Case study
SBC and AT&T

Assessing the Gains from a Merger

SAN ANTONIO, TEXAS and BEDMINSTER, NEW JERSEY, Jan. 31, 2005 — SBC Communications Inc. and AT&T announced today an agreement for SBC to acquire AT&T, a combination that creates the nation's premier communications company with unmatched global reach.

The transaction combines AT&T's global systems capabilities, business and government customers, and fast-growing Internet protocol (IP)-based business with SBC's extraordinary local exchange, broadband and wireless solutions. Both companies have common values focused on customer service, innovation and reliability.

Under terms of the agreement, approved by the boards of directors of both companies, shareholders of AT&T will receive total consideration currently valued at $19.71 per share, or approximately $16 billion.

AT&T shareholders will receive 0.77942 shares of SBC common stock for each common share of AT&T. Based on SBC's closing stock price on Jan. 28, 2005, this exchange ratio equals $18.41 per share. In addition, at the time of closing, AT&T will pay its shareholders a special dividend of $1.30 per share. The stock consideration in the transaction is expected to be tax-free to AT&T shareholders.

The acquisition, which is subject to approval by AT&T's shareholders and regulatory authorities, and other customary closing conditions, is expected to close by the first half of 2006.

"Renew America's leadership in communications technology"

"Today's agreement is a huge step forward in our efforts to build a company that will lead an American communications revolution in the 21st century," said Edward E. Whitacre Jr., SBC chairman and chief executive officer.

"The combination of these two strong, complementary companies will ensure that together we will have all the capabilities necessary to compete successfully in serving a broad range of customers across the country and around the globe," said David W. Dorman, AT&T chairman and chief executive officer. "Together, SBC and AT&T will be a stronger U.S.-based global competitor capable of delivering the advanced network technologies necessary to offer integrated, high-quality and competitively priced communications services to meet the evolving needs of customers worldwide."

Complementary, World-Class Assets

SBC and AT&T have highly complementary world-class assets and industry-leading capabilities.

<>AT&T brings to the combined company the world's most advanced communications network to meet the sophisticated data communication needs of large businesses with multiple locations. Beyond its network capabilities, AT&T has complementary assets that will allow SBC to bring a full range of innovative voice and data services to customers around the world. These include a broad, high-end enterprise customer base, proven sales expertise in complex communications solutions, and an advanced product portfolio including a broad range of IP-based services. In addition, AT&T has the world's premier communications research organization, AT&T Labs, which has more than 5,600 patents, issued or pending, worldwide.

Financial Expectations

SBC and AT&T expect the proposed transaction will yield a net present value of more than $15 billion in synergies, net of the cost to achieve them. The synergies ramp quickly with a net annual run rate of $2 billion or greater beginning in 2008.

Almost all of the synergies will come from reduced costs over and above expected cost improvements from the companies' ongoing productivity initiatives. Nearly half of the total net synergies are expected to come from network operations and IT, as facilities and operations are consolidated. Approximately 25 percent are expected to come from the combined business services organizations, as sales and support functions are combined. About 10 to 15 percent of the synergies are expected to come from eliminating duplicate corporate functions. Approximately 10 to 15 percent of expected synergies come from revenues, as the combined company migrates service offerings to new customer segments.

SBC has also taken a conservative approach modeling expected AT&T revenues. AT&T's revenues have declined over recent years as it has transitioned from a voice long distance business to an emphasis on business and data markets, and those declines are expected to continue. At the same time, AT&T's next-generation IP and e-services revenues grew 11 percent in 2004.

SBC expects the acquisition will slow its revenue growth rate in the near term following closing. New revenue opportunities include expanded wireless sales in the enterprise space and taking AT&T's industry-leading portfolio of enterprise IP-based services down market to small business and residential customers.

SBC expects the transaction will be cash flow positive in 2007 and earnings per share positive in 2008 — both growing in the years thereafter. Positive cash flow from the acquired business is expected to provide additional financial flexibility for SBC over the next several years.

AT&T currently has approximately $6 billion in net debt and SBC has $26 billion, excluding debt at Cingular Wireless. SBC expects free cash flow after dividends from the combined companies to provide the flexibility to continue to reduce combined debt levels over the next five years while providing excellent cash returns to stockholders.

[from SBC press release]


1. What is the nature of the gains from merging identified in this press release? What are the gains worth, in present value terms?
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Copyright ©2005 Ian Giddy. All rights reserved.