Major Mergers - Implications for Shareholder Wealth Maximisation, Market Competitiveness, and Society

 

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.  

 

All in all, I believe that regulators should move to cancel the merger. BT are clearly attempting to dominate the market, which is not particularly good for customers as they will have limited choice of what services they can purchase due to larger companies dominance. I was surprised that BT did not fork out more on the premier league rights, as this would have increased the urge for the public to buy their TV services. In terms of shareholder wealth, although there are some concerns, as raised earlier, I believe their bundle deal will prove massively popular as customers could get 4 services at a reduced price. With EE currently providing their network services to 31million across the UK (almost half the population), the deal will surely put BT into the driving force within the industry.

 

 

Reference List

Bachelor, L. (2015) The Guardian. http://www.theguardian.com/money/2015/feb/05/how-bt-purchase-ee-affect-me

 

BBC News (2015). Retrieved from http://www.bbc.co.uk/news/business-31144009

 

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