CASE STUDY 6: AT&T BUSINESS ACQUISITIONS ASSIGNMENT
Lisa Borgese
School of Business, Liberty University
BUSI 532: Advance Financial Statement Analysis
Dr. Debra Touhey
August 6, 2023
Introduction
As one of the largest telecommunication companies globally, AT&T is the largest service
provider here in the United States. In 2015, AT&T decided that they were going to acquire
DirecTV to diversify their investments within a portfolio to reduce portfolio risk. The acquisition
between AT&T and DirecTV was a strategic match because AT&T could benefit from DirecTV
already existing distributions in the satellite television service. The acquisition of DirecTV not
only advanced AT&T product development, but it also led to a sizable revenue increase of 10.8%
from 2014 to 2015 and a 11.6% increase from 2015 to 2016. Acquisitions can often lead to
complications in interpreting the company’s financial statements, because the financial
statements typically cannot be retroactively adjusted.
Interpretation of Revenue Growth
Intercorporate investments require extra interpretation, in which it may be more difficult
to analyze the financial statements of the company and analysts’ may be less accurate with their
interpretation. Consolidated financial statements, like the ones provided by AT&T, depict AT&T
as the parent company and DirecTV as its subsidiary. According to Revsine, “these financial
statements act to eliminate corporate boundaries and views the economic activities of parent
and subsidiary companies as one unified entity.” (Revsine, 2020)
Users of financial statements should be hesitant when acquisitions are involved. In this
scenario, one must acknowledge that AT&T’s 13.1% revenue growth in 2016, was because of
the successful acquisition of DirecTV in 2015. “All growth in the consolidated revenue is
attributed to the acquisition.” (Revsine, 2020) Failure to acknowledge the changes in disclosures
could cause one to inaccurately evaluate a company’s growth in revenues. In the case, AT&T
failed to include DirecTV's calculations in 2014 disclosure, however the 2016 disclosure
recorded the total amount.
According to Revsine, “a pro forma note to the financial statements that gives
information for key income statement items as if the acquisition had taken place on the first day
of the earliest fiscal year presented.” (Revsine, 2020) In the case, “the pro forma note
disclosures account for 2014 and 2015,” because the acquisition of DirecTV occurred during that
time frame. One can notice that AT&T tried to take the pro forma approach when declaring
their revenue, in which they included DirecTV’s revenues for the entire year. The pro forma
approach would offer the best estimation of revenue growth rates for AT&T because it offers a
more precise estimate of the progression of the company’s sustainable growth in revenue, for
years to come, rather than the growth rate based on the financial statements.
Estimation of AT&T Growth
Given the information provided in the case, one can notice that it would be more
difficult to forecast the 2017 sales due to the GAAP pro forma disclosures do not give adequate
information, therefore reconstruction of financial statements would be infeasible. Analysis and
growth trends for AT&T would be deceiving to those who are analyzing the data because of the
notable growth in revenue by the acquisition of DirecTV. According to Rouen et al,
“Components of firms’ GAAP earnings stemming from ancillary business activities or transitory
shocks are significant in frequency and magnitude and these components have grown over time
and are dispersed across various sections of the 10-K.” (Rouen et al., 2020) Rouen et al also
states that excluding acquisitions from GAAP earnings, “yields a core earnings measure that
distinguishes between the recurring and non-recurring components of net income and forecasts
future performance.” (Rouen et al., 2020)
Conclusion
The effectiveness of the data that is released on the income statement is to help users
identify distinctions in revenue, for instance the use of footnotes; merger and acquisitions
transactions and cash flow statements from various sections of the 10-K form. (Rouen et al.,
2020) “Consecutive adjustments to GAAP revenue assets can sabotage a company’s estimation
for the forthcoming years.” (Nallareddy et al., 2020)
As Christians it is imperative to act with integrity. Acquisition of another company can be
a chaotic time for many. For the parent company, it means extra work to record and disclose the
acquisition of the subsidiary on the financial statements and learning about the functionalities
of the new business. For the subsidiary, it means potentially changing the business
functionalities to conform to the parent company. And for analysts, it means that there could be
increased pressure to ensure that one is analyzing financial data and evaluating the business
correctly. Proverbs 12:22 states, “Lying lips are an abomination to the Lord, but those who act
faithfully are his delight” (Proverbs 12:22, ESV)
References
English Standard Version Bible. (2016).
Nallareddy, S., Sethuraman, M., & Venkatachalam, M. (2020). Changes in accrual properties
and operating environment: Implications for cash flow predictability. Journal of
Accounting and Economics, 69(2-3). doi: https://doi.org/10.1016/j.jacceco.2020.101313
Revsine, L. (2020). Financial Reporting & Analysis. New York: McGraw-Hill Education.
Rouen, E., So, E., & Wang, C. (2020). Core Earnings: New Data and Evidence. Journal of
Financial Economics. Retrieved from https://www.hbs.edu/ris/Publication
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