Tuesday, October 25, 2016

Dissecting the ATT Bid for Time Warner From an Economic Money Flow Perspective

At the EPJ Daily Alert, I probably get more comments along the lines of "Hey, this happened before the last crash and it is happening again."

My regular response is that you have to understand the deep details and specifics of a situation, not just some silly headline corollary that means next to nothing.

I received an email along these lines following the announced $85 billion bid by ATT for Time Warner.

Here is how I went beyond the simple corollary in the ALERT to respond to the email.
AT&T Inc. (NYSE:T) and Time Warner Inc. (NYSE:TWX) have announced they have entered into a definitive agreement under which AT&T will acquire Time Warner in a stock-and-cash transaction valued at $107.50 per share. The agreement has been approved unanimously by the boards of directors of both companies

Time Warner shareholders will receive $107.50 per share under the terms of the merger, comprised of $53.75 per share in cash and $53.75 per share in AT&T stock.

Some are suggesting that this may be the sign of a top in the market...

The last time Time-Warner was involved in a mega merger was January 2000, when AOL acquired the company for $182 billion in what was the mega deal of the last tech bubble...

I repeat once again: You must look at the specifics behind historical data and not just look at headlines and say: "Ah ha! The last great takeover of Time Warner came at the start of a crash. It is happening again!"

Yes, the AOL acquisition of Time Warner by AOL in 2000 for all practical purposes marked the start of the tech bubble and the  beginning of the recession that was to come.

But here is the thing, the 2000 deal was an all stock deal.It was just moving paper around. The current deal is 50% cash. That's $42.5 billion in cash!

Do you want to know how the money the Fed is printing is getting into the system? This is a perfect example of how.

The economist Fritz Machlup in his important book, The Stock Market, Credit, and Capital Formation  discussed the different methods of buybacks, takeovers, debt raising etc. It is not as simple at just looking at a deal without understanding the financing going on and to understand what is resulting in more money in the system.

The 2000 deal did not result in any new money in the system. This time it is different.

Unlike the 2000 deal that was all stock, the fact that this one is $80 billion in cash suggests the potential for a huge new money flow into the stock market--which is right in line with my expectation that the money flows indicate a strong stock market at the start of 2017.
An  ALERT subscriber responded to my commentary:
Hi Robert. I am a tax lawyer and have been back to a large large firm since 2014, after a 12-year hiatus. When I left the large firm in 2002, all the major acquisitions I had worked on from 1979 thru 2002 involved mostly stock and seller financing. My tax practice was focused on tax-free reorganizations for which stock is the major component. No one had the kind of cash needed for cash acquisitions. Upon my return in 2014, I was surprised to see that my first acquisition was all cash. And that turned out to be no fluke. Since 2014, I have not worked on a single tax-free acquisition involving stock. Every single deal has been all cash. I've been disappointed that my expertise in tax-free stock acquisitions has not been needed. It looks like every seller is getting all cash and paying massive taxes on those taxable sales. Thanks to my subscription to EPJ Daily Alert, I pretty much had figured out what you are saying today - that cash is everywhere now. It is pouring out of the woodwork.  

1 comment:

  1. Well it's not a done deal:

    Corporate Disaster: AT&T Has Called Off Its Upcoming Merger After Time Warner Failed To Disclose That One Of Its Employees Has Diarrhea