Besides this past year's megadeal between beer companies SABMiller (SAB) and AB InBev (BUD), activity in mergers and acquisitions (M&A) have been slow of late. Yet today the financial news media is abuzz with the announced merger deal agreed to by global giants AT&T (T) and Time Warner (TWX), reportedly one of the most valuable takeovers in U.S. history.
In terms of AT&T buying out Time Warner's stock, the deal is worth over $85 billion based on a 20% premium over the current TWX share price. Including absorbing the company's debt, it's valued at $108.7 billion.
By adding Time Warner's cable TV assets and Warner Bros. studios, AT&T is pursing a vertical integration that not only grows its media and telephony business, but makes it both a creator and distributor of content. This follows AT&T's acquisition of DirecTV for $48 billion last year.
AT&T, founded in 1885, is not only seeking one of the largest mergers in corporate history by taking over Time Warner, but also would control a multimedia empire of unprecedented scale. Whereas horizontal mergers tend to create juggernaut monopolies in a single industry, vertical integration frequently offers an economic benefit throughout the supply chain due to cost synergies and economies of scale.
There have been some suggestions that Apple (AAPL) was also involved in the bidding, but Time Warner CEO Jeff Bewkes disputed this notion. Apple is notorious for using vertical integration to its benefit.
Skepticism from Regulators
The prospect of the biggest media company ever is a concern to regulators. Despite appeals to the fact that other vertical integration mergers have passed more often than horizontal mergers, the size and scope of the acquisition—especially one with such a large impact on entertainment—is what worries Congress and the FCC.
As it stands, the likelihood that the deal is approved by federal regulators is roughly equal to the chance that it gets shot down. Some experts had to admit that regulatory approval is only a 50/50 proposition at the moment.
The divided political culture in Washington does help the deal's chances of passing regulatory scrutiny. It any event, the approval process will likely drag out more than a year.
Wall St Financing
While consumers, lawmakers, and the general public seem skeptical about the AT&T/Time Warner deal, Wall St is all-in behind the merger. These banks do, however, assume the risk associated with the deal falling through due to the red tape of regulations.
Already, it appears the Wall St banks have pledged $40 billion to help cover any financing gap involved in the deal; JPMorgan (JPM) will put up $25 billion of the loan while Bank of America (BAC) will cover the difference.
Though smaller by comparison, on any other day the report that trading platform Scottrade, Inc. is being acquired for $4 billion would be big news. The financial services firm will be bought by Toronto-Dominion Bank (TD) and its subsidiary TD Ameritrade.
In international news, the Chinese firm HNA Group has purchased a 25% stake in hotelier Hilton (HLT) for $6.5 billion. The deal includes a 15% premium over Hilton's current stock price and is expected to be closed during Q1 2017.
In the manufacturing sector, avionics giant Rockwell Collins (COL) will purchase B/E Aerospace (BEAV) for $6.4 billion.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.