McCaw Cellular Communications is a cellular telephone pioneer in the United States is faced with a challenging decision regarding the future of the firm. The direction of the company will depend on whether CEOs of McCaw Cellular Communication and AT&T agree on an appropriate price of the company. In order to capture the value of McCaw Cellular Communications, three financial valuation models were developed while taking into account the trends in the industry and potential synergies from the take-over. Valuation Model #1: Comparable Transactions:
As mentioned in the business life cycle section( Exhibit A), cellular companies are in huge demand due to their outstanding growth potential. From the period of October 1989 and September 1991, eleven mergers and acquisitions transaction took place in the cellular industry. Careful analysis of these transactions is required in order to determine the appropriate Value/POP multiple. It is important to mention that these multiples incorporate all four steps of the valuation process (As-Is, Improvements, Synergies, Future Options).
After analyzing the list, it was found that the most appropriate precedent transaction is Bell Atlantic Corp.’s acquisition of MetroMobils CTS for several reasons. First, this transaction was the most recent which will best reflect the mergers and acquisition market condition and the appropriate risk for the cellular industry. Second, similar to AT&T, Bell Atlantic Corp.’s strategy was probably trying to penetrate the wireless industry after realizing that the wireline industry is maturing which was reflected in the relatively high multiple. Furthermore, the hard synergies between the two transactions are probably similar. Bell Atlantic probably used its brand name to utilize cost saving synergies in advertising similar to AT&T’s plan, as well as operational synergies by lowering CAPEX and SG&A costs. Moreover, Bell Atlantic was probably looking to capture revenue synergies through crossing selling of its long distance services similar to AT&T’s strategy. Similarities aside, the differences between the two transactions must be considered. First of all, Mr. Craig McCaw would require a premium for giving up the control of the company that must be incorporated in the multiple (+20). Moreover, McCaw is 5 times as large as MetroMobils CTS in terms of POP which indicates that the scale of the synergies will be magnified relative to its peer (+30). Using this deals’ multiple of $213.04/POP and adding the required adjustments for size (+30) and control (+20) gives the appropriate multiple for this transaction which is 263.04/POP. Therefore, the value of McCaw using this method is 58 million multiplied by 263.04 which yields a valuation of $15.256 billion. Valuation Model #2 – Trading Comparable:
This method does a great job at determining a fair As-Is value for the company based on a certain multiple. In the case of companies in a growing industry, an Enterprise Value multiple with respect to revenues is more appropriate than profits since the majority of the companies in this industry experience negative profits.
A list of comparable cellular companies was created as shown in Exhibit D. It is important to mention that British Telecom was ignored since it is not an American company and AirTouch Cellular was ignored as well due to the lack of information. The Enterprise Value/ Revenue multiple was calculated and plotted for every company as seen in the Exhibit.
As a rule of thumb, the As-Is value of the McCaw is equal to the industry average of 11.93 with adjustments based on the financial, profitability and liquidity of the firm. In the case of McCaw, the firm is a leader in the industry with revenues that surpass its nearest competitor which requires adding a size premium of +0.5 to the multiple. However, McCaw’s debt to equity ratio of 0.95 is extremely higher than the industry average which requires downgrading the multiple by 0.25....