Analysis and Evaluation of Success Factors and Synergistic Effects in M&A Transactions in the Technology, Media and Telecommunication Industry

Using the AT&T and Time Warner Example

Bachelor Thesis, 2017

52 Pages, Grade: 1



Table of Content

Thesis Abstract

List of Abbreviations

List of Figures

List of Tables

1. Introduction

2. Fundamentals and Manifestation of M&A
2.1 Definition and Categorization of M&A
2.2 Objectives and Motives for M&A
2.3 Success of M&A

3. Synergies
3.1 What are Synergies?
3.2 Different kinds of Synergies
3.3 Mechanism of Synergistic Effects

4. M&A in the Technology, Media and Telecom (TMT) Industry
4.1 Industry Overview - An Overview of the TMT M&A Market
4.2 Transactions Process
4.3 Precedent Transactions

5. Case Study: The AT&T and Timer Warner Transaction
5.1 The Acquirer - AT&T Inc
5.2 The Target - Time Warner Inc
5.3 Analysis of Success Factors in the Post-Merger Integration
5.4 Analysis and Projection of Synergies

6. Conclusion

Reference List

Thesis Abstract

Mergers and acquisitions are one of the most used opportunities to combine businesses and achieve growth inorganically, despite a high failure rate. The main motive during transactions is the realization of synergies. To achieve those synergies, the mechanisms of those effects need to be evoked by certain success factors during the post-merger integration. A post-merger integration that is executed incorrectly is one of the main reasons why transactions go fail and synergies are not achieved.

This thesis will examine synergies and success factors for the post-merger integration of mergers and acquisitions in the technology, media and telecommunication industry, focusing on the acquisition of Time Warner Inc. by AT&T Inc.

The technology, media and telecommunication industry is currently flourishing, which is evidenced by an increasing number of transactions. Nevertheless, wireless and mobile giants like AT&T are under huge pressure in their traditional barriers of business and therefore depend on a new strategy to diversify outside their traditional barriers of business. For this purpose, AT&T aims at generating further growth in the video and entertainment market through the acquisition of Time Warner. AT&T would not only increase their growth but they would also build up a second foothold since their traditional business is stagnating. AT&T will become the leader in converging technology, media and telecommunication.

The objective of this thesis is to identify the success factors during the integration phase, which are responsible for the implementation of the mechanisms of synergies and to relate those to the underlying case study. Therefore, the theoretical framework explains the fundamentals of mergers and acquisitions as well as analyses synergies and the post­merger integration phase. The analysis shows that there are specific success factors within the post-merger integration phase in order to realize the targeted synergies through certain mechanisms, which are evoked by a successful integration in the new entity. To maintain the applicability, this thesis is combining research from general literature and publicly available secondary information and data.

Concluding, this thesis shows practical approaches of how to successfully integrate an acquisition, considering certain factors to realize targeted synergies. The projection of the synergies of the Time Warner acquisition by AT&T then serves as a role model and example for other businesses in this industry to circumvent stagnating or declining growth. The persistent pressure on mobile and wireless companies will force additional companies in this industry to get access to new markets and channels in order to create diversity in their portfolio. For this reason, competitors of AT&T in America as well as Europe may take this transaction as an example for additional measures.

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1 - Broad Sense of M&A

Figure 2 - Value Generation

Figure 3 - Interaction of Activities Along the Value Chain

Figure 4 - Global M&A Deal Value (2016) By Sectors

Figure 5 - Development of M&A Activity in the TMT Industry

Figure 6 - Transaction Process

List of Tables

Table 1 - Definitions of M&A

Table 2 - Motives of M&A

Table 3 - Checklist Success Factors Pre-Merger Integration (PMI)

1. Introduction

On October 23rd, 2016, AT&T Inc., the world’s largest telecommunication company[1], announced an acquisition agreement with the US media and entertainment company Time Warner Inc., comprising a stock and cash transaction[2] of US $85.4 billion. The agreed purchase price values the target at a price of US $107.50 per share. This represents the equity value, including the net debt of Time Warner the total transaction value and enterprise value is US $108.7 billion (Roumeliotis & Toonkel, 2016). By acquiring Time Warner, AT&T aims at synergies such as access to the content and deliver channels of Time Warner to counteract to the declining growth in the telecommunication environment and create inorganically growth.

In this thesis, an analysis of success factors during the integration phase of a transaction process and synergies of mergers & acquisitions in the technology, media and telecom industry, will be carried out in order to assess those factors and effects on the underlying AT&T and Time Warner example.

In the beginning an outline of the fundamentals and manifestations will be presented. Hence, the most important and relevant terms will be defined and categorized (Chapter 2.1) . Additionally, this section includes certain objectives and motives for M&A (Chapter 2.2) , which will serve as the basis for Chapter 3. The second chapter will end with relevant information about measures, which are accountable for a successful transaction (Chapter 2.3) . Subsequently, based on Chapter 2 synergies (Chapter 3.1) and the mechanisms of synergies (Chapter 3.3) are portrayed. Those findings will be applied in Chapter 5 to project potential synergies of the underlying transaction.

The presentation of the fundamentals and manifestations, the post-merger integration and the introduction to synergies and its mechanisms represent the theoretical framework of this thesis and have been acquired by reviewing general literature.

The fourth chapter contains an industry overview with the development of M&A in the TMT industry, together with future drivers for the market (Chapter 4.1). Additionally, the transaction process, particularly the post-merger integration phase (Chapter 4.2) will be illustrated. Subsequently, precedent transactions (Chapter 4.3) will be presented to bridge certain success factors, covered in the integration phase, to the underlying case study in Chapter 5.3. After an initial overview of the underlying transaction of AT&T and Time Warner (Chapter 5), the acquirer (Chapter 5.1) and the target company (Chapter 5.2) are presented in the last section.

The industry overview, the precedent transactions as well as the introduction to the case study, including the presentation of the acquirer and target represent the research method of this thesis and have been acquired by using publicly available secondary information and data.

Afterwards, the integration phase of the underlying transaction will be analyzed with the help of the theoretical framework and the experience from precedent transactions to define certain factors, which must be considered for a successful integration (Chapter 5.3) . This leads to Chapter 5.4, since a successful integration is the basis to evoke the mechanism of synergies. In this chapter potential synergies, which can be realized as a result of this transaction, will be projected.

Likewise, this thesis concludes with the success factors which must be considered during the integration phase to empower the mechanisms of synergies. Those factors will be illustrated in a checklist. Finally, this study can function as a role model and example for telecommunications businesses, who are affected by similar negative factors[3] like AT&T and want to circumvent those factors, whether it is an American or an European competitor.

2. Fundamentals and Manifestation of M&A

The following chapter provides conceptual framework for this study. If defines and categorize M&A, illustrate success factors on a theoretical basis (Chapter 2.1) and shows how to measure success of transactions (Chapter 2.3). Furthermore, objectives and motives for M&A will be described (Chapter 2.2). The theoretical basis of Chapter 2.2 will be elaborated in Chapter 3, in which synergies will be discussed.

2.1 Definition and Categorization of M&A

In the Anglo-American and German finance literature and among experts with corporate M&A background, there are various expressions interchangeably used, including the terms transaction, takeover, consolidation, concentration, fusion, amalgamation, business combination and sell-off (Wirtz, 2003, p. 10)[4].

In fact, the difference in interpretation results from different definitions in various countries and the misapplication of the Anglo-American term.

illustration not visible in this excerpt

Table 1 - Definitions of M&A

The listed definitions are partially showing the differences regarding the subordination of the term M&A. In the absence of a consistent definition, these expressions are generally subsumed under the generic term M&A.

In the United States the term M&A coats a broad range of corporate activities misshaping the meaning of strategic expansion which include business combination and strategically motivated cooperation. According to Copeland and Weston (1988, p. 676) “the traditional subject of M&A has been expanded to include takeovers and related issues of corporate restructuring, corporate control and changes in ownership structures of the firm”. However, the German finance literature offers a narrower definition. M&A is strictly limited to business combinations, i.e. the transfer of ownership, control rights and the management from the target to the acquirer results from transactions (Wirtz, 2003, p. 12). Figure 1 illustrates the areas of the generic term M&A regarding the broad definition as well as the narrow definition.

illustration not visible in this excerpt

Figure 1 - Broad Sense of M&A6

Translated into English from (Wirtz, 2003)

In this thesis, the narrow approach will be used to specify the term M&A and its categories.

Mergers: “A merger is the combination of two or more companies to share resources in order to achieve common objectives” (OECD, 2008, p. 198).

Depending on the legal status of the merging company followed by the transaction, mergers can be divided into different types. In all the following cases, at least one company abandons its legal independency (Schön, 2013, p. 32).

- Subsidiary Merger: In this transaction type, the acquired company will be integrated as a subsidiary of the parent company (OECD, 2008, p. 198).
- Statutory Merger: A business combination where one of the businesses goes out of existence. The merged company will be fully consolidated by the other company. Therefore, the merged company will cease to exist. It will be considered a (subsidiary) reverse merger, if the transaction direction goes in the opposing Source: Own graph direction and a subsidiary of the acquiring company is merged into the target (OECD, 2008, p. 198).

- Consolidation: All the companies integrated during the transaction process cease their legal independency in order to establish a new company. All assets and liabilities from the merging companies will be consolidated into the new company (Gaughn, 2002, p. 7).

Acquisitions: “An acquisition is a business transaction between unrelated parties on terms established by the market where each company acts in its own interest. The acquiring company purchases the assets and liabilities of the target company” (OECD, 2008, p. 198).

Furthermore, an acquisition can be segmented in Asset Deals and Share Deals.

- Share Deal: The share deal is the mostly used type of transaction in practice. It is a transfer of shares from the legal entity of the target to the acquirer. The transfer of shares ensues due to the purchasing of a certain number of shares. Those acquired shares will be booked and illustrated in an extra section in the balance sheet of the acquiring company. The transaction in the form of a share deal also involves an adaption of all assets and liabilities (Hinne, 2009, p. 13).

During this process, concomitant contracts of the acquired company will remain unaffected, unless a change of control clause[5] is coming into effect. Such a clause can endanger and, indeed, prevent an acquisition (Pernsteiner & Guserl, 2015, p. 568-569). Special types of share deal are Management-buy-out (MBO), Management-buy-in (MBO) and Leveraged-buy-out (LBO)[6].

- Asset Deal: An asset deal represents a purchase of a company due to the acquisition of its assets[7] and liabilities (Wirtz, 2003, p. 257). Thereby assets and liabilities, which are to be transmitted, will be recorded and booked into the balance sheet individually. Therefore, the company will be acquired without its legal entity[8] (Pernsteiner & Guserl, 2015, p. 568).

Furthermore, an asset deal has certain advantages and is beneficial for the acquirer in some ways.

First, individual assets can be excluded from the deal if a complete acquisition is undesirable for the acquirer. Another benefit is the fact that the acquirer does not need the approval from its shareholders for the transaction. Therefore, the transaction can be carried out faster. Lastly, the asset deals include a financial benefit. The acquired assets will be implemented directly into the balance sheet of the acquirer and can be regularly depreciated after goodwill is paid in the following years. This leads to a simplification in funding the deal because of the improvement of the firm’s cash flows, since depreciation and amortization (D&A) is not pertinent for the cash flow statement (Wirtz, 2003, p. 257).

Subsequently, in addition to the categorization of both mergers and acquisitions, a categorization of M&A is presented. M&A is segmented into horizontal, vertical and conglomerate as deal categories.

- Horizontal M&A: M&A is categorized as horizontal, when a company acquires a company within the same industry. The targeted companies are usually competitors, in a different geographical area or engaged in a similar product line. It is the most common category, because of the fewest operating risks. The acquiring company has knowledge about the entire internal and external environment, which is the result of the Due Diligence (DD) (Hooke, 2015, p. 5).
- Vertical M&A: Transactions along the value chain of a company are considered as vertical (Jansen, 2008, p. 19-20).
- Conglomerate M&A: Conglomerate M&A deals with a transaction of companies from different industries, which are not related. Motivation to efficiently diversify risk or planned expansion of company’s activities are frequently underlying reasons (Meghour, 2016, p. 13).

2.2 Objectives and Motives for M&A

There are several theories and approaches in the literature why M&A occurs and according to Seth, Song and Pettit (2002) understanding these motives is the key for understanding M&A success or failure. According to Gaughn (2002) and Schön (2013) motives are categorized in Managerial, Financial and Strategical motives. Hence, the various motives in literature can be categorized.

Arnold (2005) identifies several classes of M&A motives: synergy[9], new market access, tax consideration, risk diversification, bargain buyer and free cash flow (FCF). The FCF theory was also illustrated by Jensen (1986). He says that the level of FCF is a determinant for managers to perform acquisitions.

As already mentioned above a common motive to perform M&A is the access to new geographic markets due to economic growth. If a company has chosen to enter a particular market, but lacks the required environmental knowledge, the fastest way of establishing itself is by means of takeover of an existing player in the particular market (Gaughn, 2002, p.36).

Cantwell and Santangelo’s (2006) illustration of risk diversification is often seen when it comes to a conglomerate M&A[10]. This means overall income streams will be less volatile if the cash flows coming from markets in different geographic locations.

De Pamphilis (2005) and Walter & Barney (1990) both developed motives, which are similar to Arnold’s (2005). They say M&A is motivated through operational and financial synergies, market power, undervalued acquisition, diversification, strategic realignment, tax consideration, market position, economies of scale, cost reduction and access to new markets. Additionally, De Pamphilis (2005) also introduces the strategical realignment theory, which suggests that firms use M&A as a way of rapidly adjusting to changes in a company’s operating environment.

Several other studies show identifying motives (e.g. Levinson, 1970; Bower, 2001; Carpenter and Sanders, 2007) which are similar to those already presented above. None of these other findings offer anything new. Therefore, a specific list[11] of M&A motives can be illustrated and defined. The following table will represent the most common motives and approaches for M&A. Generally more than one motive can be applied for one transaction. But in addition to this, motives can vary in different industries, therefore several other motives can occur, which are not listed.

illustration not visible in this excerpt

Table 2 - Motives of M&A14

As already mentioned above, Table 2 illustrates the most common motives for M&A, including synergies, which are one of the main drivers for M&A. For this purpose, synergies will be the main element in this study to assess the underlying transaction in[12]

Chapter 5. Therefore, based on this and Chapter 2.3, Chapter 3 will be addressing synergies in detail for the further understanding of this study.

2.3 Success of M&A

In order to make statements on success of an M&A project, the term “success” needs to be defined in the first place.

Generally, it can be said, that M&A transactions can be considered as successful, when objectives of the transactions are fulfilled (Hinne, 2009, p. 84)

This means that the term success is the degree of attainment of targets during a transaction. It is assumed that the increase in value of both companies can be seen as the overall objective (Meyer, 2012, p. 43). But in this case, just the shareholder’s perspective is considered.

The four most common approaches to measure success in a transaction will be illustrated in the following.

Manager’s perspective

This method measures the success of an M&A transactions based on the valuation of managers or experts involved. The purpose is to detect whether the objectives of the transactions were fulfilled or not. However, this method involves a subjective and influenced point of view by the managers (Hinne, 2009, p. 86). Additionally, Kerler (2000, p. 130) points out that managers tend to an excessive positive valuation of their transaction. He proves this hypothesis during his study and illustrates that transactions valued by this method indicating a higher success rate than transactions measured with other methods.

Analysis of disinvestments

The success of an M&A deal is measured by the rate of reselling in this method. A transaction is considered as successful, when the acquired or merged company is not resold in a certain period of time. A point of criticism is the correct definition of “period” to hold the business. Furthermore, a resell after restructuring the business to capitalize the accretion is considered as failure under this method (Hinne, 2009, p. 86). Therefore, this method is less expressive according to Kirchner (1991).

Quantitative Review

The quantitative review is measuring the success with various financial key performance indicators (fKPIs). Based on the financial statements, various fKPIs[13] of the acquiring or merging company, before and after the transaction, will be compared. The main objective of this method is to see the impact of the transaction on the financial ratios and therefore, the impact on the operational performance (Glaum, Lindemann, & Friedrich, 2006, p. 297). The data can be gathered in periodic intervals or on a yearly basis and are accessible to the public. Since they are mostly derived from the formal accounting standards they are comparable to the benchmark (Hinne, 2009, p. 85).

Event Studies

Due to the weaknesses of the other methods, event studies have been used more frequently to measure M&A success. As part of this method, stock prices will be analyzed in an event window[14] surrounding a specific event. The benchmark whether a transaction is successful or not is shown by the abnormal return. The abnormal return is the difference of the market return and the normal return[15].To measure the reaction of the whole market during the time period surrounding the announcement, the abnormal return will be accumulated (Aar). A positive Aar is an indicator for increasing cash flows and decreasing risk, expected by the players on the market. Therefore, this method illustrates the expected gain in cash flows and the development of the company and not the actual performance (Hinne, 2009, p. 87). Buy-and -hold abnormal returns (BAHRs) and the farma-french-3-model (FF3F)[16] are also commonly used methods in determining long­term performance in event studies (Laabs, 2009, p. 16).

In this study, success will be determined with achieving the individual objectives of the underlying transaction and the value generation for the acquiring company. Additionally, the integration process and certain success factors such as hard factors[17], soft factors[18] and external factors[19] will be taken adequately into consideration in Chapter 5.3 (Meyer, 2012, p. 47-48).


[1] In 2015, AT&T was the largest telecommunication company according to revenues (Statista Inc., 2015)

[2] For every outstanding share of Time Warner, shareholders receive US $53,75 in cash and US $53,75 in AT&T Stock.

[3] In this context negative factors are, inter alia, a statured market and an increasing competition with aggressive pricing models

[4] See also (Jansen, 2001, p.43-46)

[5] A contractual provision which gives a party to an agreement enhanced protection if the controlling shareholding of the other party is transferred. In commercial contracts a change of control clause will often give the party who is not subject to a change in ownership the right to terminate the agreement in the event of a change of control of the other party [...] (Law, 2017).

[6] Please see (Pernsteiner & Guserl, 2015, p.568-569), (Loos, 2006, p.50) and (Fraser-Sampson, 2010, p. 59) for further and detailed information about the special types of a share deal.

[7] The term “Asset” includes both tangible and intangible assets.

[8] Please see § 433 I Satz 1 BGB for details regarding the jurisdiction.

[9] Will be introduced in detail in Chapter 3

[10] For explanation please see Chapter 2.1

[11] See Figure 2

[12] Source: Adapted from (Schön, 2013, p.68) and own reasearch

[13] For example, Cash Flow, ROI, multiples etc.

[14] Certain time period

[15] The normal return corresponds to the value of return the stock would have realized without an event

[16] For further c dexy2t5explanation please see (Laabs, 2009)

[17] Hard factors are income figures, using of synergy potential, financing and production advantages, stock performance, efficiency etc..

[18] Please see 7-S- Model of McKinsey

[19] enterprise-specific -, transaction- and environmental factors

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Analysis and Evaluation of Success Factors and Synergistic Effects in M&A Transactions in the Technology, Media and Telecommunication Industry
Using the AT&T and Time Warner Example
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M&A, Corporate Finance, TMT, Synergies, Success factors, Mergers, Acquisitions
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