Coursework Example: AT&T and Time Warner Acquisition

2021-07-28 17:55:18
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Carnegie Mellon University
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Course work
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Both AT&T and Time Warner are in the telecommunication industry both operating in the United States of America. The acquisition of Time Warner would ensure that the company is at a very strong position of posting profit in the telecommunication segment. Ideally, a proper research on telecommunication service sector and tough evaluation of AT&T is very important. Therefore, the WACC, FCF, and CAPM including the various growth rates shall be evaluated. Therefore, it will be prudent to conduct an efficient market hypothesis (Downes, 2017). According to analysts, competitors nowadays engage in an efficiency and rational manner aimed at eliminating rival. Essentially, this acquisition is grounded on theory of law rational analysis where the aspect of antitrust has emerged from the 19th Century punitive laws (Downes, 2017). The AT&T and Time warner merger acts like a strategic move that highlights on the current evolution in the world of communications and entertainment.

According to analysts, this deal is very strategic considering the wireless and wired distribution network of the two media stations and the assets that offer a perfect match (Hayes, et al. 2017). However, there are a number of threats that continue to face this merger considering that the consumers might shift to competitors like Verizon that provide a direct satellite TV service (Stern, 2017). According to Financial calculus, this deal is likely to be desired considering the short-term and long-term debts. According to analysts the acquisition is likely to apply a mixture of debt and stock in making the payment for the deal. Therefore, the more debt used by AT&T, the minor the value of stock it will be required to issue (Downes, 2017). However, the higher the value of debt, the higher the cost of borrowing According to NYSE AT&T could pay $120 each share for Time Warner that shall split at the rate of 64% of the new stock and a cash reserve of 42% acquired from borrowing.

Based on previous findings, the AT&T

AT&T offers its services through four different departments. The four various departments includes entertainment, business solutions, international finance and consumer mobility. Currently, the world has more than 40 million customers who continue to adventure the services of audio programming channels, video entertainment, internet and broadband channels offered by the institution (Hayes, et al. 2017). Essentially, Time Warner continues to act as a big player in the entertainment media organization in America and beyond. The organization operates through various divisions; Warner Bros, Tuner and Home Box Office.

The motivation behind the acquisition of Time Warner by AT&T has incorporated an acquisition program that is fast paced in the distribution and programming segment (MAMA, 2010). As indicated in the figure below, Time Warner shall assist AT&T in publishing the various contents through satellites, broadband, TV terminals and mobile phones (Stern, 2017). In essence, AT&T shall offer more value added services unlike the traditional wireless business.

Event Analysis to Test the EMH

AT&T offers its services through four different departments. The four various departments includes entertainment, business solutions, international finance and consumer mobility (Hayes, 2017). Currently, the world has more than 40 million customers who continue to adventure the services of audio programming channels, video entertainment, internet and broadband channels offered by the institution (Hayes, et al. 2017). Essentially, Time Warner continues to act as a big player in the entertainment media organization in America and beyond. The organization operates through various divisions; Warner Bros, Tuner and Home Box Office.

The motivation behind the acquisition of Time Warner by AT&T has incorporated an acquisition program that is fast paced in the distribution and programming segment. As indicated in the figure below, Time Warner shall assist AT&T in publishing the various contents through satellites, broadband, TV terminals and mobile phones (Stern, 2017). In essence, AT&T shall offer more value added services unlike the traditional wireless business.

Theoretically, the Efficient Market Hypothesis dictates that there are various standards that can be applied in ascertaining the extrinsic efficiency of a stock market. Initially, the share price can fluctuate freely or change depending on the present information. Equally, the relevant information concerning securities needs to be disclosed and distributed in equal share so that every investor can attain equal amount of information at equal time (Johnson, & Johnson, 2017). Therefore, this indicates that for an efficient market, the prices of stocks need to reflect on the present information available at the market and not past data. Therefore an EMH that is semi strong indicates that the price reflects on the prevalent information incorporating the not-public information. The volume of the two companies is as indicated below. As indicated at the time of announcement, there is a high volume since there is a high trading activities and the level of acquisition is high because of the high market reaction (Johnson, & Johnson, 2017). The VWAP of these two companies keeps following the price and there is a movement since there is a high technical implication. Generally, the reactions of the announcement date that provides a semi-strong EMH form.

This is achieved through a graphical analysis of the movement in prices where the relative percentage in change of the AT&T share price including Time Warner is highlighted (Pressman, 2017). Therefore, it is paramount to indicate the movement in prices of the various shares that is independent from one another. Therefore, the relative change in price of AT&T shall decrease by a margin of 4.14% as opposed to Time Warners 8% (Pressman, 2017). Essentially, these changes can be attributed to the changes in cash flow of Time Warner and AT&T. In that time period, the relative change in price is attributed to some identical pattern which is associated with the same amount of volatility.

The Figure 1 shows an improved performance in comparison to T. In addition, it is observable that the price of the TWX had an increment around the announcement period, while the purchase price of T showed a downturn around the same period. Apart from that latter observation, there was an increment in the price of T in the ensuing months of December and November. The following section is dedicated to the in-depth analysis of the performance of the motioned companies in the in various periods.

Event Analysis

The Estimation window

As shown in table 1, the highlighted figures show the estimation for the wi8ndows (22-10-2015) to the period 19-10-2016). The figures are the actual ranges of the NYSEs as the real return ranged from -4.3% to 2.5%. For T and TWX, the range of actual return were from -3.6% to 3.1% and -6.6% to 4.7%. The results suggest that TWX is more volatility than T. The variance and standard deviation for them confirm this view. Besides, TWX also represented a better performance then T in terms of average actual return. Regarding expected return, the ranges for T and TWX were narrower as compared with the actual return. It is worth noting that the mean expected return for TWX and T were a bit limited in comparison to the actual measured return. The average anticipated return was similar for TWX and T bearing in mind the T yielded an average of about 0.080% while TWX yielded close to 0.082%. In this case, their average abnormal return is zero. This result confirms EMH that no investor can generate an abnormal return in the market (Mama, 2010). More specifically, EMH states that investors are impossible to beat the market because the market efficiency always make current share prices to reflect all relevant information (Islam and Watanapalachaikul, 2012). In other words, stocks are trading are their fair value on stock exchanges. Hence, investors cannot purchase undervalued shares or sell shares for the added prices. It is therefore evident that the only way to boost returns is to buy stocks that portend more risk. That way the returns will certainly be higher (Mama, 2010).

 

The Event Window

The vent window mainly includes the period (20-10-2016 to 26-10-2016). It is worth noting that this particular report provides for two days before the actual date and three days after the actual date fo announcement. With the market model rT,t=0.000713+0.5rNYSE,t, Figure 2 and Table 2 represent the performance of T during the event windows.

Table 2 and figure2 represent the performance of T during the event windows.

Post-event window

Table 4 Statistic description of post-event window

At the post event window which is (27-10-2016 to 01-10-2017), as shown in Table 4, T and TWX showed a decreased performance when checked against the estimation window period. However, the price of TXW trended upwards. A comparison of the mentioned periods shows that the actual returns for T reduced from 0.079% to 0.051%. Additionally, the returns for TWX reduced from 0.081% to 0.071%. Notably, the anticipated return for them represented adverse results that increased from 0.079% to 0.104% and 0.081% to 0.12% in that order. The results show a negative influence of the announcement on the companies under discussion. The realistic explanation is maybe due to the uncertain nature of the deal.

 

Recommendation and Conclusion

In conclusion, the movement of prices of Time Warner and AT&T indicates that the Efficient Market Hypothesis involves the regression analysis and test of standard error. However, it can be indicated that despite belonging to the efficiency of semi-strong standard error of efficiency the impact of the number of days to the announceme...

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