies reviewed the basic elements of financial planning. XM-Sirius, CNET, and AT&T reviewed the investment opportunities of the new company along with the amount of debt the company had at the time of the merger. Beeyu Overseas, Ltd had to show the amount of cash it had to ensure their purchaser that the stockholders were going to get paid properly.
Another similarity LEI found after researching all seven companies was the reviewing of the company’s planning model. Some of the common elements within the seven companies researched and LEI was the sales forecast, pro forma statements, asset requirements and the companies’ financial requirements. Since sales forecasts are not always accurate and because sales always depend on the uncertain future state of the economy, LEI and all seven companies got help from businesses specializing in microeconomic and industry projections.
Also when comparing the companies, LEI found all seven companies, prior to merging, researched the pro forma statements, showing the purchasing company the balance sheet, income statements and a sources-and-uses statement. The companies also compared the asset requirements of each company of interest. With this information, all seven companies and LEI were able to see the company’s projected capital spending and the proposed uses of net working capital. All companies also compared the financial requirements of the companies they had interest in merging with. This way, they would be aware of what securities must be sold and what methods of issuance are most appropriate.
Another similarity between LEI and all seven companies researched is the analyzing of the long term financing. Reviewing the common stock of the company and their shareholders to see if they received stock certificates for the shares they own. The similarity between all seven companies and LEI is the fact they want and need to know the market value of the companies they want to merge with. This is important for the companies because one needs to know the value of the company they plan on investing money in by merging.
This will help ensure that the merge is a good idea and not a total washout and loose profit. The companies compared the stocks on the New York Stock Exchange to ensure they have and are holding their value. They also all looked and compared the replacement value of the company of interest. This way, the company will know the current cost of replacing the assets of the company. Should the company have the marketability and value the merging company is looking for, they will continue with the plans of merging.