It’s probably true that once British cellular-phone giant Vodafone decided that it really wanted to buy AirTouch Communications, erstwhile AirTouch suitor Bell Atlantic was sure to lose. After all, Vodafone’s stock trades at a pricey 20 times cash flow–as would be expected given its high-flying profile and its rapid growth–while Bell Atlantic’s shares are much more conservatively priced. As a result, Vodafone felt freer to offer a hefty premium to AirTouch shareholders, since it was paying most of that premium in stock. (In economic terms, this should only make a difference to Vodafone if it thinks its share price is inflated, but no CEO would ever admit to that.)
Vodafone’s winning bid was $58 billion in stock and cash (it works out to $88 a share in stock and $9 a share in cash). Bell Atlantic, by contrast, never went higher than $85 a share, which means, as the Wall Street Journal pointed out, that Bell Atlantic’s second offer was actually lower than Vodafone’s first. (I guess Vodafone wrote off the extra $5 in cash it tossed in after Bell Atlantic made a second bid as a kind of insurance premium.)
Still, it’s not clear that Vodafone should ever have had the opportunity to launch its pre-emptive strike. Bell Atlantic and AirTouch were in negotiations for some time before those talks became public, and by all accounts were close to making a deal. What held up the final agreement was that Bell Atlantic was intent on being able to call the purchase a merger rather than an acquisition. That would have meant that it could have used the more favorable “pooling of interests” accounting method, which would have saved it a few billion dollars in reported earnings over the next 10 years.
That sounds like a lot, but as I’ve argued in this column before, accounting gimmickry is, in the end, irrelevant to the stock market. Using “pooling of interest” would have made Bell Atlantic’s earnings number look better, but it would have made no difference at all in terms of the actual amount of cash that the new business would be generating. The billions that Bell Atlantic would have had to write off are what’s called “goodwill,” the difference between the value of AirTouch’s hard assets and the purchase price. Goodwill is purely intangible, and writing it off has no effect on the underlying value of the business. And since, in the end, investors focus on how much cash a business is throwing off–well, except in the case of Internet stocks, where they focus on how much cash a business is consuming–using “pooling of interest” instead of more traditional accounting would not have made a long-term difference to Bell Atlantic’s share price.
But try convincing Bell Atlantic of that. Bell Atlantic presents a paradoxical face to the world. On the one hand, it wants to be a national player, and it keeps talking about rolling out forward-looking technology like ADSL Internet access. On the other hand, it wants to protect its earnings stability and keep paying its dividend, just like the Baby Bells always have. In 1993, the company’s emphasis on keeping its dividend high was one ingredient in its blown merger with TCI. In 1998, its focus on protecting that earnings-per-share number hurt its attempt to become a truly dominant national cellular provider. Bell Atlantic needs to decide what world it wants to play in: the monopolistic, safe world of Ma Bell or the new world of telecom competition.