"Newbies"

Humor

Themes & Topics

Glossary

Lecture Notes

Trivia & Factoids

Bell Atlantic and Nynex Merger

 Event

On April 23, 1996, two Baby Bells, Bell Atlantic Corp. and Nynex Corp., announced their much-anticipated $23 billion merger. The new company would be called Bell Atlantic.

When Should Companies Merge?

By now you should have the answer to this question! It makes sense only if the merger adds value to the shareholders, that is, the value of the combined company is greater than the sum of the pre-merger values of the two companies.

Where is Value Creation Coming From?

Existing Business: Local Telephone Services

The merger would cut some 3,000 jobs, mostly corporate and administrative positions, according to companies’ sources quoted by CNNfn on April 22. Moreover, the merger would solidify their monopoly positions in the local telephone business, eliminating the threat of two neighboring competitors engaging in mutually destructive competition. However, whether they are able to translate this market power into price hikes is not straightforward as the regulatory agencies will be scrutinizing this issue very carefully.

New Business: Long-Distance Telephone Services

The new telecommunications law allows the Baby Bells to enter the seemingly lucrative long-distance service market, currently dominated by AT&T and MCI. The Bell Atlantic-Nynex merger gives them 12 states, from Maine to Virginia, and a crack at about $14 billion annual long-distance traffic through their region, according to estimates by the WSJ on April 23.

But why would they have to merge to enter this market?

To be able to compete with the long-distance giants, a new entrant into the market must have a competitive operating cost. As noted above, the merger could reduce the operating costs of the combined companies.

Do these companies have any advantage over the giants?

The merged company would have an advantage over the long-distance giants when it comes to servicing the needs of long-distance customers within its 12 states through providing them with "one-stop telecommunication services." This advantage, however, holds only for customers whose long-distance needs fall within this 12-state region. By the same token, the giant long-distance carriers still have an advantage when it comes to customers with border geographical needs.

Another advantage of this "one-stop" service is that it makes it harder for new companies to enter the local service market, unless they can provide similar (or better) services at a comparable (or cheaper) rate.

A hurdle that the new Bell Atlantic has to overcome is that an entirely autonomous unit must provide long-distance services. "That bars it from getting loan guarantees, equipment discounts and crucial data on customers’ calling patterns that could let it design targeted discount packages to undercut AT&T and other rivals," notes the Journal.

Summing Up

When evaluating the merits of a merger you should only look at incremental cash flows; that is, the additional cash flows that would only be generated due to the merger. In this case, there are two sources: savings in operating costs, and additional revenue from capturing some business away from existing long-distance companies. The latter source is viable as the new Bell Atlantic is able to provide more convenient service to those customers who have an affiliated business within the 12 states. Here is an illustration from the Journal: a company in Boston that also has an office in Philadelphia currently has to deal with Nynex, Bell Atlantic, and a long-distance carrier to handle its telecommunication needs. With the merger, this company has to deal with only one company, the new Bell Atlantic.

Obstacles

Antitrust

The new telecommunication law allows the Baby Bells to enter the long-distance service market only if they pass a "checklist" showing that they have opened up their local markets. This most certainly will be a challenge for the two companies who will probably strongly argue that they are making the long-distance market more competitive, other things being equal.

The antitrust division of the Justice Department and the respective state regulators have to approve the deal first. The antitrust authorities will examine whether the two companies would have become rivals for local or long-distance services without the merger. Besides prices, other factors such as service and job creation/destruction will influence the final decision of the regulators.

Shareholders

Although the Board of Directors of both companies have given their blessings to the deal, the shareholders have to approve it too. To induce them to approve it, the companies announced a hefty penalty of $200 million to be paid by the terminating party to the other member of the alliance should the shareholders not go along with the proposed deal.

Financing

The merger will come together through a stock swap. Bell Atlantic shareholders would receive 1.302 shares in the new company for each Bell Atlantic share they own now, while Nynex shareholders would receive one share of the new company for each Nynex share owned. The new Bell Atlantic would have about one billion shares outstanding with a majority of 56.2% owned by Bell Atlantic holders. This puts the value of Nynex shares at $50.

Market’s Reaction

The merger rumors began in December by a WSJ announcement. The Journal points out that "[p]rior to the December article, one share of Bell Atlantic was worth 1.38 shares of Nynex. Currently, that ratio has fallen to about 1.23, meaning that shares of Nynex are worth more relative to Bell Atlantic's stock price. Since the article, shares of Bell Atlantic are down more than 5%, while shares of Nynex are up about 7%."

On the day of announcement, Bell Atlantic shares rose 3.5%, or $2.25, to $67.25, while Nynex stock took a 4.7% dive, or $2.50, to $50.50. How can you explain the drop in Nynex’s stock price?

As noted in the above section, the deal values Nynex shares at $50 which is below the pre-announcement market price of $53, but still higher than the pre-merger rumors in December. Obviously this will not make Nynex shareholders very happy, which could have been one of the motivations for the hefty break-up penalties mentioned above.

The Emerging Company

The new Bell Atlantic would be the nation’s second largest telecommunications company, after AT&T, with almost $27 billion in revenue, $3 billion in profits, 134,000 employees world-wide, and servicing more than 36 million home and business customers, according to the WSJ.

By Alex Tajirian