Cor Jesu College

Sacred Heart Avenue

Digos City

GRADUATE SCHOOL

Final Requirement in FINANCIAL MANAGEMENT

CASE ANALYSIS

Submitted by

REINER T. LIBRADO

Submitted to

EDGEL EAR A. ABEAR, CPA, DBA

CASE NO. 2
ISSUES SURROUNDING AT&T AND NCR MERGER

In late 1990, NCR Corporation (formerly the National Cash Register Company) was
doing well. Its management had transformed a stodgy company into a leading player in
the computer game, one that was beating out IBM and other world class firms in
automatic bank teller machines and other rapidly growing high-tech markets. In the
words of Value Line, a leading investment advisory service, “This is shaping up as the
ninth consecutive year of earnings growth for NCR. We’re looking for continued games
out till the next years to come.” These good quality shares are ranked to outpace the
year-ahead markets. “NCR’s stock was selling for $65, up from $9 in 1982, so its
stockholders had benefitted from management’s good performance. NCR’s workers had
also been well served and were happy, as were its customers.
AT&T, meanwhile, had been raking in huge cash flows from its quasi-
monopolistic telephone business, but it had failed in its efforts to become a major player
in the computer industry, and it was losing lots of money there. Then AT&T’s Chairman,
Bob Allen, decided to buy NCR. Allen approached NCR’s Management and suggested
a price of $90 per share, or $6.2 billion in total, and he indicated a willingness to
negotiate, i.e., to go higher.
NCR’s Chairman Charles Exley responded that “the company is not for sale.” He
felt, justifiably, that his team had done a good job, and he wanted to continue to control
a dynamic, growing entity, not just become one part of a huge conglomerate. Exley
commented, after his talk with Allen, that AT&T ought to change its advertising slogan
from “ Reach out and touch someone” to “ Reach out and grab someone.’
NCR’s laborforce , by and large, agreed with Chairman Exley—they were well
aware that, in most mergers, quite a few workers lose their jobs as tasks are
consolidated. Further the higher the worker in the hierarchy, the more likely he or she is
to lose out. Exley would no longer be chief executive of a major company, and his top
managers would, if they were retained at all, be subordinates of AT&T’s senior
executives. NCR’s customrs were also concerned – the company had been turning out
good, attractively priced products. Would the same situation hold under AT&T’s control?
Customers like having as many potential suppliers as possible, and, if the merger
occurred there would be one less firm in the computer industry. Further, NCR is
headquartered in Dayton, Ohio, but if AT&T acquired it, many headquarter functions
would be moved to New York. This would have an adverse effect on Dayton, so the city
fathers were not happy about the prospects for the merger.
NCR’s stockholders , meanwhile, had mixed feelings. On the one hand,
thoughtful investors recognized that the company had been run well, that the
management deserved a chance to remain in control and that investors might be better
off in the long run if Exley and his team remained in charge. On the other hand, the
stock had been selling for only $65, yet AT&T had offered $90 and held out the chance
for more, and a quick 40% profit is nothing to sneeze at. Further, almost 70% of NCR’s
stock was owned by institutional investors such as pension funds, mutual funds, and
insurance companies, whose owners like to see rapidly rising values such as the buyout
would provide.
Considering the grasp that you may have on Financial Management, answer the
following issues:
 1. To what extent should NCR’s managers let their own personal positions
(versus those of NCR’s stockholders) influence their decision to resist
AT&T advances?

There are several reasons AT&T considered NCR an appropriate acquisition

target for several reasons:
 NCR and AT&T have compatible product lines and a similar philosophy
about open computer system using UNIX operating system. NCR was
also stronger than AT&T in networking.
 NCR had a corporate culture compatible with AT&T’s, especially as
compared to some of the Silicon Valley firms which AT&T had considered
as merger candidates.
 NCR has an international computer marketing presence and customer
base which AT&T lacked.
 NCR was a possible and practical acquisition whereas some other
candidates such as Hewlett-Packard have impediments to acquisition (e.g,
family trusts).

2. Should the fact that Charles Exley would no longer be the chief
executive influence his actions?

3. To what extent should consideration be given to the views of NCR’s non

management labor force? Its customers? Residents of Dayton?

 Despite the negative feedbacks circulating in the environment and among the
non-management labor force, still the persistence to pursue the acquisition
continues. When it comes to the labor force of NCR there are decisions that
needs to be enforced in order to save the company, and one of that is cutting of
employees. Further the higher the worker hierarchy, the more likely the company
loses out. Mostly when changes occur there are possibilities that the consumer
would resist the change.

In explaining this escalation of commitment, Northercraft and Wolf (1984,p.226)

suggest:

‘The decision maker may, in the face of negative feedback, feel the need to
reaffirm the wisdom of the time and money already sunk in the project. Further
commitment of resources somehow ‘justifies’ the initial decision (Staw, 1976), or at least
provides further opportunities for it to be proven correct.’

4. If you were an NCR stockholder would you vote for the merger?

 For the betterment of the company I would vote for the merger between AT&T as
long as everything is well-planned, organized that would result to a win-win
situation between the two companies. AT&T should also consider different
factors resulting to the merger; they should look into account the welfare of the
employees, the market and the stockholder.

5. As an AT&T stockholder what would your reaction be?

CASE NO. 4
PHUKET BEACH HOTEL CASE ANALYSIS

1. Assess the economic benefit associated with each of the capital project.
What is the initial outlay? What are the incremental cash flows over the life
of the project? What is an appropriate discount rate to use for discounting
the cash flows of the projects?

 Valuing Mutually Exclusive Capital Projects:

 There are two ways of computing investment return:
 Consider the time value of money
 Do not consider the time value

In this case: Phuket beach Hotel didn’t consider the time value of money, thus, it
applied Payback Period in capital budgeting instead of Discounted Payback.
However, Phuket Beach has to consider the following capital budgeting
techniques.
 Incremental cashflow: (refer to figures 4.1a & 4.1b)

2. Rank the projects using various measure of investment attractiveness. Do

all the measure rank the project identically? Why or why not? Which
criterion is the best?
 Refer to figure 4.2

3. Are the projects comparable based on the standard NPV measure, given
that they have unequal lives? What adjustment or alternative method is
required in comparing such project?
 Refer to figure 4.2a, 4.2b, 4.2c

4. How sensitive is your ranking to changes in the discount rate? What other
“key value drivers” would affect the attractiveness of the project? Estimate
the sensitivity of your result to a change in any of the key value drivers.
 Refer to figure 4.3

5. Which project should the hotel undertake?

In my opinion while looking at the tables, computation and the possible alternatives I
would suggest that the hotel should proceed with creating its own beach karaoke pub.
The profitability index shows that in time the company can gain more profit than
acquiring the Planet Karaoke Pub. Though the data shows that the Planet Karaoke Pub
can payback profit at a shorter year which is 2.46 years than the Beach Karaoke Pub
which is 3.84 years, but in years the Beach Karaoke Pub will yield more profit.