Valuation of AirThread Connections:

Current State

Background Information:

American Cable Communications (ACC) is one of the largest cable operators in the United States. ACC’s current 2007 consolidated revenue and net income projections are $30.9 billion and $2.6 billion, respectfully. The cable industry is rapidly changing and is expected to become monopolized by a handful of very large competitors in the near future; this is due to industry consolidation where the smaller companies will eventually be weeded out. For this reason, combined with the rapidly increasing cost of acquiring new customers and the high penetration rates in video and high speed internet, Robert Zimmerman, senior vice president of business development for ACC, has determined that the only path for sustainable growth is through additional acquisitions. Robert Zimmerman is currently considering an acquisition proposal from Rubinstein & Ross (R&R), a boutique investment bank that has experience in doing deals within the media and telecommunications sector. The proposal is for ACC to buy out AirThread Connections, a large regional cellular provider.

Current Issues and Considerations:

  • Advancements in technology, changes in regulation, and shifts in competitive dynamics have been driving large investments in network infrastructure among firms in the cable industry. For leading cable operating firms to utilize the new capacity, they must achieve economies of scale and expand their customer bases. The fundamental way to achieve economies of scale in the cable industry is through extensive, disciplined consolidation. Recognizing this, ACC should consider securing as many acquisitions as possible; given that they have positive intrinsic values on their operations.

 

  • It is also very important that ACC will be able to finance the acquisition with a debt to value ratio as high as 45% to 50%. By heavily leveraging the firm, AirThread will have a lower EBT and will pay less in taxes.

 

  • ACC does not currently offer any wireless services, leaving a gap in its product offering. Additionally, advanced wireless networks based on 802.16n for mobile WiMAX are entering the market which is a looming threat to ACC. ACC’s inability to offer bundles that include both wireless and cable services is also effecting their ability to enter the business market . Robert Zimmerman should consider the synergies that can be obtained through acquiring AirThread Connections. By securing AirThread Connections, ACC will be able to fill current gaps in its product offering and break into new geographical and segmented markets, farther helping the company achieve economies of scale.

 

  • AirThread Connections is also experiencing a number of issues which should be considered by ACC. AirThread, a company that offers only wireless services, is unable to bundle its services with other offerings such as landline telephony, internet access, and video services—all services that are offered by ACC. With AirThread being able to utilize ACC’s cables, the company would be able to cut down on backhaul costs by more than 20%. This allows for ACC to improve the bottom line of the already-profitable company. Again, by being able to focus on the potential synergies of the acquisition, ACC can make a better informed decision on whether the intrinsic value of the merger will be positive or not.

 

  • Due to AirThread’s unfavorable market position, the company’s long-term success is extremely unlikely. This should be considered by ACC as it gives them bargaining power in the potential acquisition.

Conclusion Based on Current State Evaluation:

After analyzing the current state of AirThread Connections, ACC has determined that the cost advantages, potential synergies, and the state of the cable industry all warrant an acquisition of AirThreads. It is recommended that a comprehensive analysis of the company’s future projections should be carried out to ensure a justified acquisition.

 

Financial Statement Analysis Ratios (Airthread Connections 2007):

Ratio Calculation Equals Explanation
 

Current Ratio

 

833.8/604.2

 

1.38

Measures ability to pay current liabilities with current assets
 

Acid Test Ratio

 

(204.5+16.4+435.5)/604.2

 

1.09

Shows ability to pay all current liabilities if they come due immediately
 

Inventory Turnover

 

640.2/101.0

 

6.34

Indicates saleability—the number of times a company sells its average inventory level during a year
 

 

Days’ Sales in Receivables

 

 

[(407.4+435.5)/2]/(3946.3/365)

 

 

39.0

Shows how many days’ sales remain in accounts receivable—how many days it takes to collect the average level of receivables
Debt Ratio 2372.2/5611.9 0.42 Indicates percentage of assets financed with debt
 

Times Interest Earned

 

451.1/84.7

 

5.33

Measures the number of times operating income can cover interest expense
 

Return on Net Sales

 

314.7/3946.3

 

0.08

Shows the percentage of each sales dollar earned as net income
Return on Total Assets (314.7+84.7)/5646.25 0.071 Measures how profitably a company uses its assets

 

 

 

 

 

 

Professor mark:

35/40 for clarity of relevant issues and questions to be asked.

 

30/40 for importance/priority of identified issues

 

17/20 grammar style and quality of written document