BUSINESS INTEGRATION
Acquisition of Time Warner Inc. by AT&T
Mr. Robert Bunyan
Raghav Chutani
What were the reasons and issues associated with the
acquisition of Time Warner Inc. by AT&T?
Raghav Chutani
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(Spangler)
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Report about Integration between AT&T and Time Warner
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BUSINESS INTEGRATION
Acquisition of Time Warner Inc. by AT&T
Mr. Robert Bunyan Raghav Chutani
What were the reasons and issues associated with the
acquisition of Time Warner Inc. by AT&T?
(Spangler)
Research Proposal Introduction This research project will be investigating the recent acquisition of Time Warner Inc. by AT&T. This is of current interest because of the magnitude of money involved and the antitrust implications of this acquisition. This research assignment informs readers about how consolidations can have adverse effects on consumers. Research Question What were the reasons and issues associated with the acquisition of Time Warner Inc. by AT&T? Methodology
- Forbes, Bloomberg, Washington Post - background and analysis of the
acquisition.
- Business Insider - Financials of the companies
- AT&T News - Projections and statements from the company of the acquisition Anticipated Difficulties Anticipated Difficulties Solutions Different sources might be biased in their political views and have different readings of the same events. Read from a diverse range of sources, considering multiple opinions. The success of the acquisition might be difficult to judge as it hasn’t been a long time since the takeover went through. Look at future predictions as well as criticisms of the same. The type of integration might be hard to judge as the companies are very large with many different subsidiaries. Evaluate main industry of the company by looking at the industries with most revenue. Time Warner Inc. and Time Warner Cable are easily confused by people. Differentiate between Time Warner Cable and Time Warner Inc. in the report.
Report On June 15 2018, AT&T or the American Telephone and Telegraph Company completed the acquisition of Time Warner Inc. for about 85.4 billion US dollars (“AT&T to Acquire Time Warner”). To provide a comparison, the reported sales of AT&T were $160 billion (“AT&T Financials”) and sales of Time Warner Inc were $31 billion in 2017(“Time Warner Financials”). This was one of the largest financial acquisitions in the past decade. When companies acquire other companies or grow externally, it is known as integration. This acquisition is an example of vertical integration. Vertical integration occurs when a company takes over another firm in the same industry but at a different level of production. Here, since Time Warner Inc, owning content producers like CNN, HBO and Warner Bros, was acquired by AT&T, a content distributor through its various platforms, this is an example of backward vertical integration. Backward vertical integration happens when the firm being acquired is at an earlier stage of production than the company taking over. Generally, vertical integrations are considered to be beneficial for companies with lower production costs and more control over the transformation process for a firm. Recently, experts have been taking the position that vertical integrations may decrease competition between firms and hurt consumers (Coy, McLaughlin & Forden). They say that a company can leverage its influence at one stage of production to reduce competition in another. For example, if a company takes over the firm that produces its parts for manufacturing, it might sell the parts at a higher price to other companies in the same industry, decreasing competition. Experts say that a company leveraging its power to reduce competition is a violation of regulatory laws. These anti-trust laws are put in place to increase choices and benefits for consumers. For these reasons, the US Department of Justice filed a civil antitrust lawsuit to block the acquisition in November, 2017 (“Justice Department Challenges AT&T/DirecTV’s Acquisition of Time Warner.”). Later, after a judge approved the acquisition, the DOJ filed an appeal to the decision for which a decision is pending. This decision will be major not just for this particular takeover but also because of the legal precedent it sets for future acquisitions. Some have said that the DOJ’s resistance to the acquisition may be motivated by political reasons instead of regulatory reasons (“How the ATT-Time Warner deal looks to one investor.”). To satisfy the DOJ’s demands, AT&T has formed separate content production and distribution businesses to keep them independent (“AT&T Completes Acquisition of Time Warner Inc.”). A key fact to note is that Time Warner Inc, owning HBO, CNN and Warner Bros, is different from Time Warner Cable which merged with Charter Communications and is now under the brand name Spectrum. AT&T acquired Time Warner Inc, now under the brand name WarnerMedia, not Time Warner Cable (Ariens). AT&T acquired DirecTV, a pay for television service, in 2015 making it the largest pay TV operator in the United States (“AT&T Completes Acquisition of DirecTV”). Since AT&T
acquired 25 million customers through its DirecTV takeover, the acquisition the content- producing Time Warner Inc. seems justified. Through the acquisition, AT&T will own much of the content that it is distributing which will result in lower costs. Rising content costs are becoming a problem for pay TV operators which makes this deal beneficial for AT&T (Trefis Team. “Why AT&T Is Buying Time Warner”). Synergy is the increased profit that a company makes after a merger or acquisition coming from increased revenues and decreased costs. As in figure 1(right), AT&T projects up to $2.5 billion dollars in synergy after 3 years from acquisition, $1 billion from increasing revenues and $1. billion from decreasing costs (“AT&T Completes Acquisition of Time Warner Inc.”). These projections do not come without criticism from economists. They point to their previous acquisition of DirecTV which hasn’t brought in the results AT&T expected. Figure 2 on the right shows that DirecTV has lost about 500,000 satellite subscribers in 2017 instead of the high post-merger growth projections. These acquisitions also lead to a high debt for AT&T; Its debt reached $180 billion after it assumed Time Warner’s debt after the acquisition (Trefis Team. “AT&T-Time Warner Deal: Reviewing The Benefits And Risks”). For Time Warner Inc, the deal is beneficial as being a part of a major content distributor is good for their content production as distribution and placement is ensured. The success of this acquisition cannot yet be seen as the acquisition happened very recently. After most acquisitions, the leadership is changed and some leaders leave. In this acquisition, the CEO of Time Warner Inc, Jeff Bewkes, was kept on in an advisory role. Jeff Bewkes is one of the most important people responsible for Time Warner Inc’s growth. For the payout, for each stock of Time Warner Inc, its shareholders received 1.437 shares in common stock of AT&T and $53.75 in cash (“AT&T Completes Acquisition of Time Warner Inc.”). Conclusion Addressing the reasoning behind the acquisition, it happened because of the benefits perceived by AT&T after acquiring Time Warner Inc like more control of the content production and lower costs. The issues associated with it were the legal anti-trust implications and the decision to let the acquisition go through. These lay the groundwork in the form of a legal precedent for future takeovers of a similar sort. This acquisition can be perceived as one of the most important acquisitions in recent history, the success of which is yet to be seen. Figure 2 Fall in DirecTV subscribers after AT&T takeover (Trefis Team. “Why AT&T Is Buying Time Warner”) Figure 1 Projected Synergy of AT&T and Time Warner Inc.