Southern Methodist University TELECOM Mergers & Acquisitions Economical & Technological Effects Case Study : VERIZON & ALLTEL Casey O’Brien & Julianna.

Southern Methodist University

TELECOM Mergers & Acquisitions

Economical & Technological Effects

Case Study: VERIZON & ALLTEL

Casey O’Brien & Julianna LaFerney

Proposed By: Dr. Raed Omar SbeitEMIS Undergraduate Capstone Project

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Project Summary

To analyze the history of mergers and acquisitions using event-study regression models with an emphasis on the effects in the telecommunications industry by using the Verizon and Alltel merger as a case study.

Casey O'Brien & Julianna LaFerney Senior Design Sp '09


History of M&A’s


10 Largest U.S. Telecom Mergers: AT&T/BellSouth - $86 billion (2007) SBC/Ameritech - $56 billion (1999) Bell Atlantic/GTE - $53 billion (2000)

Mega deal formed Verizon AT&T Wireless/Cingular- $41 billion (2004) Sprint/Nextel - $35 billion (2005) Qwest/ US West - $35 billion (2000) WorldCom/MCI - $30 billion (1998) Verizon/Alltel - $28.1 billion (2009) Alltel/private equity - $27.5 billion (2007) SBC/AT&T - $16 billion (2005)


Objectives

Determine the following: Driving forces for M&A’s. Economical & Technological effects of Telecom

M&A’s. Trends with M&A effect on U.S. Economy. Factors contributing to key successes & failures. Effects on Stock Prices, using Event-Study

Regression Models. If this merger was a good decision for Verizon

Wireless to make in terms of profitability

Constraints: US based mergers only.



Driving Forces

More conveniently built infrastructure. Licensing options for mergers and

acquisitions are easier. Mergers and acquisitions offer extensive

networking advantages. Brand value. Bigger client base. Wide array of products & services.



M&A’s: Wealth Motives

Cut down on their expenses. Achieve greater market share & market

control. Diversification. Increased managerial skill or technology. Tax considerations. Fund raising. Increased ownership liquidity. Defense against hostile takeovers.



Telecom Growth

Deregulation. Introduction of sophisticated technologies

Ex. Wireless land phone services Innovative products and services

Internet, broadband and cable services



Input Parameters

Stock Prices (relative to announcement date) 112 days before 30 days after

Correlation of success and failure factors. Different reasons companies chose to

merge.



Event-Study

The basic idea is to observe abnormal stock returns around the time a public announcement takes place, seeing what investor behavior says about expected effects of the announcement.

Abnormal Returns (AR’s) & Cumulative Abnormal returns (CARs) are calculated for the acquiring & target company’s of each merger.

Market Model's Parameters are obtained by OLS regression analysis.

100-day inspection period starting 110 days before the announcement by either the acquiring or the targeted firm (day 0).



Event-Study

Abnormal Return (AR): Difference between the return on the stock

price and the predicted stock price for.... Day Before Announcement of Merger Day Of Announcement of Merger Day After Announcement of Merger

Cumulative Abnormal Return (CAR): 3-day event window from 1 day before to 1day after

the announcement date t0 5-day event window from 2 days before to 2 days

after the announcement date (t0).



Raw Data


DATE TICKER PRC sprtrn RETURNSXRET BXRET RETX vwretd vwretx ewretd ewretx T20080603 VZ 37.36 -0.0058 -0.013 -0.01 -0.011 -0.013 -0.005 -0.005 -0.002 -0.002 -220080604 VZ 36.98 -0.0003 -0.01 -0.011 -0.011 -0.01 -8E-04 -0.001 0.0016 0.0015 -120080605 VZ 38.96 0.0195 0.0535 0.0426 0.0379 0.0535 0.0203 0.0202 0.0146 0.0146 020080606 VZ 38.23 -0.0309 -0.019 -0.001 0.0034 -0.019 -0.027 -0.027 -0.02 -0.02 120080609 VZ 37.94 0.0008 -0.008 -0.006 -0.005 -0.008 -5E-04 -6E-04 -0.008 -0.008 2

T-Stat: This is the test statistic used to challenge the hypothesis that the CAR’s are significantly different from zero. This statistic must be modified to its relevant time period.

The following formula is used to test whether or not the abnormal returns between two different groups of stocks are statistically different from each other.


Outputs


-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

1BEL

T

SBC (ait)

AWE

QWST

WCOM

SBC (att)

FON

VERIZON

CUMULATIVE ABNORMAL RETURN: 3-Day Average


Outputs: Acquirers



Outputs: Targets



Summary

This deal will double Verizon’s debt to about $42,000,000,000, which is obviously not an easy sum to pay back.

The cost of protecting Alltel’s bonds from default has doubled. Refinancing is really difficult now.

Verizon needed to merge in order to remain competitive in the telecom industry. They have taken no. 1 spot as leading provider because of this merger.



Summary

Three out of the four deals exhibited positive changed in net income. This provides us with evidence of a positive impact on the acquirer’s

business. The majority of the acquiring firms experienced increased in both

operation income and net income performance measures which can be warranted by the positive market reaction.

We believe Verizon and Alltel merger was a good decision for Verizon.


Acquiring Firm

Target Firm

Announcement Date

Change in Revenue

Change in Op. Income

Change in Net Income

WorldCom MCI 10/1/1997 13,229.0 -1900.0 -1,458.0

SBC Ameritech 5/11/1998 6383.0 3996.0 4072

Bell Atlantic

GTE Corp. 7/28/1998 2980.0 3154.0 1747.0

Qwest US West 6/14/1999 14367.0 3482.2 763


Southern Methodist University TELECOM Mergers & Acquisitions Economical & Technological Effects Case Study : VERIZON & ALLTEL Casey O’Brien & Julianna.

Documents

abnormal stock returns

history of mergers

eventstudy regression

eventstudy abnormal

verizon wireless

us based mergers

predicted stock price

market models parameters