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.