AT&T And Time Warner And The M&A Era

| About: AT&T Inc. (T)

Summary

The weekend announcement by AT&T that it was acquiring Time Warner was just one more transaction hitting the news this fall.

Financial engineering still reigns supreme in the economy as cash availability and low interest rates drive more and more companies to re-structure rather than invest.

Federal government programs and policies continue to drive rewards for the wealthy at the expense of the ordinary worker, while the full ramifications of the heavy M&A activity remain unknown.

The era is one of lots and lots of cash around and historically low interest rates.

And, what do you get?

Stock buy-backs, higher dividend payments, and mergers.

None of these really contributes to economic growth, at least in the near term, as they result in consolidation, not physical investment. They produce gains to ownership, not wages to workers.

But, this is what the federal government and the Federal Reserve have produced. So, you go with the flow…at least the smart money does.

We have the current mega-deal between AT&T (NYSE: T) and Time-Warner (NYSE: TWX) in the news.

Robert Salomon, a professor at New York University, is quoted in the New York Times, "AT&T is trying to keep up with the Joneses." The Joneses in this case is Comcast (NYSE: CCV).

But, another recent announcement includes British American Tobacco PLC (NYSE: BTI) buying the part of Reynolds American that it doesn't own. The understood reason for this acquisition is to expand into areas in the developing world where people smoke more than they do in Europe and America.

Then there is the move by TD Ameritrade Holding Corp. (NASDAQ: AMTD) move to purchase Scottrade Bank from Scottrade Financial Services, Inc.. The effort is to build scale for low cost stock trading to serve small-time investors in their battle against large brokerage firms who appear to be losing business in today's market.

Last month, German company Bayer AG (OTC: OTCPK:BAYZF), agreed to buy the agricultural giant Monsanto attempting to gain market share while getting leverage over customers.

And, there is the expectation that Qualcomm (NASDAQ: QCOM) will acquire it rival company NXP Semiconductors NV (NASDAQ: NXP) in order to gain market share and sustain its competitive position in the industry.

As far as the timing of these deals, the Federal Reserve may be included as one of the reasons for these transactions taking place at this time. Investors are betting that there is at least a two-thirds chance that the Fed will raise it policy interest rate in December, and it appears as if the Fed is reducing reserves in the banking system, as it has done before in preparation for such an increase.

Investors still remain highly uncertain about whether the Fed will follow up with more increases in 2017. Officials at the Federal Reserve do anticipate that further increases will take place during the upcoming year.

Note: these officials also believed that there would be several more increases this year…which, of course, have not happened.

The AT&T/Time-Warner deal still has to be approved by the regulatory process and this promises to be a difficult process, taking, possibly, up to two years to complete.

However, the transaction is now in place, along with a growing portfolio of other such deals.

As far as the economy is concerned, this trend is not that favorable and, in this sense, the policies of the Federal government and the Federal Reserve System are setting the stage for the next decade or so.

In the 1950s and 1960s, another trend got started because of the actions of the federal government and the Federal Reserve and this ultimately produced results that lasted for a long time. Because of the low interest rates at that time and the availability of money, mergers and acquisitions were again in favor.

However, because of regulatory actions of that time period which made it extremely difficult to achieve vertical or horizontal mergers, the conglomerate came into being and dominated the scene for a sustained period of time. Companies became treated as "products" and not as producers of goods and services. And, this evolved into the world of financial engineering, of corporate takeovers and junk bonds.

The concern here is about the distortions being created in markets by governmental policies that are causing a substantial re-structuring of industry, all under the sway of more and more financial engineering.

The editors of the Wall Street Journal claim that it is this financial engineering that is winning: "AT&T's $85.4 billion weekend bid to buy Time Warner is the latest bet, and a very big one, that technology is making wireless broadband ubiquitous despite regulatory obstacles."

"The AT&T-Time Warner tie-up is signaling that the era of the local cable broadband monopoly is ending." This "sounds like good news for consumers…."

There is an underlying concern, however, and that pertains to the distortion of AT&T's balance sheet caused by the government's economic policies.

"AT&T's rising debt lard to execute the purchase. The company says it has a $40 billion bridge loan commitment over 18 months to finance the cash portion of its half-stock, half-cash off for Time Warner. "

"But, AT&T already has more than $120 billion in debt from its previous acquisitions, and it's Standard & Poor's bond rating is BBB+, close to the edge of investment grade." A downgrade could reduce it to junk status.

If the economic expansion carries on for a few more years, and if the Federal Reserve does not raise its policy rate too fast, the cash flow from the combined firms may carry the deal through.

But, the tide of mergers is not over. You can expect more announcements in the near future, continuing to build the future economic structure that new rounds of financial engineering will have to manage.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.