Effects Of Merger And Acquisition: Analysis Of AT&T And Time Warner Merger

Analysis period

In the globalized business world the merger and acquisitions of big and large entities have become an effective way to achieve economic synergy. Companies are increasingly using the merger strategy to successfully expand their business operations. The merger and acquisitions strategy of AT&T and Time Warner shall be explained here in significant details to understand the effects of merger between the two companies especially on the economic synergies. A detailed analysis along with discussion on the merger and acquisition and its effects on the both the companies shall be helpful to understand the impact of the same on both the companies and their operations.

It is important at the very beginning to outline the time line about the different windows to properly analyse effects of different events on the operations of the two companies. From October 22, 2015 to October 17, 2016 is the estimation window where the stock prices of two companies were influencing due to the speculation about the probable merging of two companies. The event window was from October 18 2016 to October 26, 2016 where the information about the event possible merging was leaked. Post event window is the period October 27, 2016 to October 5, 2018 where the actual effects of merging of the two companies can be assessed and evaluated (Azhagaiah & Sathishkumar, 2014).

In the estimation window the movement of the share prices of AT&T along with the general movement of S&P are documented below:

Date	S&P 500 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	AT&T
Oct-22-2015
Oct-23-2015	1.103160%	-0.647822%
Oct-26-2015	-0.191300%	-0.237092%
Oct-27-2015	-0.255373%	-1.336911%
Oct-28-2015	1.184069%	0.632364%
Oct-14-2016	0.020256%	-0.381000%
Oct-17-2016	-0.303572%	0.127467%

A year prior to the merger, i.e. on October 23, 2015 S&P index moved upward by 1.10% whereas the share prices of AT&T declined by 0.65%. However, immediately prior to the merger i.e. on October 17, 2016 the share prices of AT&T moved slightly upward by 0.13% despite the general downturn in S&P index of 0.30%. The above table indicates that the news of merger of the two companies positively affected the share prices of AT&T.

The movement in the share prices of AT&T has not been in line with the general movement of S&P index. The stock prices of the company in the estimation window has adversely affected with mostly negative movement in the stock prices of the company during the estimation period of a year. In comparison the stock movement of Time Warner however, has been significantly positive during the estimation period. The following table contains the movement of stock prices of Time Warner and the general movement of S&P index during the estimation period (Cartwright & Cooper, 2014).

As can be seen in the above graph that the expected return, abnormal return and cumulative return of AT&T have all been negative during the above period indicating the pessimistic mind-set of investors about the possible merger of two companies (Carletti, Hartmann & Ongena, 2015).

Analysing the slope of the industry, market and intercept shall be helpful in determining the effects of merger news during the estimation and event window on the share prices and return of AT&T. In addition the standard error in the computation and returns are provided in the table below.    

	Industry	Market	Intercept
Slope –>	(0.120911)	0.672816	0.000753
Standard Error –>	0.069833	0.096882	0.000464
R2 –>	0.302933	0.007324	#N/A
F statistic –>	53.670966	247.000000	#N/A
SSxy –>	0.005757	0.013248	#N/A
t-stat	(1.731425)	6.944713	1.623498
Days in estimation window	250	<–  =COUNT(A15:A264)

The market slope is negative with 0.120911 with positive market slope and intercept is a clear indicator of negative implications of merger news on the share prices of AT&T which is also visible in the return and stock prices of the company during the estimation and event window. The standard error is more than acceptable with 0.069833 and 0.000464 respectively for industry and intercept (Bena & Li, 2014).

Time Warner:

Date	S&P 500	TWC
Oct-22-2015
Oct-23-2015	1.103160%	1.020279%
Oct-26-2015	-0.191300%	0.109174%
Oct-27-2015	-0.255373%	-0.613492%
Oct-28-2015	1.184069%	2.976681%
Oct-14-2016	0.020256%	0.188906%
Oct-17-2016	-0.303572%	-0.892517%

A year before the merger the share prices of TWC was moving upwards as is visible in the above table with positive movement in share prices of the company on October 23 and October 26. The increase in share prices by 1.02% and 0.11% respectively despite the decline in S&P index shows that the estimation window does not adversely affect the share prices of TWC. In fact the share prices of the company continued its upward movements immediately before and after the merger of the two companies.

As can be seen that the stock movement of Time Warner (TWC) has been significantly positive during the estimation period as against the negative movement of AT&T. Thus, it is clear that the speculation about the merging of two companies have benefited Time Warner more than AT&T (Bonaime, Gulen & Ion, 2018). Almost opposite to AT&T the expected return, abnormal return and cumulative return from TMW have been mostly positive. The expected positive synergies of possible merging of two companies have positively influenced the return of TWC whereas it has not been the case for AT&T (Aik, Hassan, Hassan & Mohamed, 2015).

Again let’s have the slope and standard error to assess the impact of merger on the stock prices and returns of TWC over the above period:

	Industry	Market	Intercept
Slope –>	1.200381	(0.317005)	0.001255
Standard Error –>	0.071564	0.092588	0.000559
R2 –>	0.649444	0.008796	#N/A
F statistic –>	228.797940	247.000000	#N/A
SSxy –>	0.035403	0.019110	#N/A
t-stat	16.773586	(3.423814)	2.245363
Days in estimation window	250	<–  =COUNT(A15:A264)

The positive slope in the industry with 1.200381 and market slope in the negative with 0.317005 it would not be incorrect to claim that the mood of the industry was quite upbeat during the estimation and event window thus, the share prices of the TWC have also reflected such upbeat mood as the stock prices of the company continuously increase during the above period.

Trading strategies and instruments

Availing the benefit of large scale of operation:

The trading strategies behind the merger of two companies include availing the benefits of large scale of operations. The merger was expected to enable the two companies to avail the large scale economies of operations. TWC and AT&T were expected to improve their ability to operate by using the benefits of large scale operations subsequent to the merger of the two companies.  

Expansion of business operations:

Expansion of business operations subsequent to the Merger of TWC and AT&T was one of the main objectives behind the decision of merger of the two companies. A successful merger will enable the resultant company to expand the business operations by significant margins. However, it was quite clear from the outcomes that the merger of AT&T and TWC did not yield desired results for both the companies.

Economic synergy:

Economic synergy is the excess accumulated value of two companies post-merger over and above the accumulated value of two companies prior to the merger. The table below shows the negative economic synergy of two companies subsequent to the merger is a clear indication of lack of synergy between the two companies.   

	Abnormal returns (AR)	Cumulative abnormal valuations (billion $)
Date	TWC	AT&T	Sum	TWC	AT&T	Sum
Oct-21-2016	7.82%	-3.00%	4.82%	8,500.27	-11,080.42	-2,580.15
Oct-24-2016	-3.06%	-1.68%	-4.74%	6,369.03	-14,956.15	-8,587.11

The movement in the stock prices of the two companies post the merger would enable us to assess the actual impact of merger on the two companies. A detailed discussion on the stock price movements shall be made on the basis of the following graph showing the movement of the stock prices of the two companies (McNichols & Stubben, 2015).

On 26^th October, 2016 the stock prices of AT&T and TWC were $32.76 and $86.17 respectively. Share prices of both the companies continued to grow at a stable rate subsequent to the merger as can be seen from the above graph barring few exceptions when the stock prices took slightly downward turn. However, in general the stock prices of the two companies were continuously growing in general as is visible in the above graph. Thus, a clear indication that the merger influenced the stock prices of both the companies positively. However, it is important to note that the impact of merger will only be for a certain period of time after which it is the performance of the two merged companies that determine the movement in stock prices of two merged companies (Lebedev, Peng, Xie & Stevens, 2015).

The table below contains the stock prices of two companies along with return from the two stocks subsequent to the merger to evaluate the impact of merger on the stock prices and the return of the two merged companies.

Oct-26-2016	2,139.43	-0.174170%	86.17	1.766867%	32.76	-0.735706%
Oct-27-2016	2,133.04	-0.298747%	85.78	-0.450956%	32.84	0.247043%
Oct-28-2016	2,126.41	-0.310728%	84.97	-0.939981%	32.83	-0.027378%
Oct-31-2016	2,126.15	-0.011958%	86.45	1.737739%	33.08	0.766920%
Nov-01-2016	2,111.72	-0.678724%	85.73	-0.831559%	32.87	-0.625167%
Nov-02-2016	2,097.94	-0.652492%	84.79	-1.099150%	32.70	-0.519707%
Nov-03-2016	2,088.66	-0.442346%	84.66	-0.148947%	32.94	0.714890%
Nov-04-2016	2,085.18	-0.166959%	83.95	-0.837635%	32.82	-0.354908%
Nov-07-2016	2,131.52	2.222699%	85.24	1.527425%	33.10	0.849310%
Nov-08-2016	2,139.56	0.377169%	85.36	0.148166%	33.26	0.489015%
Nov-09-2016	2,163.26	1.107464%	84.13	-1.445321%	33.66	1.216543%
Nov-10-2016	2,167.48	0.195087%	83.87	-0.311775%	32.88	-2.323727%
Nov-11-2016	2,164.45	-0.139673%	84.32	0.544430%	32.83	-0.164075%
Nov-14-2016	2,164.20	-0.011432%	84.32	0.000000%	32.49	-1.040807%
Nov-15-2016	2,180.39	0.747875%	86.14	2.154367%	33.06	1.771393%
Nov-16-2016	2,176.94	-0.158133%	86.41	0.315781%	33.40	1.033448%
Nov-17-2016	2,187.12	0.467637%	88.10	1.956155%	33.64	0.699850%
Nov-18-2016	2,181.90	-0.238638%	88.74	0.727754%	33.77	0.400962%
Nov-21-2016	2,198.18	0.746180%	88.95	0.229890%	33.93	0.479250%
Nov-22-2016	2,202.94	0.216275%	89.69	0.840979%	34.66	2.146267%
Nov-23-2016	2,204.72	0.081079%	90.13	0.487377%	34.82	0.466914%
Nov-25-2016	2,213.35	0.391234%	90.54	0.452683%	35.26	1.239365%
Nov-28-2016	2,201.72	-0.525361%	90.64	0.110460%	35.55	0.841609%
Nov-29-2016	2,204.66	0.133585%	90.65	0.010757%	35.50	-0.151750%
Nov-30-2016	2,198.81	-0.265402%	89.59	-1.173170%	34.73	-2.152977%
Dec-01-2016	2,191.08	-0.351440%	91.85	2.526673%	34.96	0.647155%
Dec-02-2016	2,191.95	0.039739%	91.52	-0.361157%	34.72	-0.694455%
Dec-05-2016	2,204.71	0.581751%	91.07	-0.490408%	34.73	0.051821%
Dec-06-2016	2,212.23	0.341333%	91.62	0.599953%	35.38	1.863816%
Dec-07-2016	2,241.35	1.316493%	91.69	0.085204%	36.37	2.795432%
Dec-08-2016	2,246.19	0.215636%	92.25	0.606511%	36.33	-0.098873%
Dec-09-2016	2,259.53	0.593934%	92.91	0.719192%	36.31	-0.074255%
Dec-12-2016	2,256.96	-0.113540%	92.37	-0.588046%	36.97	1.832592%
Dec-13-2016	2,271.72	0.653871%	92.37	0.000000%	37.19	0.583651%
Dec-14-2016	2,253.28	-0.811816%	92.35	-0.021133%	36.95	-0.628613%
Dec-15-2016	2,262.03	0.388436%	93.00	0.707874%	37.31	0.973226%
Dec-16-2016	2,258.07	-0.175010%	92.49	-0.545523%	37.47	0.409658%
Dec-19-2016	2,262.53	0.197506%	92.77	0.295351%	37.87	1.079912%
Dec-20-2016	2,270.76	0.363727%	93.40	0.683641%	38.19	0.830940%
Dec-21-2016	2,265.18	-0.245810%	93.65	0.271593%	38.09	-0.258994%
Dec-22-2016	2,260.96	-0.186419%	94.11	0.489630%	38.41	0.849862%
Dec-23-2016	2,263.79	0.125233%	94.06	-0.051831%	38.42	0.023405%
Dec-27-2016	2,268.88	0.224705%	94.39	0.342288%	38.35	-0.187220%
Dec-28-2016	2,249.92	-0.835343%	93.88	-0.537526%	38.23	-0.304813%
Dec-29-2016	2,249.26	-0.029594%	94.34	0.488471%	38.36	0.329260%
Dec-30-2016	2,238.83	-0.463713%	94.18	-0.165481%	38.24	-0.304742%
Jan-03-2017	2,257.83	0.848719%	94.41	0.238264%	38.68	1.152139%
Jan-04-2017	2,270.75	0.572431%	94.36	-0.051671%	38.46	-0.581141%
Jan-05-2017	2,269.00	-0.077244%	92.78	-1.675110%	38.35	-0.280555%
Jan-06-2017	2,276.98	0.351827%	92.44	-0.357559%	37.58	-1.992407%
Jan-09-2017	2,268.90	-0.354734%	91.27	-1.266490%	37.11	-1.258486%
Jan-10-2017	2,268.90	-0.000210%	91.13	-0.160342%	37.12	0.024521%
Jan-11-2017	2,275.32	0.282799%	91.40	0.299789%	36.94	-0.490084%

The above table contains only the stock prices of two companies and the respective returns from the two stock for a period of two and half months, i.e. from October 26, 2016 to January 11, 2017. The two and half month’s period is significant to understand the possible impact of merger on the stock prices of two companies. It is clear from the above data that the stock prices of both the companies as well as the return from the two stocks have been positively influenced from the merger of the two companies.

However, to the surprise of the investors the huge decline the stock price of TWC on 15^th January, 2018 from $98.77 to $33.15 which is almost a loss of 67% in the share price in a single day is beyond imagination. No such dramatic fall in the share price of AT&T however, has been experienced by the shareholders of AT&T as the stock prices of the company stayed stable even during the period when the stock prices of Time Warner took such dramatic turn. On October 5^th of 2018 the stock prices of TWC and AT&T stood at $33.99 and $33.49 respectively (Rahman & Lambkin, 2015).

The reason for the fluctuation experienced in the stock prices of two companies and especially in the stock price of TWC can be better explained after taking a closer look at the overall movement in the telecom industry in S&P index. The following graph shows the index value of telecom industry in S&P to see whether there has been any such movement in the telecomm industry to justify the huge fluctuation the share price of TWC.

It is clearly visible in the above graph that the telecom industry in S&P index has in fact continued to grow during the above period in when the merger between the AT&T and TWC have taken place. Taking into consideration the general movement of the telecom industry in S&P index it can be certainly claimed that the stock price movement of AT&T and TWC are mainly due to the internal functioning of the company and not a reflection of the general mood of the industry as the industry has continuously grown during the above period. The S&P telecom industry index value was 431.51 on October 22, 2015 which has increased to 521.89 on December 4, 2018. The increase in index value of telecom industry in S&P clearly shows that there have been positive growth in the telecom industry in S&P. Thus, the negative decline in stock price of TWC is not a reflection of the general mood in the industry in the country (Rao-Nicholson, Salaber & Cao, 2016).  

One of the biggest indicator to identify the impact of merger and acquisition is to measure the synergy value of two companies after merger and acquisition. In this case the above discussion clearly showed that the market has not reacted very positively to the new of merger between the two companies as the share prices of the two companies have not increased significantly during the period. Synergy value of the merger of two companies shall provide a clear indication as to the expected benefits or lack of it subsequent to the merger of the two companies. The table below contains the information as to the synergy value of two companies subsequent to the merger (Fich, Nguyen & Officer, 2018).    

	Abnormal returns (AR)	Cumulative abnormal valuations (billion $)
Date	TWC	AT&T	Sum	TWC	AT&T	Sum
Oct-18-2016	0.85%	0.23%	1.08%	355.13	645.81	1,000.94
Oct-19-2016	-0.34%	0.05%	-0.29%	-236.35	117.18	-119.18
Oct-20-2016	4.73%	-1.85%	2.88%	3,057.43	-4,158.26	-1,100.83
Oct-21-2016	7.82%	-3.00%	4.82%	8,500.27	-11,080.42	-2,580.15
Oct-24-2016	-3.06%	-1.68%	-4.74%	6,369.03	-14,956.15	-8,587.11

From the above discussion and analysis it is quite clear that none of the two companies have benefitted from the merger. In fact the inability of the two companies to properly expand the operations of business subsequent to the merger show that both companies have failed to use the option of merger effectively to achieve operational benefits.   

Avoiding adverse price movements:

In case of unexpected down side movement for the long position use of put option by the shareholders will help them to avoid adverse price movements in the stock market. In case of upside movement for the short position use of call option will enable the shareholders to buy shares at a stable price even when the share prices move upward unexpectedly. 

Conclusion: 

As can be seen from the above table that the sum of synergy value of two companies on October 21, 2016, i.e. immediately before the merger, was negative $2,580.15 billion which increased to negative $8,587.11 billion immediately after the merger on 24^th October, 2016 shows that there have been negative synergy of merger. Hence, it is not surprising that the market have not reacted positively to the new of merger before, during and after the event of merger (Dutordoir, Roosenboom & Vasconcelos, 2014).     

It is clear from the above that the merger of AT&T and Time Warner have not yielded the expected benefits for both the companies thus, immediate steps shall be taken to improve the economic synergy between the two companies. Using the technological advancements to implement an effective business strategy shall be helpful for both the companies to achieve their desired objectives in the future.

References:

Aik, N. C., Hassan, M. K., Hassan, T., & Mohamed, S. (2015). Productivity and Spillover effect of merger and acquisitions in Malaysia. Management Research Review, 38(3), 320-344.

Azhagaiah, R., & Sathishkumar, T. (2014). Impact of Merger and Acquisitions on Operating Performance: Evidence from Manufacturing Firms in India. Managing Global Transitions, 12(2), 121.

Bena, J., & Li, K. (2014). Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), 1923-1960.

Bonaime, A., Gulen, H., & Ion, M. (2018). Does policy uncertainty affect mergers and acquisitions?. Journal of Financial Economics.

Carletti, E., Hartmann, P., & Ongena, S. (2015). The economic impact of merger control legislation. International review of law and economics, 42, 88-104.

Cartwright, S., & Cooper, C. L. (2014). Mergers and acquisitions: The human factor. Butterworth-Heinemann.

Dutordoir, M., Roosenboom, P., & Vasconcelos, M. (2014). Synergy disclosures in mergers and acquisitions. International Review of Financial Analysis, 31, 88-100.

Fich, E. M., Nguyen, T., & Officer, M. (2018). Large wealth creation in mergers and acquisitions. Financial Management, 47(4), 953-991.

Lebedev, S., Peng, M. W., Xie, E., & Stevens, C. E. (2015). Mergers and acquisitions in and out of emerging economies. Journal of World Business, 50(4), 651-662.

McNichols, M. F., & Stubben, S. R. (2015). The effect of target-firm accounting quality on valuation in acquisitions. Review of Accounting Studies, 20(1), 110-140.

Rahman, M., & Lambkin, M. (2015). Creating or destroying value through mergers and acquisitions: A marketing perspective. Industrial Marketing Management, 46, 24-35.

Rao-Nicholson, R., Salaber, J., & Cao, T. H. (2016). Long-term performance of mergers and acquisitions in ASEAN countries. Research in International Business and Finance, 36, 373-387.