Three Megadeals, From Signing to Aftermath

00 | OVERVIEW

Similar playbooks at signing; very different results after closing.

Three deals

AT&T agreed to buy Time Warner for $107.50 a share in October 2016. Disney agreed to buy most of 21st Century Fox in December 2017 and raised its offer to $38 a share after Comcast bid in June 2018. Microsoft agreed to buy Activision Blizzard for $95 a share in cash in January 2022. Their headline values, as each buyer stated them, add up to about $225bn.

What this covers

Each deal is followed through the same steps: why the buyer wanted the target, what it was buying, how the price was reached and paid, how it was financed and protected, how regulators shaped it, what the buyer booked, what happened next, and how the forecasts behind the price held up. The companies' own filings are the evidence.

What the filings show

All three buyers paid well above the market. AT&T and Disney used their own shares for about half the price and took on heavy debt; Microsoft paid cash. Each deal took 15 to 21 months to close. Afterwards, AT&T gave Time Warner back to shareholders, Disney wrote down the international channels business that Fox's assets had expanded, and Microsoft's gaming revenue rose by about half in two years. Now that nearly every forecast year has passed, the plans can be checked: Time Warner's and Activision's near years landed within about 1%, Disney missed from its first year, later years missed by more, and the combined Disney fell about $84bn short over five years.

What they do not show

Whether any deal created value overall. The results rest on different time spans and measures, and are not a single score.

01 | STRATEGY

Why the buyers wanted these companies

Content for distributors and platforms; scale for a studio.

AT&T

AT&T's board cited combining Time Warner's premium content with AT&T's distribution and customer relationships, advancing its direct-to-consumer efforts, and diversifying into a business with low capital spending and light regulation. It expected the deal to add to earnings and free cash flow per share within a year.

Disney

Disney's board cited Fox's film and television studios and libraries, a faster direct-to-consumer strategy including control of Hulu, wider international reach and more sports for ESPN. It expected about $2bn of cost savings by 2021.

Microsoft

Microsoft framed the deal around gaming across devices, including mobile, where Activision's King unit operates, and its Game Pass subscription.

The size of the bite

Fox was the largest relative to its buyer: 35% of Disney's revenue and 24% of its EBITDA in the first forecast year. Time Warner was 19% of AT&T's revenue. Activision was 4% of Microsoft's.

02 | THE TARGETS

What each buyer was buying

Steady cash generators with modest growth, on their own forecasts.

Time Warner

Management projected revenue rising from $29.4bn in 2016 to $34.5bn in 2019, about 6% a year, with the adjusted operating margin before depreciation and amortization widening from 28% to 30%.

Fox's businesses

The assets Disney bought were forecast to grow revenue from $20.9bn to $28.6bn between fiscal 2018 and 2023, at margins of about 21% to 22%. The forecast excludes Sky, which Fox later sold to Comcast.

Activision

Activision's January 2022 forecast took revenue from $8.4bn in 2021 to $12.6bn in 2026, with margins between 41% and 45%. It was cut before signing; the appendix shows how.

What it implies

At announcement, AT&T paid about 12.2 times Time Warner's 2017 forecast operating profit before depreciation, and Microsoft about 19.3 times Activision's 2022 forecast EBITDA. Both are author calculations from headline values.

03 | NEGOTIATION

How the three prices were reached

Buyers raised their first per-share numbers by 8% to 36%.

AT&T and Time Warner

AT&T's chief executive floated about $100 a share on 25 August 2016. AT&T offered $103, then $105, on 28 September. Time Warner countered at $110 on 7 October. Four days later the two chief executives settled on $107.50, half cash and half stock, 36% above Time Warner's last price before press reports.

Microsoft and Activision

Microsoft opened at $80 on 26 November 2021. Activision said its board might entertain a proposal between $90 and $105. Microsoft wrote at $90; the board asked for $100; on 16 December Microsoft moved to $93 and then $95 in exchange for 30 days of exclusivity. Activision contacted three other strategic buyers; none proceeded.

Disney, Comcast and Fox

Disney's first approach valued Fox's assets at about $23 a share on Fox's estimate. Comcast bid $34.41 in stock; Fox chose Disney's $28 in stock after weighing how each bid allocated regulatory risk. When Comcast returned with $35 in cash in June 2018, Disney raised to $38, 36% above its own December offer.

04 | THE PRICE CHECK

Above the market, short of the forecast

Prices beat peer multiples; two stopped short of DCF midpoints.

How boards test a price

Before approving a sale, each target board received a bank's opinion that the price was fair. The proxy shows the ranges behind it: trading multiples of peers, past deals, and discounted cash flow. Eight opinions sit behind these three deals; each bank's full ranges are in the appendix.

What they show

All five trading-comparables ranges sit below their deal price: public-market multiples value a minority stake, and a buyer taking control pays for it. At Time Warner and Activision the price sat 22% to 30% of the way up each DCF range.

Fox was the exception

Fox's price was above every stand-alone value. Disney's own bankers reached $38 only by adding Disney management's synergy estimates, so Disney paid away part of the savings it expected.

05 | CONSIDERATION

Half stock, half cash, or all cash

Stock-funded buyers handed target holders up to a fifth of the company.

What was paid

At closing, AT&T paid $42.1bn in cash and $36.6bn in its own shares. Disney paid $35.7bn in cash and 307 million shares worth $33.8bn. Microsoft's purchase price was $75.4bn, essentially all cash.

Who owned what after

Time Warner holders were expected to own 14.0% to 15.3% of AT&T, and Fox holders 17% to 20% of Disney. Activision holders were bought out entirely.

Why the mix matters

Paying in stock shares the risk with the seller's holders: if the combined company does well, they benefit too. Paying cash puts the whole outcome on the buyer, and requires either cash on hand or new debt.

06 | FINANCING

Two buyers borrowed; one used its cash

AT&T's debt was set to rise by half; Disney's, over threefold.

AT&T

AT&T had about $125bn of debt in September 2016; the filing put pro forma debt at about $190bn. It arranged a $40bn bridge loan, later cut to $30bn with a $10bn term loan.

Disney

Disney had $24.7bn of debt in March 2018. It planned to fund the $35.7bn cash portion with notes or a bridge loan of the same size and expected combined debt of about $108.3bn if Fox completed its purchase of Sky, and about $83bn without it; Sky went to Comcast. At closing it assumed $21.7bn of Fox borrowings.

Microsoft

The merger was not conditioned on financing. Microsoft paid cash, and Activision brought $13.0bn of its own cash with it.

07 | DEAL MECHANICS

Collars decide who carries the stock risk

Inside the band, value is fixed; outside it, shareholders bear it.

AT&T's collar

Time Warner holders were to get $53.75 in cash plus AT&T stock worth $53.75, as long as AT&T averaged $37.411 to $41.349, 5% either side of its $39.38 unaffected price. Above the band they got 1.300 shares; below it, 1.437.

What happened

AT&T's closing 8-K reports 1.437 shares per Time Warner share, the ratio that applies only below the band. It put the aggregate value paid at about $81.0bn, $42.5bn in cash and $38.5bn in stock. The $85.4bn announced in 2016 used different share prices and share counts, so the two are not a direct comparison.

Disney's two adjustments

Disney's collar held $38 fixed while its stock averaged $93.53 to $114.32. A separate tax adjustment moved the value with Fox's transaction tax: $39.07 at a $4.5bn tax, $35.87 at $12.5bn.

Microsoft

All cash, so no collar: $95.00 at signing was $95.00 at closing. The July 2023 amendment also allowed Activision to pay a one-time dividend of up to $0.99 a share.

08 | DEAL PROTECTION

Break fees priced the regulatory risk

Buyers facing antitrust review promised targets $0.5bn to $4.5bn.

Walk-away fees

Each target agreed to pay a fee if it took a better offer or its board changed its view: $1.725bn at Time Warner, $1.525bn at Fox (a figure Disney also owed), and $2.2701bn at Activision.

Regulatory fees

Buyers owed a fee if regulators blocked the deal. AT&T's was $500m. Disney's was $2.5bn, after it first offered $750m; Comcast's rival draft offered $4.025bn, including $1.525bn to cover Fox's fee to Disney. Microsoft's rose the longer the review ran.

Why the step-up

Microsoft's schedule paid Activision more for waiting: $2.0bn before 18 January 2023, $2.5bn until 18 April, $3.0bn after. A July 2023 amendment extended the deadline to 18 October and raised the fee to $3.5bn after 29 August and $4.5bn after 15 September. The deal closed on 13 October, so no fee was paid.

09 | REGULATION

Fifteen to twenty-one months to close

Regulators, not shareholders, set each deal's clock.

AT&T

The Justice Department sued to block the deal in November 2017. A federal judge ruled for AT&T on 12 June 2018, and the deal closed two days later, 600 days after announcement.

Disney

The Justice Department cleared the deal in June 2018 on condition that Disney sell Fox's regional sports networks. It closed on 20 March 2019, 461 days after the original announcement.

Microsoft

The FTC filed an administrative complaint to block the deal in December 2022, and the UK's Competition and Markets Authority blocked the deal in April 2023. It closed on 13 October 2023, 633 days after announcement.

10 | ACCOUNTING

What the buyers put on the balance sheet

Most of each price was goodwill and intangibles, not hard assets.

Goodwill

Goodwill is the part of a price not tied to identifiable assets. It was 49% of AT&T's price for Time Warner, 71% of Disney's for Fox and 68% of Microsoft's for Activision.

Intangibles

AT&T valued Time Warner's distribution network, content library, trade names and other intangibles at $57.2bn, which with goodwill exceeds the price because AT&T also assumed $50.1bn of liabilities, including $22.9bn of debt. Microsoft booked $22.0bn, mostly brands and technology.

Why it matters

Goodwill is not amortized but is tested for impairment. If the acquired business earns less than expected, the write-down shows up here first.

11 | AFTER CLOSING

Three deals, three outcomes

AT&T reversed, Disney wrote down, Microsoft's gaming revenue jumped.

AT&T

Less than four years after closing, AT&T spun WarnerMedia off and combined it with Discovery in April 2022. AT&T received $40.4bn in cash and debt relief, and its holders received about 71% of Warner Bros. Discovery. That compares with $102.2bn paid and debt assumed in 2018, though the WBD stake is not valued here.

Disney

Disney booked $49.1bn of goodwill on Fox. In fiscal 2020 it recorded $5.0bn of goodwill and intangible impairments, all at its international channels business, citing COVID-19 and the shift to direct-to-consumer. The deal also took its Hulu stake from 30% to 60%, and to 67% by May 2019.

Microsoft

Microsoft's gaming revenue rose from $15.5bn in fiscal 2023 to $21.5bn in fiscal 2024, which included Activision from October 2023, and $23.5bn in fiscal 2025.

What it does not settle

These are different measures over different spans. They show how each thesis played out, not a return on investment.

12 | THE FORECAST TEST

The opinions are now old enough to test

All but one forecast year has passed; not every business still reports.

How old

Time Warner's three opinions are dated 22 October 2016, 9.9 years ago. Fox's are from June 2018, 8.3 years ago. Activision's is dated 17 January 2022, 4.7 years ago.

How far they looked

The disclosed forecasts ran to 2019 for Time Warner, to fiscal 2023 for the combined Disney and Fox, and to 2026 for Activision. All of those years except Activision's 2026 are over. Time Warner's management extrapolated its plan to 2025 for the banks' DCFs, and Disney's own forecast for Fox's businesses ran to 2028.

What can be tested

Time Warner's plan can be checked through 2019: first against its own reports, then against AT&T's WarnerMedia segment. Disney reports the combined company, so the combined forecast can be checked for all five years, but Fox alone cannot. Activision reported on its own only until mid-2023, so 2021 and 2022 are the full years.

One caution

After a deal, what is inside the business and how it is measured both change. Each comparison that follows states its basis.

13 | FORECAST TEST | TIME WARNER

Time Warner hit its plan, then slipped

Within 1% for two years; 3% short on revenue in 2019.

Before closing

Time Warner's 2016 revenue of $29.3bn was 0.1% below plan, and 2017's $31.3bn was 0.5% above. The plan was updated in October 2016, so most of 2016 was known when it was set. Adjusted OIBDA, computed from Time Warner's adjusted operating income plus depreciation and amortization, came within 1% of plan in both years.

Under AT&T

In 2019, the first full year under AT&T, WarnerMedia reported $33.5bn of revenue, 3.0% below the $34.5bn plan, and segment EBITDA of $9.7bn, 7.3% below. AT&T's measure reflects purchase accounting, a new revenue standard and a wider business that included its regional sports networks, so the profit comparison is approximate.

2018

The year was split by the closing. The two published part-years add up to $33.5bn of revenue, 1.9% above plan, but they are on different bases.

After the horizon

Revenue fell to $30.4bn in 2020 on AT&T's 2020 basis, which by then included Xandr, the year HBO Max launched and cinemas closed.

14 | FORECAST TEST | DISNEY AND FOX

The combined Disney fell $84bn short

Five forecast years, five misses, the deepest during COVID.

The forecast

In June 2018 Goldman Sachs compiled, at Fox's direction, a forecast for the combined Disney: revenue rising from $84.3bn in fiscal 2019 to $100.8bn in fiscal 2023. Fox's board used it to value the Disney shares its holders would receive.

What happened

Pro forma revenue for fiscal 2019 was $78.1bn, 7% short. COVID-19 then closed parks and cinemas: fiscal 2020 revenue was $65.4bn, 27% below forecast. Fiscal 2023 revenue was $88.9bn, still 12% short. Over the five years the shortfall was about $84bn, or 18%.

Profit

Disney does not report EBITDA, so the forecast EBITDA cannot be tested. Its total segment operating income, which included Fox from 2019, fell from $15.7bn in fiscal 2018 to $8.1bn in fiscal 2020 and was $12.9bn in fiscal 2023.

Basis

The forecast excludes Sky and values Hulu separately, which implies Hulu was not consolidated. The actuals consolidate Hulu but exclude the regional sports networks Disney had to sell. If the forecast included those networks, the actual business is about $3bn a year smaller, so part of each miss is a change of perimeter, not performance. Fox's businesses alone cannot be tested: Disney stopped reporting them separately.

15 | FORECAST TEST | ACTIVISION

Activision's cut forecast held; the first didn't

2022 bookings 1% below January's forecast, 7% below November's.

Two forecasts

Activision's November 2021 board plan put 2022 revenue, before deferrals, at $9.2bn. Forecasts revised in December 2021 and updated in January 2022, the version Allen & Company used, cut it to $8.6bn. The 2021 figure included management's estimate of the fourth quarter and matched the year Activision reported.

2022

Net bookings, Activision's reported measure of revenue before deferrals, were $8.5bn: 1.3% below the January forecast and 7.2% below the November plan. Segment operating income, the closest reported measure to EBIT before stock-based pay, was $3.06bn, 11.2% below the $3.45bn forecast.

2023

Activision's last results, for the first half of 2023, showed $4.3bn of net bookings and kept an outlook of at least high-single-digit growth for the year. The January forecast needed about 25% growth to reach $10.6bn. Microsoft has not reported Activision separately since closing.

In hindsight

For 2022, the only full year that can be tested, the cut forecast that one stockholder demand questioned was closer to what Activision reported.

16 | FORECAST TEST | SCORECARD

Early years held, except Disney's

Time Warner and Activision hit near years; Disney missed from year one.

The pattern

Time Warner's first two years came within 1% of plan, and Activision's 2022 net bookings within about 1% of the January forecast (7% below November's plan); both near-year plans were set when much of the year was known. Disney missed by 7% in its first year. Later years and profit lines missed by more: Time Warner's EBITDA by 7% in 2019, Activision's operating income by 11% in 2022.

Why it matters for the opinions

Most of a DCF's value typically sits in later years and the terminal value. Those are the years least tested here, and where they can be tested, the least accurate.

Disney's miss

About 60% of the five-year shortfall fell in fiscal 2020 and 2021, when COVID-19 closed parks and cinemas. Disney missed before COVID too, by 7% in fiscal 2019, and by fiscal 2023 revenue was still 12% below plan.

Limits

Three deals, changed perimeters and different measures. This is a reading of the record, not a statistical test.

17 | IMPLICATIONS

What the three deals teach

The thesis, the financing and the regulator mattered as much as price.

On strategy

AT&T's distribution-plus-content thesis did not survive four years; Microsoft's gaming revenue rose at once, mostly because Activision's sales were added; whether its platform thesis works is still open. One reading: owning content paid off best for a buyer that already had the audience and business model to use it.

On price

Every buyer paid far above the market. The deals that sat low in their DCF ranges still depended on forecasts; Disney's depended on its own synergies.

On forecasts

Time Warner and Activision met near-year plans that were largely known when set; Disney missed from the start; misses were largest where an external shock arrived. The years that carry most of a DCF's value were the hardest to forecast.

On structure

Stock shared risk with sellers; cash and debt concentrated it. When AT&T agreed the WarnerMedia deal in 2021, it said the deal would provide $43bn for debt reduction.

On process

Regulators set the calendar, and break fees priced that risk. All three took 15 to 21 months to close.

A1 | APPENDIX | AT&T / TIME WARNER

Above the market, inside the cash flows

$107.50 sat in the lower third of every DCF.

The trading view

At 8.5x to 9.5x forward operating profit, peer multiples implied $69 to $80 a share; on earnings, $69 to $86. The price was 25% to 34% above the top of those ranges. Past deals at 11x to 14x trailing EBITDA gave $87 to $117.

The cash-flow view

Each of Time Warner's three banks ran its own DCF on management's forecast. Allen & Company found $98 to $130, Citi $98 to $135, and Morgan Stanley, using an exit multiple, $101 to $130. The price sat 22% to 30% of the way up each range.

Who did what

Only the DCFs are attributed to individual banks. The comparables, precedents and market data are credited to the three advisers jointly. AT&T disclosed no fairness opinion of its own, and no AT&T adviser fees.

Management's forecast

Time Warner projected revenue rising from $29.4bn in 2016 to $34.5bn in 2019, and adjusted operating profit before depreciation from $8.2bn to $10.5bn.

A2 | APPENDIX | DISNEY / 21ST CENTURY FOX

Only the buyer's synergies reached $38

Every stand-alone value sat below the price Disney paid.

Four banks, two boards

Goldman Sachs and Centerview advised Fox's board; Guggenheim and J.P. Morgan jointly advised Disney's. All four valued RemainCo, the businesses Disney bought, per Fox share.

The sellers' view

Fox's banks put RemainCo at $25.36 to $33.87 (Goldman) and $25.50 to $34.00 (Centerview) on discounted cash flow. Past deals gave $23.38 to $34.50. The $38 price was above all of them.

The buyer's view

Disney's banks found $22.50 to $29.25 stand-alone. Adding Disney's cost synergies gave $34.50 to $44.25; adding revenue synergies too gave $44.00 to $56.25. Disney told its holders it expected about $2bn of cost savings by 2021.

What Fox holders received

Half the price was Disney shares. On a DCF of the combined company, Goldman valued the cash-and-stock consideration at $42.61 to $51.76 per Fox share at the prorated exchange ratio, and $40.85 to $49.31 at the collar's low ratio.

A3 | APPENDIX | MICROSOFT / ACTIVISION

One letter, and a DCF mostly above $95

The cash price beat peers but sat low in the DCF.

One opinion

Allen & Company gave the only fairness opinion. Microsoft, advised by Goldman Sachs, published none, and its adviser fee was not disclosed.

The market view

Take-Two, Electronic Arts and Ubisoft traded at 8.4x to 19.1x 2022 EBITDA. At 13.5x to 18.0x, Activision was worth $69.08 to $89.05; on 2023 EBITDA, $77.93 to $91.67. Eleven gaming deals at 14x to 20x gave $72.40 to $99.49.

The cash-flow view

Discounting forecast cash flow at 6.5% to 8.0%, with 2.25% to 2.75% terminal growth, gave $84.73 to $123.87. The price sat 26% of the way up that range. Analysts' targets ran from $54 to $125, with a mean of $90.52.

The fee

Allen & Company was to earn $65m: $10m for the opinion and $55m only if the deal closed.

A4 | APPENDIX | THE FORECAST

Activision's forecast fell before the DCF ran

2024 EBIT forecast fell 24% from unit inputs to opinion.

The forecasts

The proxy shows four forecast sets; three are charted. Activision's board approved a long-range plan in November 2021: $12.4bn of 2024 revenue and $5.6bn of operating income, already risk-adjusted down from business-unit inputs of $13.4bn and $6.4bn. The January 2022 forecasts Allen & Company used put 2024 at $11.1bn and $4.9bn.

The stated reasons

The proxy cites the passage of time, execution risk, and a fourth quarter in which Activision missed its revenue projections because Call of Duty: Vanguard underperformed. The January forecasts extend to 2026, with unlevered free cash flow of $3.9bn.

Why it matters

A DCF moves with its forecast. One stockholder demand described in the proxy alleged that management may have cut the plan to validate the price. That is an allegation, not a finding.

A5 | APPENDIX | ADVISER PAY

Most adviser pay depended on closing

Most of the banks' fees were payable only at closing.

Time Warner

Its three banks were to earn $140m: $50m each for Allen & Company and Citi and $40m for Morgan Stanley. Only $5m each was due on the opinion; the rest waited for closing.

Activision

Allen & Company's $65m fee paid $10m for the opinion and $55m at closing.

Fox and Disney

Goldman Sachs was to earn $58m from Fox, $5m at announcement, plus about $47m that Fox estimated Goldman would earn from financing New Fox. Centerview's aggregate fee was $22m, $4m already paid. Guggenheim and J.P. Morgan were each to earn $27.5m from Disney, $17m of it at closing.

How to read it

Pay that depends on closing gives an adviser a stake in the deal happening. The filings disclose the terms so holders can weigh that; it does not by itself mean an opinion was wrong.