AT&T Synergy Claims Should Be Taken With Grain of Salt

Merger activity is heating up, and with it talk of “synergies.” But what happens to those promises once a company has completed an acquisition?

Take AT&T. The telecom giant has claimed synergies from buying T-Mobile USA will more than offset the $39 billion purchase price. But AT&T has made similar promises alongside previous acquisitions, and it isn't clear it has achieved them. When AT&T announced the $67 billion purchase of BellSouth in March 2006, it said the deal would generate synergies with an annual run rate of $2 billion by 2008, rising to $3 billion in 2010. That was mainly from cost savings in areas like advertising and staffing. The deal closed at the end of 2006. AT&T’s filings show that its total earnings before interest, taxes, depreciation and amortization, or Ebitda, rose by about $2.5 billion between 2006, assuming the combination had been in effect all year, and 2008. That means if the synergies were achieved, profits from the organic business were barely up. As it has done with the T-Mobile acquisition, AT&T also promised the BellSouth deal would save money on capital expenditures. It estimated annual savings of $400 million to $500 million in capital expenditures by 2009, off a base of the combined companies’ 2005 capital-expenditure spending of $17.9 billion, about 15% of revenue. It is hard to see where those savings showed up. AT&T’s capital expenditures averaged $18.4 billion between 2007 and 2010, still about 15% of revenue. And it would have been higher if not for a big dip during the 2009 economic downturn. Indeed, last year it was $19.53 billion, 15.7% of revenue, and AT&T has projected it will be in the “low to mid-$19 billion range” this year.