Effective merger and acquisition outcomes in telecommunication companies
This chapter highlights the results and analysis of the primary and secondary data that was obtained. Thematic data analysis was used for the interviews and case studies, which identified common patterns, phrases, ideas, and topics within the text. The first research question aimed to find the critical motivations of telecommunication companies to select mergers and acquisitions as the form of corporate restructuring. An overview of the interviews carried out with the high-level management from the four companies indicated factors that lead to effective merger and acquisition outcomes. The case studies also contain information on the merger and acquisition effectiveness.
Impact of Mergers and Acquisitions on Corporate Restructuring
The telecommunications sector in the US experienced significant growth after the rise of mergers and acquisitions, and this led to an increase in earnings in the corporates involved. The operating capacity of the three companies increased significantly through their mergers and acquisitions, as well as accumulated a build-up of new equity capital. This enhanced their capacities of profit and revenue after mergers and acquisitions.
Case Studies Analysis
AT&T Bell South Acquisition
Key Motivations for Corporate Restructuring
In 1997 AT&T merged with the Pacific Telesis Group then the Southern New England Telecommunications Corporation in 1998 (Brown and Bird, 2019). By 1999 the corporation merged with the Ameritech Corporation, and this gave it the ability to expand its wireline operations within the US. In 2011, AT&T acquired T-Mobile USA, which made it become the second most popular mobile carrier in the US because it had a market share of 43 percent from 32 percent before the merger (Brown and Bird, 2019).
AT&T acquired Bell South in 2006, which provided it with control of 40 percent of Cingular Wireless, which meant that both companies had to share control of AT&T Wireless, which is the most popular mobile phone operator (DePamphilis, 2019). As a result, AT&T Incorporated has managed to become the most prominent US-based phone company following the acquisition of Bell South that added it an additional 1.2 million wireless mobile phone clientele (DePamphilis, 2019).
Shareholder Value
Based on the literature, stakeholders believe that mergers and acquisitions instigate beneficial effects for the companies involved. On the other hand, Han et al. (2018) reveal that mergers and acquisitions can lead to negative values for individual companies after the process is complete. In the case of AT&T acquisition of Bell South, there were synergies between Bell South as the target and AT&T as the acquirer which were immediately valued by the market. This merger and acquisition deal bidder (AT&T) experienced a significant positive return of 0.7 percent (Nandi and Nandi, 2017). Moreover, in terms of the shareholder’s wealth, the target (Bell South) experienced abnormally high returns especially when the acquisition was still hostile. However, the bidders (AT&T) experienced loss by an average of 2.5 percent (Sarala et al., 2019).
This acquisition indicates that synergies is a motive for mergers and acquisitions because the target returns are significantly successful in the US. According to Koi-Akrofi (2016), synergies can be manifested in form of managerial and financial aspects, this plays an important function in generating returns, growth, and margins. In the acquisition of Bell South by AT&T, the financial synergies arose from their combined average capital costs which led to high cash flow.
Jedin and Md Saad (2016) indicate that synergies indeed create value but accurate estimation has to be ensured because some mergers and acquisitions can fail to attain planned synergy goals. AT&T acquired Bell South in order to create a higher value for the corporation as compared to how it was before the transaction. This gave the corporation a higher competitive advantage in the US telecommunications market.
Merger Risks
It took a while to reach an agreement for AT&T and Bell South and this is considered as a condition that may make the merger and acquisition fail or succeed. For instance, Bell South had set expectations that AT&T was unable to meet at the time. The companies had significantly distinctive corporate cultures. Bell South was a conservative company that had a strong ethic of abiding by rules from the top management. At the same time, AT&T was more liberal and expected staff to be independent and create solutions to arising problems.
Based on the literature review, dysynergy can occur during the merging and acquisition process and this can weaken the competitive position of the companies or destroy it (Koi-Akrofi, 2016).
Exxon and Mobile Merger
Key Motivations for Corporate Restructuring
The Mobile Corporation and Exxon consolidated in 1999 and is still the most influential company in the world. Both companies were struggling to operate because of their reduced profits. Furthermore, based on the financial market at the time, the companies were only going to be more profitable if they could make themselves more efficient (Jedin and Md Saad, 2016). Exxon attempted to become more effective by streamlining operations which attained immense economies of scale. As a result, its marginal cost of instilling further improvement exceeded the savings that were produced (Jedin and Md Saad, 2016). This meant that Exxon needed to achieve significant growth to attain scale economies.
Exxon determined that it would increase the value of its assets by acquiring another company to maximize reserves that would catalyse an increase in the wealth of the stakeholders and reduce operational risk, appreciate the assets of the company and increase production. Exxon determined acquisition of Mobile as risk free even if it would have been at a high premium price (Han, Jo, & Kang, 2018). Thus, it can be concluded that the low financial market in the telecommunications sector triggered the merger and acquisition at the time.
The turnover growth from the post-merger grew significantly higher than the pre-merger growth rate of both companies. This means that the merger attracted a superior market performance due to the market power of each of the firms that were set to merge. Furthermore, the growth was as a result of significant asset acquisition through both companies’ internal investments.
Value Factors
Exxon and Mobile formed a horizontal merger and this showed that significant synergies would be formed between the companies (Han, Jo, & Kang, 2018). Apart from the evident strategic advantages, the two companies would combine their telecommunications markets and limit duplicative administrative operations which would increase Mobile’s value to Exxon as compared to its value to an organization outside the telecommunications industry. Such qualitative benefits show that a merged company can be more valuable in comparison with companies that remain separate.
The financial markets also reacted positively to the merger because the stock price of Mobile rose a short time after the merger was announced. Exxon, on the other hand, had its stock price fluctuate before its trading price returned to normal. This implied that the market considered the merger would create value and that Exxon was merging with Mobile at a fair price.
An empirical study carried out by Appelbaum et al. (2017), aimed at investigating how stakeholders react to mergers and acquisitions in the telecommunications industry found that such activities could have a negative impact to the market and the shareholder value. This means that synergy or value creation through mergers and acquisitions may fail to occur even if the company size is set to increase.
Merger Risks
Unfortunately, when two companies are set to merge, there are challenges that they have to overcome so that the projected benefits can be achieved. This includes forming a common culture rather than maintaining distinct cultures from each company, meeting antitrust and regulatory requirements to ensure operations of the competitive marketplace, and retaining key personnel that can offer their beneficial expertise and knowledge.
From a regulatory point of view, the two companies have distinctive markets where they dominate individually (Angwin,et al., 2016). Therefore, this may affect the success or failure of the merger unless the competitive markets are maintained. However, retention of the executive staff has strengthened the merger of the companies because different market strategy perspectives are applied and this has enabled the merged company to remain competitive. Exxon had exploited various market niches with Mobile but it had a negative outcome because the two still acted as competitors which threatened the maintenance of the merger. Nonetheless, this situation has since been improved on and the performance of the merger has increased significantly.
Sprint Corporation and Nextel Communications
Key Motivations for Corporate Restructuring
Nextel Communications and Sprint Corporation merged in 2005 and was renamed as Sprint Nextel Corporation. Sprint Corporation purchased Nextel Communications when they were the third and fifth major US mobile providers respectively. The two companies merged so that they could grow their capital market and reduce the capital costs. In the literature review, it is indicated that companies consider mergers and acquisitions as a way of growing rapidly, produce economies of scale, reduce cost of capital, and access improved capital markets. Brown and Bird (2019) stated that some companies partake in mergers and acquisitions as a way of generating profits as well as pursuing diversification and exploring new markets. Nextel Communications agreed to be purchased by Sprint because it had a significant share of the customer market and it was dominant in the wireless data communications. On the other hand, Nextel mostly had a customer base that mainly included business clientele. Therefore, the merger was projected to improve operational efficiency specifically in customer support, sales, infrastructure marketing and overall administration cost.
Value Factors
Nextel Communications and Sprint Corporation formed a mutually beneficial merger and this showed that significant synergies would be formed between the companies (Jedin and Md Saad, 2016). Apart from the evident strategic advantages, the two companies combined their telecommunications markets and limited duplicative administrative operations which would increase Nextel’s value to Sprint as compared to its value to an organization outside the telecommunications industry. Such qualitative benefits show that a merged company can be more valuable in comparison with companies that remain separate. Nextel Communications agreed to be purchased by Sprint to add value to its customer market and acquired some of the wireless data communications market from Sprint.
Merger Risks
Both companies failed to be compatible in their corporate culture and infrastructure which made the merger be at risk of failing (Sarala et al., 2019). The main aspect that led to the merger’s failure was the cultural difference. Spring had the bottom-down culture while Nextel had the opposite entrepreneurial culture. Even though the newly merged company attempted to blend the culture by using consultants, the tension between the two companies worsened.
The literature review indicates that the process of mergers and acquisitions have led individual companies to experience negative values after the mergers and acquisitions formalities have been finalised (DePamphilis, 2019). In addition, it is highlighted that company stakeholders usually formulate wrong values during pre-mergers and acquisitions process owing to grey areas and hidden costs that are usually not assessed before initializing the process. The two parties in this case failed to trust each other because Sprint eventually realized that Nextel’s network was deteriorating which they assumed led to increased customer loss in the company (Brown and Bird, 2019).
Additionally, the network infrastructure of both parties combined failed to be compatible which was a major contributor to the merger failure. This meant that the Sprint phones could not use the Nextel network system and vice versa because of the difference in network systems. Ultimately, the merger’s combined company assets were not compatible and this meant that the new company had to dispose some assets that were not useful. Therefore, it is important to measure the success of a merger by determining whether the assets increase in value after a merger or reduce (Appelbaum et al., 2017).
Thematic Analysis
Theme 1: The Motivations/Reasons for Acquisition or Merger
When the respondents were asked to express their perceptions regarding the motivations/reasons that prompted the company to seek for the merger or acquisitions, participant A from the Exxon and Mobile merger stated that “The merger was an opportunity for Mobile to generate more value for its shareholders by instigating synergies that can increase our revenues and control cost by closing gaps within the service range and offering customers with improved services.” Participant C from the AT&T Bell South Acquisition mentioned that, “AT&T pursued the acquisition so that we could be able to have increased market size and share which could only be facilitated through the M&A strategies that was projected to enhance our company’s credibility based on the perspectives of the larger customer.” Hence, it can be interpreted that the motivations/reasons of M&A are triggered by the desire of the companies to enhance their performance and generate additional value for the shareholders, drive revenues, improve credibility, and reduce costs in the long-term.
Interviewee B highlighted that, “Future profits can also be realized through cost reductions from the economies of scale, which is an opportunity to apportion fixed cost especially the ones linked to technology over extensive scale of operations.” Similarly, respondent D pointed out that, “Cost economies can be achieved through merger and acquisition by eliminating duplications in the brand network and functions. M&A was agreed upon because it contributed to the reduction of risks linked to the telecommunications function; hence saved cost because of the geographic diversification.” Respondent E asserted that, “There was the advantage of cost reduction provided by fostering M&A because the size of the company would increase and this would assist to appeal to potential investors hence reduce cost of capital and offer alternative strategies to up-surge the shareholder value.” Respondent F mentioned that, “The telecommunications sector inevitably needs agglomeration which is desirable because it assists to enhance shareholder value by minimizing costs and accelerating revenue, hence establishing sustained business growth.”
Theme 2: Challenges Involved in Effective Implementation of M&A
The research participants were asked to elaborate on the key challenges that affected effective implementation of the merger and acquisition to which varying points of view were illuminated. Participant A examined that, “One of the biggest challenges was communication and this resulted into failure of the company synergies. Interacting with the staff, motivating them, and formulating a culture that will help them strive were the most significant elements of integration. I observed that when mergers and acquisitions occur, management and staff are normally left to deal with the situation alone.” Restricted answers and fear were noted to deter the high-level management from disclosing information which employees require to redirect their initiatives within the merged corporation.
On the other hand, participant C stated that, “As top management, not every manager is focused on increasing shareholder value and this negatively impacts the M&A terms and weakens the competitive position of the companies.” While responded B explained that, “From a general perspective, during the mergers and acquisitions process, the most vital challenge is employee retention and in other scenarios it can become a threat. Even today, mergers and acquisitions still experience retention challenges which arise predominantly from the staff’s negative attitudes. The negative attitude results from uncertainty relating to the company’s future, job security and confusion arising from lack of communication.” Therefore, it is noted that controlling the employees’ negative attitudes is a significant challenge that needs to be addressed so that the mergers and acquisitions can be successful in the telecommunications industry. Based on the responses, it is evident that effective communication has to be maintained due to its importance in helping to embrace mergers.
Participant D explained that, “The telecommunications industry in US has a competitive market that has escalated the need for applying relevant measures to supervise the telecommunications operations. Leadership conflicts and lack of a strategic vision are among the most crucial issues in effectively implementing M&A strategies. In addition, company culture clashes, absence of pre-merger preparations and fulfilling stakeholders’ requirements are additional challenges in effectively implementing M&A.” Alternatively, participant E mentioned that, “High costs were incurred during the merger and acquisition based on the need to upgrade the organizational processes as well as infrastructure to minimize risks and ensure adequate governance. I believe that in order to maximize on the advantages of M&A and reduce risk factors, it is essential to manage the aspects related to cost adequately.”
In a similar sequence, respondent F explained that, “Telecommunications institutions usually fail to create synergy across operations and establishing financial synergy. The mergers and acquisitions in the US telecommunications industry have increased owing to the increasing competition in the market. There is need to consider technical innovations and revamp infrastructure because this is a major challenge to the telecommunications companies.”
It is assessed and reflected from the responses of the high level management that the costs incurred during the M&A, failure to develop operating synergy and establish financial synergy, need to upgrade infrastructural process, and absence of strategic vision are among the crucial challenges in the effective implementation of M&A. Moreover, the study found that the telecommunications sector in US faces issues on stakeholder and leadership preferences that affect M&A procedures negatively.
Theme 3: Impact of the Mergers and Acquisitions on the Performance and Productivity of the Company
Respondents were asked about the impact the M&A had on their company’s performance and productivity and rate their views on a scale of 1 to 10 with 10 being the highest. Participant A responded that, “I would rate it at 9 because the acquisition by AT&T led to the firm acquiring a larger market share. As a result, the company performance increased because we contained the competitors and combined both market shares to increase productivity.” In the same context, participant B noted that, “The operating efficiency significantly improved due to the M&A implementation. The financial performance of the company improved and this was indicative on elements like Return on Assets and Return on Equity. Therefore, I would rate the increase in performance and productivity at 10.” Alternatively, participant C stated that, “Improving the performance of a company and harnessing the advantages of the M&A strategies may lead to deterioration in the company’s performance. This is as a result of failure to synergise operations after the merger and acquisition which affects the performance of the company. Therefore, I would rate it at 5.”
Respondent D asserted from a general point of view that the success of mergers and acquisitions mainly depends on the capability of management, leadership practices, as well as the leader’s strategic vision. As a result, economies of scale are secured, growth is strengthened and sustainability of the company is guaranteed. In this view, the interviewee D provided a rating of 9.
It has been examined that effective M&A has advantageous implications for the productivity and performance of the company and enhances shareholder value. This has been realised by the fact that companies complement one another through their respective strengths allowing them to overcome challenges after they become a combined entity. The operating capacity of the three companies in terms of performance and productivity increased significantly through their mergers and acquisitions as well as accumulated a build-up of new equity capital. This enhanced their capacities of profit and revenue after mergers and acquisitions.
Discussion
The data findings show that the mergers and acquisitions provide an essential technique for the telecommunications organizations to increase value for the key shareholders. This is done by instilling strategies that escalate revenues and control costs as the larger telecommunications companies have potential to attain revenue gains through filling existing gaps in the service range. M&A processes also enable companies to increase their market size and combine the advantages of economies of scale which improves the credibility of the companies. Embracing M&A enhances the performance of the company by generating value for the shareholders and accelerating revenues.
The findings also show that M&A offers the advantage of cost reduction and increases the company size that eventually assists in igniting potential investor’s interest. Literature sources also showed that the business performance of the companies was improved as a result of embracing cultural change that helped in gaining a competitive advantage (Appelbaum et al., 2017). The telecommunications sector in the US experienced significant growth after the rise of mergers and acquisitions and this led to increase in earnings in the corporates involved. The operating capacity of the three companies increased significantly through their mergers and acquisitions as well as accumulated a build-up of new equity capital. This enhanced their capacities of profit and revenue after mergers and acquisitions.
The case of AT&T and Bell South acquisition comprised of an efficient and robust network where AT&T acquired 50.1% of Bell South. After this acquisition AT&T received increased exposure and experienced an improved capital position. As a result, the company was able to build connectivity and enhance its performance. The case study of the Mobile Corporation and Exxon showed that the company improved its position after the merger in the telecommunications market share. Furthermore, the shareholder value increased and the company began to flourish in the US.
However, the Nextel Communications and Sprint Corporation merger clearly defined the factors that could affect the failure. The literature review indicates that the process of mergers and acquisitions have led individual companies to experience negative values after the mergers and acquisitions formalities have been finalised (DePamphilis, 2019). In addition, it is highlighted that company stakeholders usually formulate wrong values during pre-mergers and acquisitions process owing to grey areas and hidden costs that are usually not assessed before initializing the process. The two parties in this case failed to trust each other because Sprint eventually realized that Nextel’s network was deteriorating which they assumed led to increased customer loss in the company.