Co-Opetition - Adam M. Brandenburger [41]
LIN sought other suitors. Several of the Baby Bells were rumored to be interested. BellSouth, with its vast financial resources and a strategy of buying cellular, seemed the most likely to answer the call. LIN’s Los Angeles and Houston franchises would complement BellSouth’s existing holdings in those cities. The combined holdings of the two companies would come to 46 million POPs, only 4 million short of McCaw’s 50 million—not quite a national footprint, but a very serious threat to McCaw’s lead position.
For BellSouth, the chance of winning a bidding war against McCaw was low. McCaw was projecting that 15 percent of Americans would use cellular phones by the year 2,000, making each POP worth about $420. The consensus forecast among the Baby Bells was that penetration would be only 10 percent. That led to valuations of only $280 per POP. In a contest between BellSouth and McCaw, the smart money was on McCaw.
McCaw had an extra motive to bid high. A rise in the market valuation of POPs would make the 50 million POPs he already owned all the more valuable. For BellSouth, the cost of playing the game was high: attorney and investment banker fees could top $20 million, and top company executives would find themselves distracted from their job of running ongoing operations. Moreover, if it lost, as was the likely outcome, BellSouth would lose credibility as a determined bidder in the future. Egos would get bruised.
Nevertheless, BellSouth was willing to acquire LIN for the right price. The problem, of course, was that by entering the fray, it would trigger a bidding war, and then LIN wouldn’t sell for a reasonable price. BellSouth knew only one bidder could win, and it wanted something for its trouble in the likely event that the winner was McCaw. Thus, as a condition for bidding, BellSouth got LIN’s promise of a $54-million consolation prize and an additional $15 million toward expenses should it be outbid. Having been paid to play, BellSouth made an offer that market analysts valued at $105–$112 per share.
As expected, McCaw did not give up. He outbid BellSouth with a new offer valued at $112–$118 per share.11 LIN came back to BellSouth and asked it to up its bid. In return, BellSouth again asked to be paid. LIN raised BellSouth’s expense cap to $25 million, and, in return, BellSouth entered a new bid valued at $115–$125 per share.
McCaw raised his offer to an amount valued at $124–$138 per share and then added a few dollars more to close the deal. At the same time, he paid BellSouth $22.5 million to exit the game.12 At the final price, LIN was valued at $6.3–$6.7 billion. At this point in the bidding, Pels recognized that his stock options were worth over $100 million, and the now friendly deal with McCaw was done.
So how did the various players fare? The day before BellSouth announced its first bid, LIN was trading at $105.50. When BellSouth exited, the stock price was $122.25. The net rise of $16.75 a share comes out to almost $1 billion. So LIN got itself an extra billion, which made the $54 million plus expenses it paid BellSouth look like a bargain. McCaw got his national network and subsequently sold out to AT&T, making him a billionaire. And BellSouth, by being paid first to play and then to go away, turned a weak hand into a $76.5-million fee plus expenses. BellSouth clearly understood that even if you can’t make money in the game the old-fashioned way, you can get paid to change it.
With the benefit of hindsight, a few questions come