Create and answer a case study similar to Memo 4 from Time Warner (Most Relevant Chapters 5, 7, and 14) that analytically looks at when to acquire a company.
Katherine Ittenbach
Memo 4 Summary & Analysis:
In order to develop a case similar to the conditions facing Time Warner during its merger with American Online in 2000, we must first understand and rationalize the decisions being made during this time.
Being one of the largest mergers in U.S. history, this merger naturally garnered much attention. Unfortunately, it is now being used as a model of what NOT to do during a merger. The original intent of the merger in 2000 was to combine to core companies of two successful companies. More specifically, Time Warner wanted to bring together their abilities in media operations with AOL’s success in their Internet operations. (Baye, 2010)
How could two market leaders fail to merge in such a way to be established as one of the “worst deals in history?” There are several reasons:
Failure of executive leadership to collaborate;
Inefficient mixture of corporate cultures;
Poor projection of future success within the technology sector; and
Overstatement of revenues on behalf of AOL.
Now, Time Warner is determining the viability of yet another acquisition with Fox News. It is more important than ever that Time Warner not duplicate the past mistakes realized in the merger with AOL. Time Warner is looking for the acquisition of Fox News to broaden their reach within the European and Asian markets. Additionally, this acquisition would realize an additional 83.6 million subscribers with faster growing revenues than Time Warner’s current CNN division. The synergy of this acquisition is thought to be substantial, but is that the truth or is this another misled perception similar to that last observed in the AOL merger?
Another question to pose, is would this acquisition be approved by the Federal Communication Commission? Regardless of the potential synergy that may result as a result of the acquisition is more important to first understand if the acquisition could ever come to fruition. Being that Time Warner and Fox News are industry leaders, it is important to understand the four-firm concentration and Herfindahl-Hirschman Index in this situation.
Four-firm concentration ratio: “The fraction of total industry sales generated by the four largest firms in the industry. When four or fewer firms produce all of an industry’s output, the four-firm concentration ratio is 1. The closer the four-firm ratio is to zero, the less concentrated is the industry; the closer the ratio is to 1, the more concentrated is the industry.” (Baye, 2010)
= (Sales firm 1 + Sales firm 2 + Sales firm 3 + Sales firm 4) / Total sales of all firms in the industry
Herfindahl-Hirschman Index: “The sum of the squared market shares of firms in a given industry multiplied by 10,000. The value of the Herfindahl-Hirschman index lies between 1 and 10,000. A value of 10,000 arises when a single firm exists in the industry. A value of zero results when there are numerous infinitesimally small firms.” (Baye, 2010)
= sum of squared market shares of firms in a given industry, multiplied by 10,000.
In a more written format, this formal can be described as: =10,000(sum of each: (firm’s sales / total sales in industry)^2)
Analysis of the Time Warner / Fox News acquisition would result in the following metrics within the news programming market. (Baye, 2010)
Four firm concentration before acquisition: 85%
Four firm concentration after acquisition: 94%
HHI before acquisition: 2,255
HHI after acquisition: 3,535
The synergy resulting in the acquisition would be more difficult to measure but would most likely be in the determination of how two separate entities would operate or merge together. One question to ask would be if there would be economies of scope determination as a result of the acquisition? As found in the mistake with AOL, it would be difficult to run the two seamlessly together. It seems that the two news entities would have to be run in parallel which would diminish the reward of from economies of scope and would increase costs in trying to run the two separately. (Baye, 2010)
Additional Analysis on when to Acquire or Merge:
A Harvard Business review discusses the facts around when to acquire in their article “When to Ally and When to Acquire.” The discussion is first developed with the harsh fact that most acquisitions fail. To make matters worse, the Journal of Finance found that an acquiring firm will take on a 10% decrease in wealth within five years of the acquisition. This article makes mention of three determinants that companies should decide upon when looking to acquire:
“The resources and synergies they desire;
The marketplace they compete in; and
Their competencies at collaborating.”
Had Time Warner and AOL fully understood and analyzed these concepts, they would have found deficiencies in the synergy, the projected marketplace and their ability to collaborate on an executive level.
This is but one analysis on when to acquire. There are many, if not thousands, of opinions and ideas surrounding this topic. With such a high rate of failure, the topic is not well understood. Much like finding the key to success in investing in the stock market, there is no one formula for success.
John Psarouthakis in The Business Thinker breaks down the decision process into 16 seemingly simple steps:
“1. Know what you want to acquire. 2. Set up criteria to guide you on what you want to buy. 3.Set up a plan on how you will proceed. 4. Identify/build a team that will work, do, and manage the process with you. 5.Develop a network of credible sources for acquisition candidates. 6.Screen carefully and thoroughly the candidates using the criteria set. 7. Conduct an effective preliminary evaluation/due diligence before you spend a great deal of time and money. 8. Negotiations really begin at the first meeting with the owner or his/her representatives. Preliminary agreements take place then and should be included in a letter of intent. 9. Involve your attorney early in the process and also with the letter of intent. 10. Conduct a thorough evaluation/due diligence. Look for surprises, but do not panic. 11. Develop a detailed action plan and complete it before you close the deal. 12. Review the value and price of the business with your colleagues. 13. Negotiate the purchase agreement with the full participation of your attorney. 14. Close the deal. 15. Begin implementation of the action plan immediately. 16. Last, but most important, meet as many people of the company as possible during the acquisition process. Do not wait to meet them after you close the deal.”
Seems fairly easy right?
Let’s take a look at current situation that is stealing the headlines.
A Real World Analysis:
The AT&T / T-Mobile merger that was announced in March of 2011 has been of primary focus for the Department of Justice and Federal Communications Commission.
Background:
In March of 2011, AT&T announced its intention to acquire T-Mobile in a $39 billion dollar deal. This acquisition was thought to combine the competitive forces of two of the top industry leaders. IN an article by engadet.com, the deal was thought to be, “a rosy garden of straightforward synergies thank to a set of complementary network technologies, spectrum operations and operations.” Currently, the market’s leaders include Verizon Wireless, AT&T, Sprint Nextel, and T-Mobile. This acquisition would leave the industry with only three primary leaders. From the beginning, speculation was already surfacing about possible regulatory barriers to seeing the proposed 12 month deal through. In light of speculation, AT&T offered T-Mobile a $3 billion guarantee in case the deal falls through. So while company leaders are optimistic of the possibilities after the acquisition, it looks like the biggest battle will be working through the red tape.
Current Realities for AT&T:
Analysts are calling the AT&T and T-mobile acquisition a “text-book case” of anti-trust law. A critical review by the New York Times quoted a professor of law at the University of Iowa in saying, “It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window. This merger clearly seems to violate them.”
Author, James Stewart, of the New York Times ran an analysis on the Herfnidahl-Hirschman Index using the proposed score of 2,500 to be considered a concentrated industry by the Obama administration. When looking at the index with the merger of AT&T and T-mobile, 96 of the tested 100 markets were above this target. In fact, New York even scaled a 3,335. For the United States, the HHI would be 3,100.
With this in mind, it is no wonder that AT&T is fighting a battle on two fronts: Against the Department of Justice and the Federal Communications Commission.
The purpose of the Department of Justice is to:
“To enforce the law and defend the interests of the United States according to the law; to ensure public safety against threats foreign and domestic; to provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior; and to ensure fair and impartial administration of justice for all Americans.”
The purpose of the Federal Communications Commission is to:
“The Federal Communications Commission regulates interstate and international communications by radio, television, wire, satellite and cable in all 50 states, the District of Columbia and U.S. territories. It was established by the Communications Act of 1934 and operates as an independent U.S. government agency overseen by Congress. The commission is committed to being a responsive, efficient and effective agency capable of facing the technological and economic opportunities of the new millennium. In its work, the agency seeks to capitalize on its competencies in:
Promoting competition, innovation, and investment in broadband services and facilities;
Supporting the nation’s economy by ensuring an appropriate competitive framework for the unfolding of the communications revolution;
Encouraging the highest and best use of spectrum domestically and internationally;
Revising media regulations so that new technologies flourish alongside diversity and localism;
Providing leadership in strengthening the defense of the nation’s communications infrastructure.”
The Decision:
As expected, both the DOJ and FCC have filed and blocked the acquisition between AT&T and T-mobile. For a formal review of these initiatives, the following links describe these initiatives and further detail. An easier interpretation of the reasoning for blocking the acquisition was quoted in the Chicago Sun Times by the Deputy Attorney General James M. Cole in saying: "The combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services. Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation's wireless carriers, particularly the four remaining national carriers. This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition." The Assistant Attorney General in charge of the Department of Justice’s Antitrust Division was also quoted saying: "T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network. Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer." http://www.justice.gov/css-gallery/gallery-att-tmobile.html
An article posted on Bloomberg’s website mentioned the fact that the FCC was already concerned with the concentration of the wireless market before AT&T even made an announcement of their intentions to take acquire T-mobile. So it comes as no surprise that the FCC announced on November 28th that the merger was not in the public interest. http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1130/DA-11-1955A2.pdf
Next Steps:
AT&T was confidently supported and backed their claim but now seem to be running scared. An article posted by cnet.com posted that AT&T is working to make the deal happen even offering up 40% of T-Mobile’s assets to help calm fears. For now, AT&T has backed off from fighting the FCC and focusing on the current suit against the DOJ and then will move back to the FCC debacle. AT&T’s arguments to support the acquisition include:
Faster 4G networks
Increased innovation
More jobs
It seems AT&T can try to make a good fight for more jobs, but as a consumer it seems the only future would be higher bills. Relating back to the Time Warner case, they are pegged as a possible contender to buy up T-Mobile’s assets in the case that the AT&T T-Mobile does not go through. Stayed tuned to national news as these suits unfold and more decisions are made.
Baye, Michael. Managerial Economics and Business Strategy. New York: McGraw-Hill/Irwin, 2010. "Photo Library." August 2011. The United States Department of Justice. 4 December 2011. <http://www.justice.gov/css-gallery/gallery-att-tmobile.html>.
The Time Warner merger with AOL has gone down in history as one of the biggest merger failures. To begin understanding what makes a merger fail or succeed, the Time Warner/AOL merger seems like a good example of what NOT to do.
Of first mention, it seems that the future of AOL and current profits were inflated. Although AOL was described as being the "Google of its day," it was already showing signs decline with high-speed becoming increasingly more popular. It should have been foretasted that the dial-up system may soon be outdated and replaced. Although a company is profitable today, does not mean it shows a promising future. This is particularly true in technology-based companies.
Also important in a merger is combining company cultures and ways of doing business. The failure of the merger was also attributed to this false match-up of cultures and company principles - or lack of corporate synergy.
In light of our current class lecture discussing market concentration and mergers, here is a great article over the AT&T / T-Moble acquisition controversy:
Katherine Ittenbach
Memo 4 Summary & Analysis:
In order to develop a case similar to the conditions facing Time Warner during its merger with American Online in 2000, we must first understand and rationalize the decisions being made during this time.
Being one of the largest mergers in U.S. history, this merger naturally garnered much attention. Unfortunately, it is now being used as a model of what NOT to do during a merger. The original intent of the merger in 2000 was to combine to core companies of two successful companies. More specifically, Time Warner wanted to bring together their abilities in media operations with AOL’s success in their Internet operations. (Baye, 2010)
How could two market leaders fail to merge in such a way to be established as one of the “worst deals in history?” There are several reasons:
Now, Time Warner is determining the viability of yet another acquisition with Fox News. It is more important than ever that Time Warner not duplicate the past mistakes realized in the merger with AOL. Time Warner is looking for the acquisition of Fox News to broaden their reach within the European and Asian markets. Additionally, this acquisition would realize an additional 83.6 million subscribers with faster growing revenues than Time Warner’s current CNN division. The synergy of this acquisition is thought to be substantial, but is that the truth or is this another misled perception similar to that last observed in the AOL merger?
Another question to pose, is would this acquisition be approved by the Federal Communication Commission? Regardless of the potential synergy that may result as a result of the acquisition is more important to first understand if the acquisition could ever come to fruition. Being that Time Warner and Fox News are industry leaders, it is important to understand the four-firm concentration and Herfindahl-Hirschman Index in this situation.
Four-firm concentration ratio: “The fraction of total industry sales generated by the four largest firms in the industry. When four or fewer firms produce all of an industry’s output, the four-firm concentration ratio is 1. The closer the four-firm ratio is to zero, the less concentrated is the industry; the closer the ratio is to 1, the more concentrated is the industry.” (Baye, 2010)
= (Sales firm 1 + Sales firm 2 + Sales firm 3 + Sales firm 4) / Total sales of all firms in the industry
Herfindahl-Hirschman Index: “The sum of the squared market shares of firms in a given industry multiplied by 10,000. The value of the Herfindahl-Hirschman index lies between 1 and 10,000. A value of 10,000 arises when a single firm exists in the industry. A value of zero results when there are numerous infinitesimally small firms.” (Baye, 2010)
= sum of squared market shares of firms in a given industry, multiplied by 10,000.
In a more written format, this formal can be described as:
=10,000(sum of each: (firm’s sales / total sales in industry)^2)
Analysis of the Time Warner / Fox News acquisition would result in the following metrics within the news programming market. (Baye, 2010)
The synergy resulting in the acquisition would be more difficult to measure but would most likely be in the determination of how two separate entities would operate or merge together. One question to ask would be if there would be economies of scope determination as a result of the acquisition? As found in the mistake with AOL, it would be difficult to run the two seamlessly together. It seems that the two news entities would have to be run in parallel which would diminish the reward of from economies of scope and would increase costs in trying to run the two separately. (Baye, 2010)
Additional Analysis on when to Acquire or Merge:
A Harvard Business review discusses the facts around when to acquire in their article “When to Ally and When to Acquire.” The discussion is first developed with the harsh fact that most acquisitions fail. To make matters worse, the Journal of Finance found that an acquiring firm will take on a 10% decrease in wealth within five years of the acquisition. This article makes mention of three determinants that companies should decide upon when looking to acquire:
Had Time Warner and AOL fully understood and analyzed these concepts, they would have found deficiencies in the synergy, the projected marketplace and their ability to collaborate on an executive level.
This is but one analysis on when to acquire. There are many, if not thousands, of opinions and ideas surrounding this topic. With such a high rate of failure, the topic is not well understood. Much like finding the key to success in investing in the stock market, there is no one formula for success.
John Psarouthakis in The Business Thinker breaks down the decision process into 16 seemingly simple steps:
“1. Know what you want to acquire.
2. Set up criteria to guide you on what you want to buy.
3. Set up a plan on how you will proceed.
4. Identify/build a team that will work, do, and manage the process with you.
5. Develop a network of credible sources for acquisition candidates.
6. Screen carefully and thoroughly the candidates using the criteria set.
7. Conduct an effective preliminary evaluation/due diligence before you spend a great deal of time and money.
8. Negotiations really begin at the first meeting with the owner or his/her representatives. Preliminary agreements take place then and should be included in a letter of intent.
9. Involve your attorney early in the process and also with the letter of intent.
10. Conduct a thorough evaluation/due diligence. Look for surprises, but do not panic.
11. Develop a detailed action plan and complete it before you close the deal.
12. Review the value and price of the business with your colleagues.
13. Negotiate the purchase agreement with the full participation of your attorney.
14. Close the deal.
15. Begin implementation of the action plan immediately.
16. Last, but most important, meet as many people of the company as possible during the acquisition process. Do not wait to meet them after you close the deal.”
Seems fairly easy right?
Let’s take a look at current situation that is stealing the headlines.
A Real World Analysis:
The AT&T / T-Mobile merger that was announced in March of 2011 has been of primary focus for the Department of Justice and Federal Communications Commission.
Background:
In March of 2011, AT&T announced its intention to acquire T-Mobile in a $39 billion dollar deal. This acquisition was thought to combine the competitive forces of two of the top industry leaders. IN an article by engadet.com, the deal was thought to be, “a rosy garden of straightforward synergies thank to a set of complementary network technologies, spectrum operations and operations.” Currently, the market’s leaders include Verizon Wireless, AT&T, Sprint Nextel, and T-Mobile. This acquisition would leave the industry with only three primary leaders. From the beginning, speculation was already surfacing about possible regulatory barriers to seeing the proposed 12 month deal through. In light of speculation, AT&T offered T-Mobile a $3 billion guarantee in case the deal falls through. So while company leaders are optimistic of the possibilities after the acquisition, it looks like the biggest battle will be working through the red tape.
Current Realities for AT&T:
Analysts are calling the AT&T and T-mobile acquisition a “text-book case” of anti-trust law. A critical review by the New York Times quoted a professor of law at the University of Iowa in saying, “It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window. This merger clearly seems to violate them.”
Author, James Stewart, of the New York Times ran an analysis on the Herfnidahl-Hirschman Index using the proposed score of 2,500 to be considered a concentrated industry by the Obama administration. When looking at the index with the merger of AT&T and T-mobile, 96 of the tested 100 markets were above this target. In fact, New York even scaled a 3,335. For the United States, the HHI would be 3,100.
With this in mind, it is no wonder that AT&T is fighting a battle on two fronts: Against the Department of Justice and the Federal Communications Commission.
The purpose of the Department of Justice is to:
“To enforce the law and defend the interests of the United States according to the law; to ensure public safety against threats foreign and domestic; to provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior; and to ensure fair and impartial administration of justice for all Americans.”
The purpose of the Federal Communications Commission is to:
“The Federal Communications Commission regulates interstate and international communications by radio, television, wire, satellite and cable in all 50 states, the District of Columbia and U.S. territories. It was established by the Communications Act of 1934 and operates as an independent U.S. government agency overseen by Congress. The commission is committed to being a responsive, efficient and effective agency capable of facing the technological and economic opportunities of the new millennium. In its work, the agency seeks to capitalize on its competencies in:
The Decision:
As expected, both the DOJ and FCC have filed and blocked the acquisition between AT&T and T-mobile. For a formal review of these initiatives, the following links describe these initiatives and further detail.
An easier interpretation of the reasoning for blocking the acquisition was quoted in the Chicago Sun Times by the Deputy Attorney General James M. Cole in saying:
"The combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services. Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation's wireless carriers, particularly the four remaining national carriers. This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition."
The Assistant Attorney General in charge of the Department of Justice’s Antitrust Division was also quoted saying:
"T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network. Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer."
http://www.justice.gov/css-gallery/gallery-att-tmobile.html
An article posted on Bloomberg’s website mentioned the fact that the FCC was already concerned with the concentration of the wireless market before AT&T even made an announcement of their intentions to take acquire T-mobile. So it comes as no surprise that the FCC announced on November 28th that the merger was not in the public interest.
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1130/DA-11-1955A2.pdf
Next Steps:
AT&T was confidently supported and backed their claim but now seem to be running scared. An article posted by cnet.com posted that AT&T is working to make the deal happen even offering up 40% of T-Mobile’s assets to help calm fears. For now, AT&T has backed off from fighting the FCC and focusing on the current suit against the DOJ and then will move back to the FCC debacle. AT&T’s arguments to support the acquisition include:
It seems AT&T can try to make a good fight for more jobs, but as a consumer it seems the only future would be higher bills. Relating back to the Time Warner case, they are pegged as a possible contender to buy up T-Mobile’s assets in the case that the AT&T T-Mobile does not go through. Stayed tuned to national news as these suits unfold and more decisions are made.
Works Cited:
"About DOJ." August 2011. The United States Department of Justice. 4 December 2011. <http://www.justice.gov/about/about.html>.
Baye, Michael. Managerial Economics and Business Strategy. New York: McGraw-Hill/Irwin, 2010.
"Photo Library." August 2011. The United States Department of Justice. 4 December 2011. <http://www.justice.gov/css-gallery/gallery-att-tmobile.html>.
Dyer, Jeffrey. "When to Ally and When to Acquire." Harvard Business Review. July 2004. 4 December 2011. < http://hbr.org/2004/07/when-to-ally-and-when-to-acquire/ar/1>.
Psarouthakis, John. "How to Acquire the Right Business." Businessthinker.com. 6 November 2010. 4 December 2011. < http://businessthinker.com/how-to-acquire-the-right-business-an-introduction/>.
Reardon, Marguerite. "AT&T and T-Mobile merger madness recap." CNET News. 28 November 2011. 1 December 2011. <http://news.cnet.com/8301-30686_3-57332490-266/at-t-and-t-mobile-merger-madness-recap-faq/>.
Savov, Vlad. "AT&T agreesto buy T-Mobile USA from Deutsche Telecom for $39 billion (update)." Engadget.com. 20 March 2011. 4 December 2011. <http://www.engadget.com/2011/03/20/atandt-agrees-to-buy-t-mobile-from-deutsche-telekom/>
Stewart, James. "Antitrust Suit Is Simple Calculus." The New York Times. 9 September 2011. 4 December 2011. < http://www.nytimes.com/2011/09/10/business/att-and-t-mobile-merger-is-a-textbook-case.html?pagewanted=all>.
"What We Do." Federal Communications Commission. 4 December 2011. <http://www.fcc.gov/what-we-do>.
Multiple Choice Questions:
- Which of the following is the correct equation for the Herfindahl-Hirschman Index?
- A. Sum of squared market shares of firms in a given industry, multiplied by 10,000.
B. Sum of market shares of firms in a given industry, multiplied by 10,000C. None of the above
Answers:
1. A
2. B
3. C
4. C
5. D
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BLOG:
WHY MERGERS FAIL:
The Time Warner merger with AOL has gone down in history as one of the biggest merger failures. To begin understanding what makes a merger fail or succeed, the Time Warner/AOL merger seems like a good example of what NOT to do.
http://www.foxnews.com/story/0,2933,51388,00.html
Additional findings on why mergers commonly fail:
http://www.mid-day.com/lifestyle/2009/sep/030909-Nine-Reasons-Failed-Mergers-IT-Adda-Bangalore.htm
http://knowledge.wharton.upenn.edu/articlepdf/1137.pdf?CFID=74275168&CFTOKEN=40148076&jsessionid=a83041f5bd16a0952f5a78b1c7e165b29295
In light of our current class lecture discussing market concentration and mergers, here is a great article over the AT&T / T-Moble acquisition controversy:
http://news.cnet.com/8301-1035_3-20107511-94/states-join-feds-in-opposing-at-ts-t-mobile-buy/?tag=mncol;txt
http://www.bloomberg.com/news/2011-08-31/u-s-files-antitrust-complaint-to-block-proposed-at-t-t-mobile-merger.html