AT&T vs.
Verizon
Background
• The telecommunications industry is a cornerstone of the modern
economy, providing critical infrastructure for communication,
information exchange, and digital services. In the United States,
this industry is dominated by a few key players, with AT&T and
Verizon being the largest. Both companies have a long history of
competition, each striving to capture market share and innovate
in the rapidly evolving landscape of telecommunications.
AT&T:
• Founded in 1885, AT&T has evolved from its roots as a telephone
service provider to become a diversified global leader in
telecommunications, media, and technology. AT&T’s strategy has
included significant acquisitions, such as DirecTV and Time Warner, as
part of its effort to integrate media content delivery with its
telecommunications services. However, these moves have also brought
challenges, including increased debt, complex integration processes,
and a shift away from its core telecom business.
Verizon:
• Established in 1983, Verizon has consistently focused on being a leader
in the wireless communications market. Unlike AT&T, Verizon has
avoided large-scale acquisitions in the media space, choosing instead
to invest heavily in its wireless network infrastructure, particularly in 5G
technology. This focused strategy has allowed Verizon to maintain a
strong position in the telecom market, with a particular emphasis on
network quality and customer service.
Strategic Divergence: AT&T
• Has pursued a strategy of vertical integration, aiming to control both
the content and the distribution channels. This has led to significant
investments in media and entertainment, which are seen as growth
areas beyond traditional telecommunications.
Strategic Divergence: Verizon
• Has remained focused on its core strength in telecommunications,
particularly in wireless services. The company’s investments in 5G
infrastructure are aimed at maintaining its leadership in the telecom
sector and capitalizing on the next generation of wireless technology.
Technology and Market Evolution
The telecommunications industry is undergoing rapid technological changes, particularly with the
rollout of 5G networks. 5G promises faster data speeds, lower latency, and the ability to connect a vast
number of devices simultaneously. This technology is expected to be a major growth driver for telecom
companies, influencing everything from mobile communications to the Internet of Things (IoT).
• 5G Investment: Both AT&T and Verizon are heavily investing in 5G technology, but their approaches
differ. Verizon has positioned itself as a leader in 5G deployment, focusing on the quality and
coverage of its network. AT&T, while also investing in 5G, has spread its resources across various
segments, including media and entertainment.
• Wireline vs. Wireless: The traditional wireline business, which includes landlines and broadband
services, is in decline as more consumers and businesses shift to wireless solutions. Verizon’s focus
on wireless gives it an advantage in this trend, while AT&T’s diverse portfolio requires balancing
declining wireline revenues with growth in other areas.
Financial and Operational Challenges
• Debt Management: AT&T’s acquisition strategy has led to a substantial
increase in its debt load. Managing this debt while continuing to invest in new
technologies and maintain shareholder returns is a key challenge.
• Profitability and Efficiency: Verizon’s more focused approach has allowed it to
maintain higher profitability margins compared to AT&T. However, the capital-
intensive nature of the telecom industry requires both companies to continuously
invest in infrastructure, which can pressure margins.
• Regulatory Environment: The telecommunications industry is heavily
regulated, and both AT&T and Verizon must navigate complex regulatory
landscapes that can impact their operations, pricing, and competitive strategies.
How to analyze a Company’s Performance when
Companies are different in Financial and Operational
Aspects?
Steps to Focus on
• Reorganizing Financial Statements: To distinguish between operating and financial
components, providing a clearer view of each company’s core business operations.
• Segment Analysis: Evaluating the performance of different business segments,
particularly wireless and wireline, to understand where each company’s strengths and
weaknesses lie.
• Unlevered Free Cash Flow (FCF): Deriving FCF to assess the companies’ ability to
generate cash from operations and fund future growth.
• DuPont Analysis: Breaking down return on equity to understand the drivers of profitability
and efficiency.
• Impact of Actuarial Gains and Losses: Analyzing how these can affect the financial
results and how analysts might adjust for these effects.
Let us Build this on Excel (Step1)
• Calculate Net Operating Assets. Operating Assets Include items such as
PP&E, Goodwill. And deduct Operating Liabilities (Accounts Payable,
Deferred revenue, other operational liabilities)
• Calculate Net Financial Assets. Cash, marketable securities, and
investments fall under financial assets, as they represent the
company’s financial reserves. And deduct Financial Liabilities that
include short-term and long-term debt, which are the primary sources
of financial leverage.
• Reclassify the Balance Sheet
Let us Build this on Excel (Step2)
• Calculate Working Capital.
• Current Assets – Current Liabilities
• Positive Change: Indicates that more cash is tied up in working
capital.
• Negative Change: Suggests that working capital is releasing cash,
which could be used for other investments.
Let us Build this on Excel (Step3)
• Calculate Unlevered Free Cash Flow to Firm (FCF)
• Unlevered Cash Flow= EBIT (1-Tax Rate) + Depreciation – Change in
Working Capital – Capital Expenditure
Let us Build this on Excel (Step4)
• Calculate ROE using Du Pont Analysis
• Net Profit Margin * Asset Turnover * Equity Multiplier
• Net Income/ Sales * Sales/Beg Assets * Beg Assets/ Beg Equity
