Financial Analysis of a Hypothetical Merger: Netflix and AT&T

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Finance Term Project
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Table of Contents
Executive Summary..................................................................................................................................3
Company Overview..................................................................................................................................4
Introduction................................................................................................................................................5
Valuation of Bonds and Stocks of the companies................................................................................5
Analysis of Historical Financial Performance and making Projections..............................................7
Analysis of Capital Structure and Weighted Average Cost of Capital for the Companies............12
Determining Bid Price for Netflix...........................................................................................................13
Pest Analysis...........................................................................................................................................14
Conclusion...............................................................................................................................................15
References:.............................................................................................................................................16
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Executive Summary
This report will be made in which two companies will be selected which are listed in the
U.S. or Canadian major stock exchange and there will be hypothetical merger &
acquisition of these two companies that have been taken in the assignment. Focus on
this report will be to show the effect of the financial position of the company along with
the results in relation to the valuation of the stocks and bonds of the two companies.
Two companies that will be taken in the given report are Netflix and AT&T both of which
is related form the field of media and communication. Both the companies are listed in
the US Stock exchange and are its shares are traded in the OTC Market also. Major
factors and aspects relevant for merger and acquisition will be considered in this report
including valuation of financial data including financial market instruments, analyzing
financial data of the company from the available information and financial statements
and conducting a valuation of the two corporate companies taken. This analysis will
focus on the historical financial performance of the two companies that will be taken in
the report and on the basis of the same projections for the financial data of the target
firm will be taken. Analysis on the basis of capital structure and the weighted average
cost of capital for both the companies will also be determined which helps to determine
the bidding price which the acquiring company will offer to the seller company. In this
report, it has been assumed that AT&T would be acquiring Netflix Company thus finally
dissolution of the company Netflix will happen and merger of the same into AT&T.
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Company Overview
Netflix and AT&T are the two companies that have been considered for the merger in
the given report. Both of these companies are listed in the US Stock Exchange and
have origin in the US. Netflix, on one hand, is a leading internet entertainment service
provider having around 151 million subscribers which extend to around 190 countries
worldwide. Netflix provides with several TV Series, Movies, Documentaries in different
languages which can be enjoyed anywhere and anytime with the availability of internet
services. Netflix has it's headquartered in Los Gatos, California and was founded in the
year 1997. The primary revenue for Netflix is by subscriptions taken by various people
around the world to get access to the online content listed in the website or application
of Netflix (media.netflix, 2019). Netflix also has started getting engaged in the
production and distribution of various films and TV series which generates additional
revenue for the company.
On the other hand, AT&T is the company which is engaged in the telecommunication
field and is one of the largest telecommunication companies in the world. Also, AT&T is
engaged in mobile telephone services and fixed telephone services (about.att, 2019). It
is the largest provider of fixed telephone services in the world. The origin of AT&T
Company is from back in 1885 when it was the subsidiary of Bell Telephone Company
which was founded by Alexander Graham Bell. It is a well-settled company having the
main source of income from the provision of telecommunication services all around the
world by providing wireless as well as fixed line services. It should be noted that AT&T
is planning to start the new segment relating to online entertainment which it seeks to
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attain by acquiring Netflix which is already engaged into similar sort of business thus
giving a competitive edge to both the companies in their respective industries.
Introduction
In this report analysis of the proposed merger between the two companies namely
Netflix and AT&T both of which are listed in the US Stock Exchange. Various analysis
has been conducted to determine whether the merger of the two companies is feasible
or not and whether the same will generate improved earnings in the future. The analysis
of the same is made taking into consideration the market prices of shares and bonds
and valuation of the same using financial statements of the companies. The projected
situation of the two companies after the merger in relation to all the stakeholders have
also been considered in the given report. In the case of the proposed merger, it should
be noted that AT&T is taking over Netflix and shareholders of Netflix will be provided
shares of AT&T. All the assets and liabilities of the Netflix will become part of AT&T and
an overview of the merger would be given in this report.
Valuation of Bonds and Stocks of the companies
The valuation of the stocks of Netflix and AT&T can be done either on the basis of the
Net Income of the company or on the basis of the market price of the shares as both the
companies are listed in the stock exchange. By using the net income method following
is the value of shares for both the companies:
Particulars AT&T Netflix
Net Income Available to Common Shareholder (In
Millions)
19,370.
00
1,211.2
0
Current Outstanding Shares (In Millions) 7,281. 436.6
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60 0
Value of Share
2.
66
2.
77
Thus it indicates that the value of the shares based on the Net Income of the company
is almost equal for both the companies.
However if the market price of the shares are considered then in that case following
results can be seen:
Particulars AT&T Netflix
Market Capitalization (In Millions)
$
234,563.79
$
153,307.23
Shares Outstanding (In Millions)
$
7,281.63
$
436.60
Value of Share
$
32.21
$
351.14
Thus it can be seen that the market value of AT&T is lower in comparison to Netflix so
the shareholders of Netflix will get more shares from the AT&T Company for each share
held by them. It is also proposed to use Market value to compute the value of shares of
the respective companies as it shows the better picture of the listed companies in
comparison to other methods.
It should also be noted that bonds have been issued by both the companies and the
current value of bond for Netflix is $ 109.30 at the coupon rate of 5.8750% and Yield of
3.70%. The number of bonds issued by AT&T is 196000 and giving the coupon rate of
9.455% giving coupon payment 2 times in a year.
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Analysis of Historical Financial Performance and making Projections
In Millions of USD except Per Share AT&T Netflix
12 Months Ending 12/31/2018 12/31/2018
Market Capitalization 234,563.8 153,307.2
Revenue 170,756.0 15,794.3
Net Income (Losses) 19,370.0 1,211.2
It can be seen that the market capitalization of the company AT&T is much more in the
previous years in comparison to Netflix. Also, revenue generation and net income of
AT&T exceeds Netflix based on the historical financial performance.
On the Basis of Cash Flows in the two Companies
In Millions of USD except Per Share AT&T Netflix
12 Months Ending 12/31/2018 12/31/2018
Cash from Operating Activities 43,602.0 21.6
Cash from Investing Activities -63,145.0 -244.7
Cash from Financing Activities -25,989.0 5.6
Net Changes in Cash -45,532.0 -217.8
Cash Paid for Taxes - 28.9
Cash Paid for Interest - 19.0
It can be seen that cash flow from operating activities in AT&T is much more than
Netflix. However, the cash outflow from investing and financing activities has been
much more thus affecting the overall change in the cash flow of the company.
On the basis of Assets and Liabilities
In Millions of USD except Per Share AT&T Netflix
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12 Months Ending 12/31/2018 12/31/2018
Total Noncurrent Assets 480,437.0 16,280.3
Total Assets 531,864.0 25,974.4
Total Noncurrent Liabilities 273,560.0 14,248.3
Total Liabilities 337,980.0 20,735.6
Total Equity 193,884.0 5,238.8
It can be seen that overall assets and liabilities of the AT&T Company is much more
than Netflix. Thus the historical balance sheet position of AT&T is more appreciated
then Netflix in terms of figures.
On the Basis of Returns and Profitability
In Millions of USD except Per Share AT&T Netflix
12 Months Ending 12/31/2018 12/31/2018
Return on Common Equity 11.93 27.46
Return on Assets 3.97 5.38
Return on Capital 7.78 12.67
Return on Invested Capital 4.83 12.87
Gross Margin 53.49 36.89
EBITDA Margin 31.93 10.69
Operating Margin 15.28 10.16
Incremental Operating Margin 60 18.69
Pretax Margin 14.57 7.77
Net Income Margin 11.34 7.67
Div Payout Ratio 72.81 0
Sustainable Growth Rate 3.24 27.46
It can be seen that in the past both the companies were earning profits but only AT&T
was distributing a dividend to its shareholders. Netflix was not paying a dividend to its
shareholders and the gross profit margin of the same is also less than the AT&T
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Company. However, it can be seen that the net income margin of Netflix is not touching
the benchmark as the company would have liked to increase the same. The same might
get increased if the company will merge into AT&T as it will give a competitive edge and
the overall net profit margins and other margins of the amalgamated company will
increase compared to the individual company.
Thus it can be projected that it is estimated that the assets and liabilities of the AT&T
Company will increase significantly once the merger of Netflix happens with AT&T. Also,
it should be noted that the merger will give the advantage to AT&T Company as the
same will diversify its business to online social content which will help to develop a new
line of business for AT&T thus advantaging the company in long term. Also, it is
estimated that the profit margin for the company is also expected to increase by the
proposed merger and acquisition.
Analysis of Capital Structure and Weighted Average Cost of Capital for the
Companies
Particulars AT&T Netflix
Weighted Average Cost of Capital 6.16% 12.17%
Equity 193884 5238.80
Long Term Debt 166250 10360.10
Debt Equity Ratio 0.857471478 1.9775712
It can be seen that AT&T is having the weighted average cost of capital of 6.16%
whereas the WACC of Netflix is 12.17%. This specifies that the risk in Netflix is
significantly higher in comparison to AT&T as the WACC is almost double than AT&T.
The WACC depicts the overall cost that is estimated for all kinds of financing in the
company (Vaidya, 2019). It is beneficial for companies to determine the WACC as there
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are several sources of funding for the listed companies and it gives an overall view to
the stakeholders.
The above table also signifies the capital structure of the two companies. AT&T consists
of more of equity portion then the debt portion. The debt-equity ratio of the company is
less than 1 which signifies that the financial leverage of the company is low thus a good
indication for the company (corporatefinanceinstitute, 2019). On the other side, Netflix
has a debt portion more in comparison to equity thus depicting high financial risk and
leverage for the company. The debt-equity ratio of the company is also more than 1.
Thus it can be seen that in comparison to AT&T, Netflix has more financial leverage and
risk thus the merger of the two would compensate and bring the capital structure to an
acceptable level.
Determining Bid Price for Netflix
Bid price can be defined as the price which the prospective buyer is ready to offer to
acquire the seller company. Calculation of the bid price is a complex and technical
matter and can be calculated by way of various techniques like enterprise value, equity
value, etc. In the case of equity value the market price of the shares of the company are
calculated and the same is taken into consideration for the shareholders of the company
(Leonard, 2019). Also, the bid price can be calculated based on the intrinsic value of the
net assets of the company.
In the given case as AT&T is proposing to take over Netflix thus AT&T would offer bid
price to shareholders of Netflix. Generally, the determination of bid price is a complex
matter as many factors are to be considered before determining the same. Also, there is
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a process of negotiations that take place before the finalization of the bid price. The bid
price for the share can be determined by the market price of the shares in addition to
other relevant factors or cost which might be important to include in offering bid price. It
can be seen that the market price of Netflix's share is $ 351.14 which means that each
shareholder of Netflix would be given an equivalent number of shares of AT&T along
with any other cost which might be included in the shares. Thus it is generally seen that
the bid price of the share not less than the market price except in extraordinary
situations.
Pest Analysis
Pest analysis is the analysis of the political, economic, social and technical matters
which might affect the company. PEST analysis is conducted before any proposed
merger as it specifies the effect of factors on the merger. The AT&T will have to look at
all the macro factors which might get the merger affected and its effect on the merger.
Netflix, on the other hand, has to conduct PEST analysis so as to check whether there
are any tax obligations or any other obligations which might affect the company (Frue,
2019). Generally, a merger of the two companies affects the political and social aspect
by way of tax regulations and caste, culture, etc. It is considered to be the necessity for
any company before taking the step for business expansion.
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Conclusion
Thus to conclude it can be said that the report specifies the financial position and
performance of the company. The proposed merger of Netflix and AT&T will benefit
both the companies and its stakeholders as it is estimated that the same would give a
competitive edge in the industry. For making the analysis in the report the use of various
figures, assumptions and information has been taken. The merger is expected to be a
success after analyzing the same in the above report however the uncertainty prevails
as the same is related to the future.
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