TELECOM Mergers & Acquisitions
Economical & Technological Effects
Case Study:
VERIZON & ALLTEL
Southern Methodist University
Casey O’Brien & Julianna LaFerney
Proposed By: Dr. Raed Omar Sbeit
EMIS Undergraduate Capstone Project
Project Summary

To analyze the history of mergers and
acquisitions using event-study regression
models with an emphasis on the effects in
the telecommunications industry by using
the Verizon and Alltel merger as a case
study.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
History of M&A’s
10 Largest U.S. Telecom Mergers:
 AT&T/BellSouth - $86 billion (2007)
 SBC/Ameritech - $56 billion (1999)
 Bell Atlantic/GTE - $53 billion (2000)
 Mega deal formed Verizon
 AT&T Wireless/Cingular- $41 billion (2004)
 Sprint/Nextel - $35 billion (2005)
 Qwest/ US West - $35 billion (2000)
 WorldCom/MCI - $30 billion (1998)
 Verizon/Alltel - $28.1 billion (2009)
 Alltel/private equity - $27.5 billion (2007)
 SBC/AT&T - $16 billion (2005)
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Objectives

Determine the following:
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Driving forces for M&A’s.
Economical & Technological effects of Telecom
M&A’s.
Trends with M&A effect on U.S. Economy.
Factors contributing to key successes & failures.
Effects on Stock Prices, using Event-Study
Regression Models.
If this merger was a good decision for Verizon
Wireless to make in terms of profitability
Constraints:

US based mergers only.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Driving Forces
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More conveniently built infrastructure.
Licensing options for mergers and
acquisitions are easier.
Mergers and acquisitions offer extensive
networking advantages.
Brand value.
Bigger client base.
Wide array of products & services.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
M&A’s: Wealth Motives

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Cut down on their expenses.
Achieve greater market share & market
control.
Diversification.
Increased managerial skill or technology.
Tax considerations.
Fund raising.
Increased ownership liquidity.
Defense against hostile takeovers.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Telecom Growth

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Deregulation.
Introduction of sophisticated technologies
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Ex. Wireless land phone services
Innovative products and services

Internet, broadband and cable services
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Input Parameters

Stock Prices (relative to announcement date)
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112 days before
30 days after
Correlation of success and failure factors.
Different reasons companies chose to
merge.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Event-Study


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The basic idea is to observe abnormal stock
returns around the time a public announcement
takes place, seeing what investor behavior says
about expected effects of the announcement.
Abnormal Returns (AR’s) & Cumulative Abnormal
returns (CARs) are calculated for the acquiring & target
company’s of each merger.
Market Model's Parameters are obtained by OLS
regression analysis.

100-day inspection period starting 110 days before the
announcement by either the acquiring or the targeted firm
(day 0).
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Event-Study

Abnormal Return (AR):
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Difference between the return on the stock
price and the predicted stock price for....
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Day Before Announcement of Merger
Day Of Announcement of Merger
Day After Announcement of Merger
Cumulative Abnormal Return (CAR):
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3-day event window from 1 day before to 1day after
the announcement date t0
5-day event window from 2 days before to 2 days
after the announcement date (t0).
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Raw Data
DATE
TICKER PRC
20080603
VZ
37.36
20080604
VZ
36.98
20080605
VZ
38.96
20080606
VZ
38.23
20080609
VZ
37.94
sprtrn
-0.0058
-0.0003
0.0195
-0.0309
0.0008
RETURNSXRET
-0.013 -0.01
-0.01 -0.011
0.0535 0.0426
-0.019 -0.001
-0.008 -0.006
BXRET
-0.011
-0.011
0.0379
0.0034
-0.005
RETX
-0.013
-0.01
0.0535
-0.019
-0.008
vwretd
-0.005
-8E-04
0.0203
-0.027
-5E-04
vwretx
-0.005
-0.001
0.0202
-0.027
-6E-04
ewretd
-0.002
0.0016
0.0146
-0.02
-0.008
ewretx
-0.002
0.0015
0.0146
-0.02
-0.008
T
-2
-1
0
1
2
T-Stat: This is the test statistic used to challenge the hypothesis that the
CAR’s are significantly different from zero. This statistic must be
modified to its relevant time period.
The following formula is used to test whether or not the abnormal returns
between two different groups of stocks are statistically different from
each other.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Outputs
5.00%
CUMULATIVE ABNORMAL RETURN: 3-Day Average
0.00%
BEL
1
-5.00%
T
SBC (ait)
AWE
-10.00%
QWST
WCOM
SBC (att)
-15.00%
FON
VERIZON
-20.00%
-25.00%
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Outputs: Acquirers
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Outputs: Targets
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Summary

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This deal will double Verizon’s debt to
about $42,000,000,000, which is obviously
not an easy sum to pay back.
The cost of protecting Alltel’s bonds from
default has doubled. Refinancing is really
difficult now.
Verizon needed to merge in order to remain
competitive in the telecom industry. They
have taken no. 1 spot as leading provider
because of this merger.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09
Summary

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Acquiring
Firm
Target Firm
Announceme
nt Date
Change in
Revenue
Change in
Op. Income
Change in
Net Income
WorldCom
MCI
10/1/1997
13,229.0
-1900.0
-1,458.0
SBC
Ameritech
5/11/1998
6383.0
3996.0
4072
Bell Atlantic
GTE Corp.
7/28/1998
2980.0
3154.0
1747.0
Qwest
US West
6/14/1999
14367.0
3482.2
763
Three out of the four deals exhibited positive changed in net income.
This provides us with evidence of a positive impact on the acquirer’s
business.
The majority of the acquiring firms experienced increased in both
operation income and net income performance measures which can
be warranted by the positive market reaction.
We believe Verizon and Alltel merger was a good decision for
Verizon.
Casey O'Brien & Julianna LaFerney
Senior Design Sp '09