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Valuation Methodology

The document outlines the valuation methodology used to evaluate the merger between AT&T and Time Warner. It describes how each company was individually valued using financial forecasting and discounting of free cash flows. It then explains how a combined valuation was done incorporating revenue and cost synergies. The value created due to synergies is calculated as the difference between the combined value and the sum of the individual parts.

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Jatin Kalra
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43 views2 pages

Valuation Methodology

The document outlines the valuation methodology used to evaluate the merger between AT&T and Time Warner. It describes how each company was individually valued using financial forecasting and discounting of free cash flows. It then explains how a combined valuation was done incorporating revenue and cost synergies. The value created due to synergies is calculated as the difference between the combined value and the sum of the individual parts.

Uploaded by

Jatin Kalra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Valuation Methodology: The following stepwise procedure has been used to evaluate the

merger.
Both the companies were individually valued.

 The valuation of AT&T has been done before the acquisition using the following
approach
 Sales forecasts were made for the next 6 years. Sales was assumed to grow at the
average growth observed in the last 4 years.
 Cost of services and operating expenses were taken as a fixed percentage of sales.
This percentage was calculated from the average trend of last 4 years.
 EBIT or operating income was achieved after subtracting cost of services and
operating expenses from the revenues.
 CAPEX for each year was forecasted on the basis of CAPEX/Sales ratio of last 4 years.
 Depreciation expense was calculated using last 4 years Dep/Net PPE ratio.
 Change in working capital requirement were projected using average of last 4 years’
change.
 Free Cash Flows to the Firm (FCFF) were calculated using above forecasted data.
 Cost of equity was calculated using CAPM; Regressed Beta on last 5 years was used.
 WACC was calculated using the Debt-to-capital ratio.
 A long term growth rate of 2% was used (U.S. economy). Effective tax rate of 28%
and Marginal tax rate of 34% was used.
 Terminal value was calculated, all the free cash flows were discounted to the present
and the Enterprise value was obtained.
 Value of equity was calculated after subtracting debt and adding back cash and cash
equivalents.
 Similar valuation was done for Time Warner. Acquisition premium is the access
amount which AT&T paid above and over the computed value of Time Warner

Combined valuation using Synergies.

 The procedure to calculate the combined value is same as above barring the
following changes.
 Revenue and cost synergies were incorporated in the model.
 The calculation for Beta was done in the following manner; The Betas of both the
firms were unlevered using the pure-play method. A weighted average unlevered
Beta was calculated by taking the values of the firms as weight. Finally, the levered
Beta for the combined entity was calculated using the debt-to-equity ratio of the
merged entity.
 The value of equity was calculated similarly, but the cash amount which AT&T paid
has been subtracted.
 The difference between this value and the sum of the parts is the value created due
to the synergies.
 To get the net value added or the net integration benefits, we subtract the
acquisition premium and the transformation costs.

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