VALUATION OF AIR THREAD CONNECTIONS Harvard Case Solution & Analysis

Valuation of Air Thread Connections Case Study Solution

Background

The American Cable Communications (ACC) is looking forward to acquiring Air Thread Company.  It collectively thought about selling the products according to the product bundling concept.  American Cable Communications was purely a traditional cable operating company; however, AirThread was a cellular provider on aregional scale.

American Cable provided internet, landline telephone and video services but did not offer wireless facilitates. This wireless facilitation service gap was being captured by the competitors. The local exchange carriers were cost efficient and reactive to the increasing demand-supply gap of wireless technology service.

Furthermore, American Cable faced high competition from mobile applications’ need for a wireless network. This is because of the advanced technological shifts to wireless networking due to branded cell phones have enabled the customers to make free or cheaper calls through wireless phone and other internet services.

On the other hand, Air Thread faced opposite issues as compared to American Cable. Air Thread provided wireless technologies but did not offer telephone, landline and internet services.  However, Air Thread was facing severe issues pertaining to acquisition pressure due to its limited product portfolio and slow growth rate while operating individually.

Problem

American Cable Communication is one of the largest companies in the telecommunication sector in the United States. They want to acquire AirThread; it provides wireless technologies but did not offer telephone, landline and internet services.  So now they have the problem with valuation of AirThread. As there are different methods of valuation, the company wants to value the AirThread through its investment approach, they want to know the exact value of the company and according to that, they would give purchase price to the other company.

VALUATION OF AIR THREAD CONNECTIONS Harvard Case Solution & Analysis

 

 

Analysis

What methodological approach should be used to value Air Thread (WACC, APV, or some combination of both)?  How should the cash flows be valued for 2008 through 2012?  How should the horizon value be estimated?

In terms of methodological approach to value the AirThread Company, there are two types of methods that can be used for the valuation of AirThread.

Usually, both methods APV and WACC give the same results however adjusted present value is more used for free cash flows.

However, WACC is used for discounting the unlevered cash flows, unlevered cash flows are defined as the money that business has before paying its financial obligation.

WACC contains both the after-tax cost of debt and cost of equity. The benefits of tax are indirectly incorporated while finding the after-tax cost of debt.

We have used WACC for valuation of AirThread.

The cash flows are evaluated based on the service revenues, we can see from the exhibits that it shows the increasing trend. In the fiscal year 2008, it was 4.2 billion dollars and it increased to 6.33 billion dollars in the fiscal year 2008.

We cannot ignore the capital expenditure, the capital expenditure has been also taken into consideration, which was $631 million in 2008 and $1,055 million in the fiscal year 2012.

Thereafter, the revenue based upon the equipment has been taken into consideration and this is also reflecting an increasing trend starting from the fiscal year 2008 and ending in 2012.

It is increasing at the rate of 7.5% annual growth. It has increased from 314 million dollars in the fiscal year 2008 to 475 million dollars in the fiscal year 2012.Hence, the total revenue has been obtained, which is 4,509 million dollars in the fiscal year 2008 and it has increased to 6,807 million dollars in thefiscal year 2012.

Apart from this, the cost of equipment has also been deducted from the total revenue and the equipment cost was 755 million dollars in the year 2008 and it was almost 1,140 million dollars in the year 2012.

Moreover, the system operating expense has also taken into consideration and deducted from the net revenues, it is having a value of 839 million dollars in 2008 and in the next few years, it became almost 1,266dollars in the year 2012................

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