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A Small Spat about $1.6 Billion

Company valuation is not a precise science. When two companies dispute the price that one should pay for the other, a battle between their investment bankers can be guaranteed.

AT&T bought McCaw Cellular in 1994. As a result it acquired McCaw s 52 percent stake in the shares of a cellular communications company, LIN Broadcasting, and assumed an obligation to buy the remaining 48 percent of the shares at their fair value. The process for determining fair value was laid down when McCaw acquired its initial stake in LIN. AT&T and LIN had 30 days to come up with an initial valuation of the shares and then a further 15 days to consider their final numbers. Ifthe two companies valuations were less than 10 percent apart, AT&T would be obliged to buy at the average of the two prices. If they were more than 10 percent apart, an independent arbitrator would be appointed. If the arbitrator decided that the true value was about midway between the two companies valuations, then the arbitrator s valuation would be used. If it was close to AT&T s valuation, then the arbitrator s price and AT&T s price would be averaged and LIN s valuation would be ignored. Conversely, if it was close to LIN s figure, then the arbitrator s price would be averaged in with LIN s valuation and AT&T s figure would be ignored.

Each company appointed an investment bank to prepare and argue its case. AT&T s case was presented by Morgan Stanley while LIN s case was prepared by Bear Stearns and Lehman Brothers. Each side faced a quandary. AT&T s advisers were tempted to go for a low figure, while LIN s advisers were tempted to come up with a high figure. But if the dispute went to arbitration, then an extreme valuation was more likely to be out of line with the arbitrator s figure and therefore was more likely to be ignored. It seemed to make sense to take an extreme position only if each could be sure that the other side would do so also. Conversely, a more middle- of-the-road posture made sense if each could be confident that the other would provide a middle-of-theroad valuation.

When the two parties met at Morgan Stanley s offices to examine each other s valuations, there was a stunned silence, and then Bear Stearns s team began to laugh. Morgan Stanley s valuation was $100 a share, while Lehman Brothers and Bear Stearns came up with a figure of $162 a share. Since AT&T was proposing to buy 25 million LIN shares, the disagreement amounted to a thumping $1.6 billion.

Fifteen days later the two sides met again to exchange their final valuations. There was an air of shock in the room; despite hearing the other side s arguments, the difference in their valuations had barely narrowed. It seemed that an independent arbitrator was required and so another investment bank, Wasserstein Perella, was called in to provide an independent valuation. Some weeks later a herd of about 50 investment bankers and lawyers crowded into the offices of Wasserstein Perella to defend their estimates of the value of LIN. Comparisons were made with the value of other cellular communications companies. Each side presented projections of LIN s future profits and dividends.

There were also arguments about the rate at which these future dividends should be discounted. For example, each side argued that the other had failed to measure properly the risk of the stock. The final upshot: After hearing the arguments from both sides, Wasserstein Perella placed a value of $127.50 on each share of LIN. This meant that the total cost of the shares to AT&T was about $3.3 billion.