Acquisition of McCaw Cellular Case Study Solution
The case introduces AT&T, a company engaged in providing telecommunication services to the customers available in the U.S market, headquartered in Downtown Dallas, Texas. Its roots could be traced back to Bell telephone firm established by Graham bell. Furthermore, it can be evaluated that, the company had seen significant growth over the years, after its establishment. Moreover, the case illustrates that, in 1992 Robert E Allen, the former CEO of AT&Tappointed CFO Alex Mendel to head company’s expansion through acquisition efforts in the wireless communication industry. However, Mendel focused on the tremendous opportunities present in the form of McCaw cellular potential partnership. Where, McCaw was recognized as a dominant competitor in long-distance wireless telecommunication industry. Therefore, the senior management of AT&T were faced with a tough decision of how to acquire McCaw, and how to evaluate the company. Hence, the company’s management should develop effective valuation methodologies to ascertain the enterprise value of McCaw Cellular. Which, in turn, would enable AT&T to effectively enhance its appeal in the market by targeting the wireless telecommunication industry’s customers, and expanding its reach to Europe and other parts of the world. Which could allow them, to gain and maintain sufficient share of the market, ensuring their long-term survival by staying technologically relevant in the telecommunication industry.
Assumptions
Certain assumption were taken for simplicity that,is comparable company’s valuation analysis, and there would be no Cash & cash equivalent for the year 1991. Additionally, for Vanguard cellular acquisition transaction of Palmer communication (ME) and (NH), it was assumed that, an additional enterprise value would be added to Vanguard amounting to $400,000 and it would remain the same after acquisition under both cases, with respect to precedent transaction valuation analysis.
Valuation Analysis
It can be evaluated from the case and the data provided in the case that, with respect to seller perspectives McCaw cellular was valuated under three different valuation methodologies, known as DCF valuation analysis, comparable company’s valuation analysis and precedent transaction analysis. Which enabled us to determine, the enterprise value of the organization under the first two analysis conducted. However, the third analysis was used to assess the precedent transaction of different organizations acquiring various companies, to ascertain their transactions EV/Revenues and EV/net income. In which, the enterprise value was increase by the amount of acquires companies value. Therefore, three valuation analysis are illustrated below.
1. Discounted Cash Flows Analysis
Under discounted cash flow valuation analysis.Firstly the weighted average cost of capital was estimated by attaining the cost of equity and debt, their respective weights in the total value of equity and debt. Through which, the WACC could be calculated amount to 14.80%. This cost of capital at 14.80% would be used to discount the cash flows of McCaw cellular over the years;
Through the General formula,
(1+r)^-n
Where r= the cost of Capital
& n= No. of years
Furthermore, it was assessed that, the net income of cellular was negative in the year 1989 and 1991 at $297,329 and $153,295 respectively, while the terminal growth rate was calculated by taking an average of the industrial growth rate spread between the years 1990-1991, at 34.97%. Moreover, the net income of McCaw were used as its relevant cash flow for the year, where it was evaluated that due to non-profitability, the company did not make any capital investments. Then the relevant cash flows would be discounted at 14.80%, discount factor to determine the present value of the cash flows generated between the years 1989-1991. In addition to this, it was estimated that, the net present values of the cash flows amounted to a negative $58,714.10. However, the terminal value of the organization was calculated using the formula;
(Last year FCF*(1-terminal growth rate)/ (WACC-Terminal Growth rate)
Where, the 34.97% terminal growth rate was used, calculated earlier. Which would enable us to determine the terminal value of McCaw cellular at $748,163. Which would make the enterprise value of the organization amount to $6.91 million. Therefore, it can be evaluated under discounted cash flow valuation analysis that, the board of directors of McCaw cellular should only consider acquisition or partnership bids from AT&T with respect to their company, at no lesser than $6.91 million, as the enterprise value of McCaw cellular was estimated at $6.91 million.
Acquisition of McCaw Cellular Harvard Case Solution & Analysis
2. Comparable Companies Valuation Analysis
Under the comparable companies valuation analysis, the enterprise value of every company in the comparable companies excel exhibit was calculated through this formula;
(Cap rate per share*shares outstanding)+Long-term debts of each company. In which, it was assumed that, there would be no cash & cash equivalent for the comparable companies. The enterprise value of McCaw cellular amounts to $5.42 million. Hence, it can be recommended to its Board of directors under comparable companies Valuation that, they should not accept any bid, whether for acquisition of partnership lessor then $5.42 million........................
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