AT&T Wireless 2006 Annual Report Download - page 57

2006 AT&T Annual Report : : 55
We and BellSouth jointly owned AT&T Mobility and the
Internet-based publisher YELLOWPAGES.COM (YPC). In the
AT&T Mobility joint venture, we held a 60% economic interest
and BellSouth held a 40% economic interest and in the YPC
joint venture we held a 66% economic interest and BellSouth
held a 34% economic interest. For each joint venture, control
was shared equally. We and BellSouth each accounted for the
joint ventures under the equity method of accounting,
recording the proportional share of AT&T Mobility’s and YPC’s
income as equity in net income of affiliates on the respective
consolidated statements of income and reporting the owner-
ship percentage of AT&T Mobility’s net assets as “Investments
in and Advances to AT&T Mobility” and the ownership percent-
age of YPC’s net assets as “Investments in Equity Affiliates”
on the respective consolidated balance sheets. After the
BellSouth acquisition, BellSouth, AT&T Mobility and YPC
became wholly-owned subsidiaries of AT&T.
We paid a premium (i.e., goodwill) over the fair value of the
net tangible and identified intangible assets acquired for a
number of reasons, including the following:
AT&T Mobility
• Ownership of 100% of AT&T Mobility will permit us to
better integrate AT&T Mobility offerings with our other
communication offerings. We expect that this will create
enhanced marketing opportunities, significant network
synergies resulting from the combination of multiple
Internet Protocol (IP) networks and the ability to more
rapidly develop and make available advanced products
and services. The ownership change in AT&T Mobility will
also improve the speed and focus of decision making,
which should help to develop and deliver more quickly
the new products and services customers desire.
Network Integration
• The merger will allow for the ability to integrate IP
networks of AT&T, BellSouth and AT&T Mobility into a
single fully-integrated wireless and wireline IP network
and will not only offer substantial cost-saving opportuni-
ties, but should also allow us to offer the desired
products and services demanded by customers.
• The addition of the BellSouth wireline network, which
already includes a substantial build-out of fiber-optic
cable to points near end-users, will complement our
existing plans to deploy IPTV to existing wireline service
areas and to increase the number of potential customers
for our IPTV product.
The application of purchase accounting under FAS 141,
requires that the total purchase price be allocated to the fair
value of assets acquired and liabilities assumed based on
their fair values at the acquisition date, with amounts
exceeding the fair values being recorded as goodwill. The
acquisition of BellSouth’s portion of AT&T Mobility has been
accounted for as a step acquisition. In accordance with
purchase accounting rules, BellSouth’s investment in AT&T
Mobility has been adjusted to its fair value through purchase
accounting adjustments.
The assets and liabilities of BellSouth and AT&T Mobility
have been appraised, based on third-party valuations, for
inclusion in the balance sheet, adjusting 100% of BellSouth’s
and 40% of AT&T Mobility’s values. Long-lived assets such as
property, plant and equipment will reflect a value of replacing
the assets, which takes into account changes in technology,
usage, and relative obsolescence and depreciation of the
assets, sometimes referred to as a “Greenfield approach.” This
approach often results in differences, sometimes material,
from recorded book values even if, absent the acquisition, the
assets would not be impaired. In addition, assets and liabilities
that would not normally be recorded in ordinary operations
will be recorded at their acquisition values (i.e., customer
relationships that were developed by the acquired company).
Debt instruments and investments are valued in relation to
current market conditions and other assets and liabilities are
valued based on the acquiring company’s estimates. After all
values have been assigned to assets and liabilities, the
remainder of the purchase price is recorded as goodwill.
These values are subject to adjustment for one year after the
close of the transaction as additional information is obtained.
The allocation process requires an analysis of acquired
fixed assets, contracts, customer lists and relationships,
contractual commitments, legal contingencies and brand
value to identify and record the fair value of all assets
acquired and liabilities assumed. In valuing acquired assets
and assumed liabilities, fair values were based on, but not
limited to: future expected discounted cash flows for cus-
tomer relationships; current replacement cost for similar
capacity and obsolescence for certain fixed assets; compa-
rable market rates for contractual obligations and certain
investments, real estate and liabilities, including pension and
postretirement benefits; expected settlement amounts for
litigation and contingencies; and appropriate discount rates
and growth rates.
The assets and liabilities of BellSouth were recorded at
their respective fair values as of the date of the acquisition,
December 29, 2006. Additionally, we recorded BellSouth’s
ownership percentage, or 40%, of AT&T Mobility’s assets and
liabilities at their respective fair values and our ownership
percentage, or 60%, of AT&T Mobility’s assets and liabilities at
their historical, or book value. We recorded goodwill of
$54,024 as a result of the BellSouth acquisition. We have
obtained preliminary third-party valuations; however, because
of the proximity of this transaction to year-end, the values
of certain assets and liabilities are based on preliminary
valuations and are subject to adjustment as additional
information is obtained. Such additional information includes,
but is not limited to: valuations and physical counts of
property, plant and equipment, valuation of investments and
the involuntary separation of employees. We will have
12 months from the closing of the acquisition to finalize our
valuations. Changes to the valuation of property, plant and
equipment may result in adjustments to the fair value of
certain identifiable intangible assets acquired. When finalized,
material adjustments to goodwill may result.
We have not identified any material unrecorded pre-
acquisition contingencies where the related asset, liability or
impairment is probable and the amount can be reasonably
estimated. Prior to the end of the one-year purchase price
allocation period, if information becomes available that
would indicate it is probable that such events had occurred
and the amounts can be reasonably estimated, such items will
be included in the final purchase price allocation and may
adjust goodwill.