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In this case study you are to analyze the strategic scope of the horizontal acquisition by Verizon C Show more In this case study you are to analyze the strategic scope of the horizontal acquisition by Verizon Communications (hereafter referred to as Verizon) of Verizon Wireless from Vodafone. Discuss whether or not this deal improves Verizons sustainability of its resources and its performance? Does this acquisition meet the two tests of broad scope? Is so how? If not why not? How does the acquisition of this strategically valuable resource meet the Collis and Montgomery resources tests discussed in Lesson Topic 1? How is value created by this acquisition? In two decades Vodafone became the telecommunications leader in Global Systems for Mobile networks (www.associatedcontent.com). Vodafone provides innovative and cutting edge telecommunications services on the largest wireless network on earth. Verizon Wireless is a joint venture between Verizon Communications out of New Jersey and the European-owned telecommunications company Vodafone. Verizon Wireless is a wireless communication carrier that operates in the continental United States. IT was born from a joint venture between Bell Atlantic (which would later become Verizon and Vodafone in 1999. Verizon Wireless has been very good to the partners and they have been able to split sizable profits from the deal over the past couple of years. In 2012 Vodafone received $8 billion in dividend payments for its 45% share of the venture. Vodafone was formed in 1983 as a joint venture between Rascal Electronics (a UK electronic firm) and Millicom (a US telecom company) and was granted one of two mobile phone licenses in the UK (www.associatedcontent.com). That became the UKs first mobile license. The name Vodafone came from the firms goal to establish a voice and data services over cellular telecommunication networks. In which the VO is represents voice and the DA symbolizes data hence Vodafone (www.associatedcontent.com). In 1985 Vodafone launched its service but as a Rascal subsidiary (www.vodafone.com). In May 2000 Vodafone launched Verizon Wireless (www.vodafone.com). Vodafone and Bell Atlantic combined their US wireless assets to make up Verizon Wireless (www.vodafone.com). Vodafone later launched YORN (Young Original Network) first global and integrated communications network a brand new concept of content initiatives events and offerings for the younger generation (www.vodafone.com). Currently Verizon Wireless provides wireless communication services to over 103 million customers nationwide including customers in Hawaii and Alaska. Its products include wireless voice and data services using the largest wireless voice and data network in the United States (Hardawar 2013). Cingular Wireless is currently the leading cellular carrier when it comes to amount of customers on its wireless network. However as Verizon Wireless continues to grow its market share as the United States second largest wireless carrier it ranks number one in total revenue collected as well as how it is viewed by Wall Street. Verizon Wireless strong market position perception of quality and its proportion of income has a strong competitive advantage that would allow a small price increasemaking the demand inelastic quality demand stretches very little in response to price change (McConnell et. al 2004). Verizon Wireless is the most profitable division of Verizon and it makes sense for Verizon to want full control. Verizons desire to fully own the wireless unit intensified as consumers demand for all things mobile grows unabated. They were looking at a world where growth was coming from these ancillary devices. Such a deal tightens Verizons control over its fast- growing wireless business which is outpacing U.S. rivals (Welch Campbell & Simmons 2013). CEO McAdams believes converged services is a huge opportunity particularly given Verizon Communications existing FiOS broadband footprint Verizon Wireless LTE footprint and the companies vast content relationships It leads to more creative subscriptions plans new types of advertising or perhaps even business ideas that have not even been considered. Verizon Wireless generates a lot of cash Verizon could use at a time when the landline business might not be able to fund its dividend (Welch Campbell & Simmons 2013). Thus full ownership gives Verizon significant financial benefits when it comes to dividends as well as seamless integration that will allow the buyout to profit more quickly. Verizons CEO McAdams speaking on CNBCs Squawk on the Street on Tuesday September 2013 noted Verizon has paid $25.5 billion in dividends since January 2012 45% of which have gone to Vodafone (Thomson 2013). Verizons buyout of Vodafones 45% portion of the wireless company gives Verizon it an edge in an industry where competition and consolidation continue to mount. The wireless industry is getting fiercely competitive as consolidation becomes more and more common. Although AT&Ts was essentially blocked from acquiring much more of substance in the United States because of the FCCs and Department of Justices nixing of the companys bid to buy T-Mobile USA for $39 billion in 2011 in April of 2013 MetroPCS Communications merged with T-Mobile USA and Japans SoftBank was given the OK in July to purchase Sprint Nextel for $21.6 billion (Thompson 2013). The $130 billion deal is the third-largest merger-and-acquisition transaction ever and boost worldwide telecom deals to $224.3 billion for 2013 according to Thomson Reuters. The rate of mobile device adoption is slowing from its early years in the U.S. While nearly all adults in the U.S. carry a mobile phone demand for other home devices that may require wireless connections such as tablets thermostats refrigerators home security equipment and solar power motoring LP gas tank level monitoring and cameras is growing. In responding to the trend U.S. wireless carriers have rolled out data-sharing plans that can be accessed by all family members and they will make up for the losses in voice and text revenues. Even in the saturated market (Verizon Wireless) continues to post growth figures said Bill Menezes an industry analyst at research firm Gartner. Theyre looking at a world where growth is coming from these ancillary devices (Yu 2013). Nevertheless seizing full control of the largest U.S. carrier gives Verizon multiple strategic options for future growth. In the most recent quarter Verizon Wireless service revenue grew 8.3% year-over-year as the total number of connections exceeded 103 million. Its 4G LTE coverage the fastest data network type available in the U.S. is available in 500 markets across the U.S. With Verizon fully under its umbrella of operations it can integrate the wired and wireless units more deeply particularly in back-end operations and IT systems Entner said. They can also seamlessly bundle the bill. They can do more joint marketing he said Krantz 2013). Verizon set up its Enterprise Solutions unit to target business customers but the limited ownership of the wireless service has kept it in check Menezes said. They can offer more unified offerings. It is arguably the most valuable wireless assess in the world. Verizons management touts where else can you buy a business with over 100 million loyal customers 50 percent margins with no integration risk. In fact Verizon officials were concerned the proposed buyout would not be approved since U.S. regulators previously blocked AT&T from acquiring T-Mobile in 2011 and Verizon CEO Lowell McAdam feared regulators would only approve the proposed deal if Verizon sold off large chunks of spectrum (Parker 2014 p 1). McAdams went on to say bringing in Verizon Wireless under full control has major implication for future customer service. He specifically addressed the deal enables Verizon to leverage every asset and paradoxically thinking believes gives Verizon the capabilities to provide services to customers they do not know they even need. Furthermore Vodafones stake and its presence in other markets around the world likely affected Verizon Wireless expansion ambitions. Charles Golvin an industry analyst at Forrester Research states They can now make those decisions completely independently. CEO McAdams postulated on the sustainability of unlimited data plans in the market being offered by Sprint and T-Mobile. The physics of spectrum and network management mean that the industry as a whole will more widely adapt to a tiered data pay plan. McAdams reveals Verizon will have excess spectrum as a result of acquiring Version Wireless and more than enough to handle growth needs for the foreseeable future and in fact could sell some of the excess (Parker 2014). Now That Its Done Who Profits Off the Vodafone/Verizon Deal? In a nut shell Favorable conditions in the financing market likely drove Verizon to pick up the pace and close a deal over decade in the making. Interest rates are going up and that could be the driver said Roger Entner a wireless industry analyst at Recon Analytics. Financing the deal becomes increasingly expensive (Yu 2013). Verizon paid $58.9 billion in cash and $60.2 billion worth of Verizon shares as well as $5 billion in loan notes. Verizon also paid with its 23% stake in Vodafone Italy worth about $3.5 billion and assume $2.5 billion of Vodafones debt. Verizon Communications Expenses Bank Gains Under the deal Verizon Communications paid for their 45 percent stake in Verizon Wireless giving Verizon Communications sole ownership of Verizon Wireless. Vodafone meanwhile paid to Verizon for its 23.1 percent minority stake in Vodafone Italy returning full control of the Italian carrier to Vodafone. Lastly Verizon also took on $2.5B USD of Vodafones debt obligations making the total deal worth roughly $129B USD. Of the $129B USD in the deal $58.9B USD is cash. Where does one get close to sixty billion dollars in cash? Well you go to the bank of course. The deal is funded by: Bond Offerings $49B USD (U.S. 8-part Sept. 2013) $5.4B USD (Europe 3-part Feb. 2014) Bridge Loan 1-year $6.6B USD The tough work of funding the deal began when Verizon carried out an eight-part series of bond offerings designed to raise $49B USD. To get that money it tapped the experts. Its lead bank underwriters were: JPMorgan Chase & Comp. (JPM) Morgan Stanley (MS) Bank of America Corp. (BAC) Barclays plc (LON:BARC) For the banks this was a sweet payday as the fees Verizon paid them were above average for debt offerings. The total payments to the top four banks were $41.6M USD a piece with $265.3M USD in total paid to these banks and other smaller underwriters. But Verizon actually only paid about half of that as Vodafone agreed to split the fees. The offering was a wild success achieving its lofty goal. The strong interest was driven by Verizons willingness to sweeten the deal on the interest rates of its bonds which varied in length from 3 years to 30 years. Its two biggest offerings were a 10-year bond with a 5.15 percent yield and a 30-year bond with a 6.55 percent yield. Those were some nice rates versus the 2.90 percent and 3.90 percent the U.S. Department of the Treasury was offering at the time.Verizon could afford to give bond buyers and the banks a bit more thanks to the last years low interest rates and its strong credit. The Verizon Communications bond sale set a record for investment-grade bonds breaking the record set earlier in the year by Apple Inc. (AAPL). Sprint Nextel Corp. (S) similarly achieved the largest debt offering in five years for junk grade bonds last year selling $6.5B USD in bonds in Sept. 2013. It wrapped up the final two instruments it needed to pay for the deal: a $6.6B USD bridge loan from its creditors and a $5.4B USD bond offering in Europe. Verizon chose Europe for its final smaller sale as interest rates in Europe are currently significantly lower than in the U.S. Some of this debt carried a 2.06 percent return versus 1.18 for 12-year swappable European bonds. The bonds offered in the UK were set at 1.45 percent (145 basis points) more than UK government debt of the same length. With $61B USD in hand Verizon only need to release stock which it did on February 24 to close the deal. It issued Vodafone 1274764121 shares of Verizon common stock to accompany the $58.9B USD hoard. Verizon shares closed at a price of $47.27 and under the deal terms $0.10 USD/share was deducted from the price to give a figure of $60.1B USD. Thats on the low end $47-51 USD/share range that Verizons deal had locked the share prices in at. That means that Vodafone gets more shares which is good news for it if share prices go up but bad news if Verizon struggles (Burrows 2013). Impact on Verizon Shareholders Verizon shareholders including those who hold Vodafone shares and acquired Verizon shares as part of the deal received their normal dividends. Otherwise they did not receive any direct payouts from the deal. They will likely see a boost at some point in dividend income as the deal is expected to improve cash flow from Verizon Wireless by 10 percent. In other words Vodafone shareholders cash out Verizon shareholders go long UK/U.S. taxmen and their bank brethren collect and charity gets roughly 7 thousandths of a percent of the total haul. Sources: Verizon and Vodafone Financial Times Investors Chronicle Bloomberg.Verizon sees its EBITDA-to-debt ratio soar to 2.3 but it hopes to cut that to 2.22 by the end of the year. While Vodafone expects its debt ratio to increase from 2014-2016 Verizon hopes to trim it to 1.86 by 2016. It currently has roughly $110B USD in debt but by the end of the year it hopes to be at around $100B USD. Verizon may be able to launch additional efforts such as share repurchasing using its consolidated profits but that will be in a future tense. Verizon shareholders will benefit from increased exposure of the stock. As part of the deal Verizon will now be directly listed on the London stock exchange. Summary Summarizing the deal breakdown: Verizon Gives $2.5B USD in debt obligations take on $61B USD in loans for cash $60B USD in stock Vodafone Italy minority stake Gets Sole ownership of Verizon Wireless Verizon shareholders Give (nothing directly) Get (nothing directly) Vodafone Gives 45 percent stake in Verizon Wireless Income from that stake Gets $10B for network improvements ~60% cut in debt Sole ownership of Vodafone Italy U.S. Government Gives (nothing) Gets $5B USDUK Government Gives (nothing) Gets $1.7B USD in dividend income tax (estimated) $1.7-3.4B capital gains tax (estimated) Banks Give $6.6B loan Get $500M+ in fees $1B+ from short term debt appreciation Billions from long term debt appreciation Charities Give (to the public but not to the deal) Get ~$1M USD in UK roundoffs SELECTED FINANCIAL DATA (Verizon 2012 Annual Report) VERIZON COMMUNICATIONS INC. AND SUBSIDIARIES 2012 2011 2010 2009 2008 Results of Operations Operating revenues $115846 $110875 $106565 $107808 $97354 Operating income 13160 12880 14645 15978 2612 Net income (loss) Attributable to Verizon 875 2404 2549 4894 (2193) Per common share basic .31 .85 .90 1.72 (.77) Per common share diluted .31 .85 .90 1.72 (.77) Cash dividends declared Per common share 2.030 1.975 1.925 1.870 1.780 Net income attributable to Non-controlling interest 9682 7794 7668 6707 6155 Financial Position Total assets $225222 $230461 $220005 $226907 $202185 Making a case for Price inelasticity Verizon Wireless cellular service is inelastic because the products and services it offers makes them the dominant leader in the wireless industry; therefore a 10% change in calling plan prices (monthly access fees) would not affect the quantity demanded. Verizon Wireless can depend on this inelasticity in their pricing model because of the strength of its brand and the wealth of products and services it offers. Verizon Wireless competitive advantage comes from its ultra-low churn rate (the percentage of customers who disconnect their service is less than one percent of its 103 million customer base). This indicator suggests that custo