Wednesday, August 31, 2005

Sale of AT&T Wireless

Glad to see people are reading – Parkite poses a question about whether the sale of AT&T Wireless to Cingular was really in the shareholders’ interest. It’s a good question, and certainly one that a few shareholders asked when the deal was announced. However, in my opinion it was an outstanding deal for the shareholders. I would also note that I’m not going out on a limb with this sentiment – the merger did, of course, go before the shareholders for a vote, and it was overwhelming approved.

Frustration on the part of long-term holders of AWE stock isn’t hard to understand. The stock went public (as a tracking stock) in April 2000 at $29 a share. It peaked in the $30s a couple of weeks later, and never came remotely close again. By the time AT&T Wireless was spun off from AT&T in July 2001, the stock was trading at $16 a share. Telecom in general (and wireless in particular) crashed further in early 2002, as the capital markets dried up and a wave of bankruptcies ensued. Overlaid on top of all of this was the AWE initiative to replace its TDMA technology with GSM, an expensive and at times customer-frustrating initiative. AWE shares fell below $10 a share in early 2002, and went below $4 a share at one point. For most of 2002 and 2003 the stock bounced between $6 - $8 a share.

When the deal with Cingular was signed in February 2004, the $15 per share price represented a premium of more than 100% over where the stock had traded prior to the rumors of the auction process being underway. More importantly, it was a very full price when viewed through the internal modeling work we did to evaluate the company's options. It’s fair to say that many people were stunned to get a price as high as $15 per share.

For shareholders who had bought at the IPO and held, it obviously represented a significant loss. Despite the timing of the company’s life as a stand-alone company (In hindsight, April 2000 was not the best of time to have an IPO), many felt that with snappier execution and decision-making the company could have done far better, perhaps swallowing Cingular or Voicestream and becoming the dominant U.S. wireless carrier. I wish that could have happened. However, looking at the state of the business at the beginning of 2004, it’s hard to imagine a better outcome than the $15 per share Cingular paid. As business managers and owners (as with our personal investments), we always need to look forward, rather than backward. We have to focus on maximizing shareholder value at that particular moment, not based on what could have been done had the business been run more effectively.


Parkite said...

How do you deal with the temptation of tweaking the discount rate or growth rate when trying to justify a buy or sell price? Wouldn't it be relatively easy to fall into the trap of making an adjustment here or there so that your model spit out the price that the acquisition team wants to see?

Josh King said...

Take a look at my earlier posts on objectivity and credibility. You can't afford to look like you're gaming the process, and most senior managers can quickly look at major drivers in a DCF model and ask whether they're consistant with those used in the company's internal long-range plan. They'd better be - the acquisition team will be quickly marginalized or replaced if perceived as driving for deal flow above all else.

Of course, if senior management has "deal fever", they may ask you to change your models as you've described. There will be arguments that the combined company will have a lower risk profile or higher growth rate, thus justifying adjustments to the model. Sometimes those arguments will be valid, but often they won't.