Cash, they say, is king.
Nowhere was that more evident than in Cingular Wireless’ announcement Tuesday that it would pay $41 billion in cash for AT&T Wireless, which would easily be the largest all-cash merger in U.S. history.
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Cingular also would assume some AT&T Wireless debt, but the deal is twice the size of the previous all-cash record, Unilever’s $20.2 billion takeover of Bestfoods in 2000, according to merger researchers at Factset Mergerstat LLC.
That AT&T Wireless was able to secure its $15-a-share cash deal speaks volumes about the strength of its bargaining position.
Although there are exceptions, companies being acquired–and their shareholders–typically adore cash, but not all of them get it.
“Cash is generally the more attractive currency” over stock, said Stephen Fraidin, a partner and mergers and acquisitions expert at the Kirkland & Ellis law firm in New York.
A common thread among those that get cash, he said, is competition among the suitors.
AT&T Wireless went on the auction block in January, saying it had already received several offers.
The bidding was intense: AT&T Wireless shares jumped 34 percent as rumors swirled in the two weeks before it formally put itself up for sale, and soared another 36 percent from that level to the price Cingular agreed to pay.
Even so, the per-share offer Cingular made is only about half of what AT&T Wireless was worth when it went public in April 2000.
Irwin Gold, a senior managing director at investment banking firm Houlihan Lokey Howard & Zukin, said several factors influence whether a firm being acquired can swing a cash deal.
Among them are the competitive landscape surrounding the bids, and potential tax implications.
Fraidin said equity-based deals are often preferable in heavily regulated industries, such as banking and insurance, because they leave the combined firm in better health.
Although several studies have shown that surviving companies’ stock and financial results typically underperform their peers after a big merger, Fraidin said cash versus stock can be a tossup if the acquirer is a powerful, well-performing firm.
“Some companies’ stock is fundamentally like cash,” he said.
In the case of Cingular, the decision to pay cash was simple: It’s not publicly traded.
Cingular is a joint venture of SBC Communications and BellSouth, and trying to craft a stock deal, while theoretically possible, would have been problematic at best.
A key issue: placing a value on ATT Wireless with the shares of two companies.
“They always approached this as a cash deal,” said Gold, an expert in telecommunications merger activity.
Gold said a bid from Cingular effectively pushed AT&T Wireless on the auction block in the first place, pressuring rivals to pursue cash deals as well.
For those bent on a bid, paying cash has its advantages, because it doesn’t dilute earnings per share like a stock deal. Borrowing, moreover, can be attractive in a low-interest-rate environment.
Indeed, SBC and BellSouth are looking to the credit markets. SBC, which owns 60 percent of Cingular, will have to pay $25 billion, with BellSouth responsible for $16 billion.
At year-end, SBC had just over $4.8 billion in cash on its balance sheet, while BellSouth had a little under $4.6 billion.
The deal raised concerns among credit-ratings agencies.
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Fitch Ratings placed the senior unsecured long-term debt of BellSouth and SBC on rating watch negative after the announcement.
In addition, Moody’s Investors Services put both on review for possible downgrade. Standard & Poor’s put both on credit watch with negative implications, citing the additional debt the firms will have to take on.
Cingular would become the nation’s largest wireless operator under the merger and said it expects to generate more than $2 billion annually in savings beginning in 2007, but S&P analysts voiced some doubts .
“Given that there will still be five major national wireless players after this transaction, industry competition and pricing pressures may not be markedly reduced from this combination,” analyst Catherine Cosentino said. Integration of the two wireless giants could take up to three years.