McCaw Cellular Communications: The At&t/mccaw Merger Negotiation

Introduction

Our case study titled, The AT&T and McCaw merger negotiation, provides us with an opportunity to negotiate the terms of the merger between McCaw cellular and AT&T. McCaw was the largest competitor in the rapidly growing cellular telephone communications industry. AT&T was the dominant competitor in long-distance telephone communications in the United States, and one of the largest corporations. Prior to the negotiations, it had no position in cellular communications.

Brief Insight: McCaw Cellular Communications

McCaw Cellular was a Kirkland, Washington-based wireless provider operating in the largest urban areas under the name Cellular One. McCaw had been one of the first to recognize that cellular (or wireless) communication technology offered consumer incredible conveniences never before dreamed possible in a largely wired nation. In the early 1980s, McCaw realized that communications could occur between people instead of only between locations.

Brief Insight: AT&T

The American Telephone & Telegraph Company, in its later years simply AT&T Corporation, provided voice, video, data, and Internet telecommunications and professional services to businesses, consumers, and government agencies. During its long history, AT&T was at times the world's largest telephone company, the world's largest cable television operator, and a regulated monopoly.

At its peak, it employed one million people and its revenue was roughly $300 billion annually in today's dollars (for comparison, ExxonMobil's 2006 annual revenue was $377.6 billion). In 2005, AT&T was purchased by Baby Bell SBC Communications for more than $16 billion, who then changed its name from SBC to AT&T Inc. The original AT&T Corporation continues to legally exist as a subsidiary of AT&T Inc.

The case in hand talks about AT&T bringing a new form of business in the telecommunications, through Merging with McCaw Cellular Communications naming AT&T wireless.

Risks for AT&T

AT&T’s Possible Financial Risks

• Break up of the offer by a while knight (i.e., someone willing to pay even more than AT&T).

• Sudden run on McCaw’s Stock price due to speculation.

• BT demands a premium greater than the other shareholders.

• AT&T’s stock goes down unexpectedly causing it to issue more shares to reach McCaw’s price and diluting AT&T’s shareholder’s value even more.

AT&T’s Possible Regulatory Risks

• Regulators require the immediate divestiture of crown jewels (for example: LIN, one or more of the top McCaw markets)

• Regulators impose public interest obligations placed on the combined company (for example: offer low cost services to commercially unattractive markets)

• Regulators impute access charges to the AT&T McCaw combination in order to prevent AT&T’s bypass of the traditional local telephone network.

• Regulators prohibit transactions between At&T’s equipment subsidiary and McCaw minimizing the potential for synergies between the two affiliates.

• Regulators prohibit joint marketing of AT&T long distance service and McCaw’s cellular service.

• Regulators prohibit entry into other related markets such as PCS or local telephone service in return for letting the acquisition go through.

Operational Risks

• Craif McCaw and his top managers have difficulty being integrated into the AT&T culture – all want to depart to start their own company to participate in the new PCS market.

• McCaw’s existing network architecture and design does not match AT&T expertise nor does it fit the equipment built by its equipment subsidiary.

• McCaw’s network is at full capacity in all markets requiring AT&T to upgrade all of McCaw’s markets at the same time.

Risks for McCaw

McCaw’s Financial Risks

• AT&T puts a low valuation on the table suggesting protracted negotiations.

• Unexpected market conditions tighten the credit market, increasing McCaw’s