Valuation of AirThread Connections – Case Solution

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Valuation of AirThread Connections Case Answers

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Executive Summary – Valuation of AirThread Connections

American Cable Communications is one of the largest companies in the cable industry. The company realizes the importance of business consolidation in order to be compatible with the entire industry. It is planning for the acquisition of AirThread Connections, a regional cellular provider.

As the market develops, a challenge American Cable faces is that it does not provide wireless service compared to other fast-developing firms. Business acquisition is one of American Cable’s operating strategies it has been using to expand its business.

As American Cable acquires more companies, its management team gains substantial experience and expertise in recognizing firms that may be the right target to acquire.

The changing dynamics of the telecommunications industry are leading American Cable to consider the acquisition of AirThread Connections in a bid to expand the company’s business operations.

AirThread Connections is one of the largest regional wireless firms that provides services to over 200 markets within five geographical areas.

Under this extraordinarily competitive industry environment, AirThread’s financial operation is at a cost disadvantage compared to other companies due to its technical difficulties.

Another issue AirThread is facing is that since most of the companies in the telecommunications industry provide both cable and internet services to attract their customers, AirThread’s operation is at a competitive disadvantage compared to other companies as it only provides wireless service.

With the possible synergies AirThread provides, it could be contemplated as a reasonable acquisition target. With this intention, American Cable can bundle its cable services together with AirThread’s wireless service to expand its market.

Even though American Cable and AirThread are both profitable with their current services, the services needed and required by the market are truly the combination of the services that the two companies provide.

American Cable’s executive believes that AirThread would increase in revenue while decreasing its backhaul costs by more than 20% after the acquisition.

In the meanwhile, American Cable is unsure about different aspects of the value AirThread Connections can bring. Consequently, American Cable uses several valuation techniques to determine if the acquisition is beneficial or not before they make any decisions on AirThread’s acquisition price.

Synergies

The synergy created by acquiring AirThread can be categorized into three forms: expanding the product offering, customers, and operating cost savings.

Expand product offering

American Cable Communication currently provides video, internet, and landline telephony to their customers.

By acquiring AirThread Connections, which provides wireless service to their customer, American Cable Communication and AirThread can help each other complete their product line and offer bundled service to their customer.

The completed product line and bundled service will bring a competitive advantage for American Cable Communication and AirThread in the market.

Moreover, multiple services offering can benefit American Cable Communication and AirThread in their network utilization. Ms. Zhang quantifies the synergy of expanding the product offering as increasing annual business revenue.

Customer

According to the business development group from American Cable Communication, additional acquisitions are the best way to increase the customer base.

In December of 2007, American Cable Communications served 24.1 million video subscribers, 13.2 million high-speed Internet subscribers, and 4.6 million landline telephony subscribers.

AirThread’s network covers over 80 million people in five geographic regions. By combining the two companies, American Cable Communication and AirThread will have the opportunity to reach more customers with the bundled service.

Moreover, by accessing each other’s customer data, American Cable Communication and AirThread Connections can provide customized bundled services to potential customers according to their needs.

Operating cost saving

In the acquisition, there is another benefit for AirThread in terms of operating costs.

AirThread can use American Cable’s fiber line instead of using landlines leased from competitors or microwave equipment, which will save 20% of the backhaul cost for AirThread. Ms. Zhang quantifies the operating cost saving by calculating the reduction in backhaul cost.

Risks

Risks entail the uncertainties that would result from the combination of the ACC and AirThread company operations.

One of the primary risks that two companies are likely to face is the integration challenges in terms of their operations. The two companies offer some differing services; ACC does not provide wireless network services, while AirThread Connections offers the service. Therefore, integration of the different services provided by each company may…