In the past week, it was reported that BT were set to
finalise its acquisition of Britain’s largest mobile operator, EE, for the
hefty fee of £12.5bn. The merger would lead to the combined group supplying
home-phone lines, broadband, TV and mobile services (BBC News, 2015).
The expected merger would combine “the UK’s biggest
telecoms and broadband network with the country’s most advanced 4G mobile
system” (Monaghan, 2015).
With BT set to splash the cash to add to its current
services, it is worth noting the effect this could have on their shareholder
value maximisation. The deal may look good on paper, but major mergers of the
past haven’t all been as successful as first thought. Also, from an external
perspective, it is worth appreciating the knock on effect this will create
within the market and its competitiveness.
A primary aim of all
profitable companies is to maximise shareholder wealth. Their wealth is
measured by the company’s share price, and this price takes into account
factors such as timing, magnitude and risk of cash flows generated over a
period of time. The wealth created commonly indicates that the company has
satisfied all stakeholders (Graham et al, 2009).
BT’s potential acquisition of EE is a clear statement of intent
to dominate the UK telecoms market. On the day the two firms agreed the deal,
BT’s share price rose by 4.8 per cent. This will give BT access to EE’s
31million customers (Ehrenburg, 2015). One of the clear indicators of shareholder
wealth (as mentioned above) is share price, and with BT’s rocketing up due to
the deal this can only be seen as a positive sign for shareholders. However,
some shareholders may seek information on their motive for the move. Obviously they
want to reinstate themselves within the mobile networking market, but is their
primary aim to add this service to their current services to fend off
competitors. The group have made plans to target customers with a bundle deal,
providing all four of their services in one unique package, however Talk Talk
and Virgin media already offer these packages (Bachelor, 2015). Some
shareholders may be concerned that they are chasing the pack, in the sense that
they are following other major competitors with an all in one deal. Although the
bundle deal looks a promising venture, providing this will lead to the reduced
cost of individual services which could concern shareholders.
Regarding competitiveness, Porter’s 5 forces model provides
a good insight into what companies identify and threats and opportunities within
markets. Porter’s 5 forces model, according to Hill and Jones (2007, p45),
concerns 5 forces that shape competition in markets. They are: 1 – risk of
entry by potential competitors, 2 – intensity of rivalry among established
firms, 3 – bargaining power of buyers, 4 – bargaining power of suppliers, 5 –
closeness of substitutes to products/service. With Talk Talk and Virgin already
providing a bundle package they are not providing diversity and with those companies
already establishing a popular bundle deal, BT could be seen as a substitute
for their services, so this would be seen as a huge threat to their future
plans. There is little chance of other companies following BT’s plans as the majority
who provide services do so solely, not in a 4 service deal. Bargaining power of
suppliers could affect BT, as they suppliers could see BT’s plans and opt to
hike their prices to force BT to pay more for their supplies.
Source: Hill and Jones (2007, p45)
With EE services to be combined with BT’s current amenities,
the concept of competitiveness is becoming a smaller factor. With so few
companies offering multi-product/service deals customers may be forced to opt
for bundle deals, if BT decides to increase the cost of individual services
costs to force customers into a package deal. The British public may not take
too kindly to this approach, but in a sense it would be an intelligent decision
for the company to make as their popularity could increase as the company would
be providing a diverse service.
It is worth noting the cost of the acquisition, and the effects
this would have on their other ventures. With BT paying over £12 billion for
the purchase of EE, some of their shareholders may feel concerned that they did
not compete more with Sky for the English Premier League football rights. Sky
forked out over £4 billion for the rights of 126 games, whilst BT paid £960m
for 42 games (all in an annual basis). Although everyone concerned was shocked that
Sky paid so much for the rights, some may think that BT did not do enough to
challenge them (BBC Sport, 2015). It is worth noting the satisfaction of shareholders,
as UK football rights is a huge deal worth mega money, they may be alarmed that
BT are putting all their eggs in one basket.
Reference
List
Bachelor, L. (2015) The
Guardian. http://www.theguardian.com/money/2015/feb/05/how-bt-purchase-ee-affect-me
BBC
Sport (2015). Retrieved from http://www.bbc.co.uk/sport/0/football/31357409
Ehrenburg, D. (2015) City
A.M. Retrieved from http://www.cityam.com/208765/bt-agrees-deal-buy-mobile-network-ee-125bn
Graham, J. Smart, S. Megginson, W. (2009). Corporate Finance: Linking Theory to What
Companies Do. Third Edition. Ohio: Cengage Learning.
Hill, C., Jones, G. (2007) Strategic Management: An Integrated Approach. Eight Edition.
Boston: Cengage Learning.
Monaghan, A. (2015). The
Guardian. Retrieved from http://www.theguardian.com/business/2015/feb/05/bt-to-buy-ee-4g-broadband
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