Financial Analysis of the Merger between Vodafone and Telecom Company - Case Study Example

l Financial analysis of the merger between Vodafone and Telsim Company {Insert university name} {Insert instructor’s name} {Insert student’s name} January 3, 2012. Abstract This particular report will examine the acquisitions and merger between Vodafone and Telsim which is in turkey. The essay will therefore provide a financial analysis of the merger between the two companies. This is be achieved by the company making use of ratio analysis. This will be further achieved by calculating the existing changes in the financial positions of Vodafone Company and Telsim in both the post and pre merger period. Secondly, the report will examine the existing the changes regarding the two companies of the two companies during the post and pre merger periods by making use of non parametric approach. Nonetheless, there was evident of significant alterations pertaining to shareholders’ earnings. However, pertaining to Vodafone and Telsim liquidity position, there was no significant change regarding the same (The economist, 2008, p. 56). The obtained analysis of the merger between Vodafone and Telsim in Turkey shows a clear indication that there is an essential correlation between the merger between the two firms and their financial performance. The report further analyses the key benefits of the merger in addition to the success of the merger between Vodafone and Telsim four years before and four years after the merger. In December 2007 Vodafone Company announced that it will take over Telsim which is the second largest mobile operator in Turkey. Vodafone company the company using funds from Turkish savings deposit and investment fund for a sum amounting to us$ 4.55 billion. Financial analysis of the merger between Vodafone and Telsim Company Introductions Strategic acquisitions, alliances and merges have been embraced by a number of organizations and telecommunication sector is not an exception. This has been further enhanced by the fact that high percentage of firms has the urge of improving their performance so that they can be strategically placed despite the existing competition. Thus the merger between Vodafone and Telsim company in turkey was motivate by the fact that Vodafone as a telecommunication company so the need to reduce not only the operation costs, increase investments, expand its operations globally but also to gain from the benefits of economies of scale and improve the value of the shareholders not only within turkey but also beyond its borders. During the first years after the merger, Vodafone Company seemed to be preparing to handle any external competition (Brigham & Houston, 2009, p. 124). About Vodafone Vodafone as a telecommunication is one of the first telecommunication company in the world. The company operates in 27 countries which are spread in 5 continents. In addition to that the company has 171 million proportionate customers in the whole. The aforementioned figures were as per 2005 report two years before the merger (www.vodafone.com). About Telsim Before Telsim merged with Vodafone Telecommunication Company, it was regarded as the second largest GSM operator in turkey. As per 2005 annual report the company had approximately 8.7M customers. The market of Telsim share was estimated to 21.4% according to the report that was released in 2005. In addition to that in 2004, Telsim as a telecommunication company generated EBITDA and revenue which totaled up to USD 87 million and 712 million respectively (www.telsim.com). Financial results before and after the merger The financial results of the Vodafone Company before and after the merger are reported on the basis of international financial reporting standards (The economist, 2008, p. 56). According to Vodafone official website the company has certain percentage of minority stakes. However, the aforementioned stakes are not included in the consolidated turnover of the company. Furthermore, the company publishes not only its growth trends but also overall scale in the proportionate turnover (www.telsim.com). The proportionate turnover figure of the company is outlined in the tables below (www.vodafone.com). For instance in 2006, it was reported that the company owned 45% of Telsim Company and this resulted into a turnover of approximately £ 10 billion. The aforementioned turnover was similar to £ 4.5% billion turnover that was under the ownership of Vodafone Company before the merger. Nonetheless, it is essential to point out that the proportionate turnover of Vodafone or any other company should not be used an accounting measure as it is not official in nature (Vodafone official website). Hence it is essential that the proportionate turnover of Vodafone is compared with statutory turnover of other companies (Brigham & Houston, 2009, p. 124). In addition to that Vodafone is in a position to give out a proportionate customer figure that is constant. For instant after the merger, Vodafone had a stake of 30% which translated to 10 million customers. The following table indicates the proportionate figure of Vodafone after the merging (Brigham & Houston, 2009, p. 124) Earnings per share of the Vodafone Company before and after the merger For the need of knowing the true return on the investments made by the company, the Vodafone Company had to evaluate all of its investments but not on the basis of total amount on dividend received but on earning per share of the company. This is because the higher the EPS of the company after the merger the better was the prospects and the performance of the company (Vodafone official website). Key advantages of the merger The fact that the Vodafone company was in a position to merge with Telsim is an indication that the company is in a position to have full control of the biggest market share within the European region. Additionally, the merger has proven to be consistent with strategy of the Vodafone Company which is to increase its exposure so that it can have wider market coverage (Brigham & Houston, 2009, p. 124). Moreover, the key benefits of the Vodafone Company merging with the Telsim are that the company was in a position to be exposed to the Turkish market which is not only growing but also attractive in nature. Based on the report released by www.telsim.com the Turkish market has a market population of approximately 72 million people. The market which is fourth among the largest market in the European region is controlled by Vodafone Company. In approximately five years the company, the company was in a position to penetrate the market approximated at 53% with the same likely to improve after the merger (Vodafone official website). Additionally, after the merger, the company proven to be the youngest and fastest growing population and it forecasts to grow at approximately 1.4% for the next three years after merging with the Telsim. The company further targets market sector of individuals who are of 25 years of age. Moreover, by the year 2010, Vodafone Company expects to have a market population which is greater than that of German. Furthermore as a result of the merging, the company was positioned in a manner that it was in a position to uniquely benefit from Telsim turn around. This is due to the fact for a long time the Telsim Company has suffered from mismanagement in addition to being under-managed and suffering considerably from under investment emerging from both customers’ proportion and its networks (www.telsim.com). In addition, proximity of Turkey to other operations that are affiliated to Vodafone Company makes the company to be in a position to enjoy a number of benefits including roaming opportunities. Moreover, the company enjoys corporate market an aspect that made the merger to be a success (Vodafone official website). Overview of the transactions After merging with the Telsim Company, Vodafone Company accepted to take over all the businesses and the assets that were initially owned by Telsim Company. Nonetheless, Vodafone Company did not acquire the liabilities that were under the ownership of Telsim Company in addition to those that were related to Nokia and Motorola. However, this did not include employee related liabilities that were minor in nature (Brigham & Houston, 2009, p. 122). Furthermore, despite the price consideration, Vodafone as a company was required to pay VAT totaling up to $0.4 billion (Vodafone official website). The paid VAT was to be recovered against the future VAT liabilities owned by Telsim Company. Moreover, after the merger, Vodafone Company expected to recover the aforementioned payment by changing the payment pattern from short term to medium term and the same also included Vodafone as a company carrying out Telsim valuation (www.telsim.com). Investing with an aim of capturing the future growth of the company After the merger the company had the intention of putting significant investment in both network and operations of the Telsim. This was done with an aim of ensuring that the company produces services and products that are superior in nature thus giving the Turkish market a new perspective (Vodafone official website). According to the expectations of Vodafone Company, Telsim will need an estimate of US$1 billion as an additional funding. In addition the acquisition of Telsim by the Vodafone Company is expected to improve the revenue of both EBITDA and also Vodafone profile of growth (The economist, 2008, p. 56). Nonetheless, Vodafone as a company expected Telsim to suffer from net losses in both the medium term and short term as the company merges with it and in specific its network. Additionally, after the merger the company aimed at building both a stronger scale, brand and customer proposition (Brigham & Houston, 2009, p. 124). Additionally, Vodafone as a company has high expectations of all the transactions to be diluted in addition to adjusting all the shares based on the shares owned by the company. Furthermore, the aforementioned transactions are not expected to affect the purchase of the shares that are owned by Vodafone Company (The economist, 2008, p. 56). In addition to that, the same is not expected to influence the credit ratings of Vodafone Company after the merger (Vodafone official website). The EPS of the merged companies during the post merger and the pre merger, there was increase of the EPS during the first four years of the merger (www.telsim.com). In addition to that the EPS of Vodafone company increased by approximately 50% during the post merger in comparison with the same during the pre merger period (Brigham & Houston, 2009, p. 124). Additionally during the third year of the two companies merging, there was an improvement in EPS during the first three years after the merger (Vodafone official website). Liquidity parameters of Vodafone during post and pre merger with Telsim Financial review before Vodafone merged with Telsim Profit and Loss Statement Analysis for the first three before the merger Profit & Loss Statement % Chg Total revenues 112.9 152.1 1 132.2 1 165.3 3% 110.0 Revenues of direct costs Administrative expenses 112.9 152.1 1 132.2 1 165.3 3% 110.0 Marketing and selling expenses 445.6 445.6 445.6 445.6 445.6 EBITDA 112.9 152.1 1 132.2 1 165.3 3% 110.0 Financial income Financial expense 445.6 445.6 445.6 445.6 445.6 Total revenues Total direct revenues 445.6 445.6 445.6 445.6 445.6 Net income 187.9 86.8 86.8 86.8 187.2 Year ended 31 June Turnover £m Profit before tax £m Profit for the year £m Basic eps (pence) Proportionate customers (m) 2010 44,000 8,100 7,100 12.44 211.7 2009 42,017 4,200 4,040 6.78 207.0 2008 35,000 7,001 5,700 10.45 190 2007 31,111 1,383 5,297 8.94 178.9 2006* 28,350 12,000 20,342 25.00 165 2005 32,073 6,000 7,000 11.00 132.0 2004 36,492 9,013 6,112 7.80 144.9 Marketing and selling expenses after Vodafone merging with Telsim Turkey The marketing and selling expenses of the company reduced by approximately 4%. The aforementioned percentage amounted to US$ 196.9 million in the second and third year (Vodafone official website). This was as a result subscriber TRY and acquisition costs depreciating (Brigham & Houston, 2009, p. 124). Moreover, the proportion of the marketing and selling expenses of the total revenue made the company in the third and fourth year of merging reduced by 17% to 18 % in the second year and third year respectively (www.telsim.com). However, in the fourth year, Vodafone Company expected the proportion of marketing and selling expenses to improve in terms of percentage compared to the second and the third year after the merging. This made Vodafone to have a full control of Telsim as their actions were strengthen an aim that resulted into their loyalty to be improved (www.telsim.com). Nonetheless, the marketing and selling expenses that the company realized in 2007 were similar to the ones that it realized in 2008(Vodafone official website). Net financing costs In the second and third year after the merge, the financial income of Vodafone Company decreased to approximately US$ 26.9 million. This was caused by interest in the rate of incoming decreasing (Vodafone official website). This was in line with the reduced cash in hand which is due to reduced dividend and tax payments during the first four years of the merge. In addition to that in the first four years of the gained foreign exchange amounted to US $7.9 (Brigham & Houston, 2009, p. 124). In addition to that, Vodafone recorded an increased financial income which was as a result of depreciation. Nonetheless, there was no gain in foreign exchange in the second year after the merger (The economist, 2008, p. 56). Moreover, the financial expenses of Vodafone improved to US $ 88.6 million. This was as a result of loss of the foreign exchange was estimated to US $ 65.5 million. The aforementioned financial expenses amounted to approximately US $ 64.4(Brigham & Houston, 2009, p. 124). In total, the net financing cost of the Vodafone Company after the merger totaled US$ 61.7 million in the third year after the merger (www.telsim.com). This is due to increased losses in the foreign exchange as a result of decreasing interest income and macroeconomic environment. This I due to a decrease in the cash balance of the company three years after the merger (Vodafone official website). Income tax expense Q2 2005 Q1 2006 Q2 2006 Q1 Q1 06-Q2 06 % change 69.5) Current Tax benefit /(charge) (36.0) (84.8) 22% Deferred Tax benefit /(expense) (54.4) (17.9) (80.1) 347% Income Tax benefit /(expense) 90.4) (87.4) (164.9) 89% Profitability ratios after the merger Growth Rates % Company Industry S&P 500 Sales (Qtr vs year ago qtr) 6.10 18.00 12.20 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) -11.40 8.00 42.40 Sales (5-Year Annual Avg.) 7.35 10.77 8.21 Net Income (5-Year Annual Avg.) NA 6.49 8.46 Dividends (5-Year Annual Avg.) 7.95 11.20 5.87 Four years before the merger, Vodafone had its taxation increased by approximately US $164.9 million (Vodafone official website). However, the income rate was estimated to be at 30% of the 2005 fiscal year which decreased by approximately 20% according to 2006 financial analysis of Vodafone company. In addition to that the tax law which was enacted before the merger, there was a decrease of the corporate tax of Vodafone company. Nonetheless, the extent of the change pertaining to corporate tax rate had two key impacts in the taxation expense especially in the first two years before the merger (www.telsim.com). In addition to that, after the merger, the tax benefits resulted into various forms of deductions which were majorly meant for corporate tax. These particular deductions exempted Vodafone Company from approximately 30% of the total corporate tax. However, the deductions were as a result of the tax being withheld at a rate of approximately 19.8%.In addition to that in the first four years after the merger there was a change in the tax rate which was estimated to make a difference of 19.8% and 30% regarding to the withholding and corporate tax respectively. The existing withholding tax four years after the merger was perceived as a benefit emerging from deferred tax. However, regarding the liabilities of the deferred tax which are as a result of the financial statements of the Vodafone company four years before and four years after the merger, the differences in the liabilities was 20% and 30% respectively (www.telsim.com). This made the company to have record minimal liabilities of deferred tax due to the fact that there was a reduced rate in the existing taxes (Brigham & Houston, 2009, p. 124). This made the total amount of the deferred tax to increase by approximately US$ 80.1 million in the first four years of the merging a difference of 30% before Vodafone company merged with Telsim Turkey. Additionally, there has been approximately US$ 84.8 million which is directly related to the present charges of tax. The tax increased due to the fact that the existing charges increased Vodafone company operational profitability and the same was directly linked to the existing tax charges (Vodafone official website). Market value four years after the merger Firm A before merger Firm B before merger Firm A after the merger (AB) 1. Earnings per share $3 $2 $2.56 2. Price per share $50 $20 $ 80 3. Price-earnings ratio 40 20 20 4. Number of shares 10 million 40 million 30 mil. 5. Total earnings $ 30 mil. $30 mil. $70mil. 6. Total market value $2,200 mil. $400 mil. $2,000 mil. 7. Earnings per dollar invested in the stock (line 1  line 2) $.033 $.10 $.0333 Liquidity ratios (in $million) Firm A before merger Firm B before merger Firm A after the merger (AB) 1. Earnings per share $3 $2 $2.33 2. Price per share $50 $20 $50 3. Price-earnings ratio 20 20 18 4. Number of shares 10 mil. 50 mil. 40 mil. 5. Total earnings $30 mil. $50 mil. $70 mil. 6. Total market value $1,100 mil. $500 mil. $1,500 mil. 7. Earnings per dollar invested in the stock (line 1  line 2) $.022 $.08 $.044 Financial leverage ratios of Vodafone after the merger Consolidated cash flow for the first three years of Vodafone Company merging with Telsim, Turkey 2007 2008 2009 Net cash resulting from operating activities 249.2 125.3 385.0 Net cash as a result of investing activities 200.3 113.4 57.5 Cash which are used for financing purposes 234.0 169.2 496.2 Cash balance 683.8 1,000.3 629.5 The net cash flow of the company that results from operating activities increased to approximately US$ 125.3 million. This was realized in the first and the second year after the merging. However before the merging, Vodafone had a net cash flow of US $100 million in 2005 and 2006 (Brigham & Houston, 2009, p. 124). This was due to an increase in the rate of revenue in addition the decreased the cost of revenues which was generated directly. In addition to that there was an increase in the marketing and selling expenses (Vodafone official website). Two years after the merger, there was a further increase of the revenue generated which amounted to approximately US $ 340 was related the operations of the Vodafone after merging with Telsim company (Vodafone official website). Moreover, there years after the merger there was short loans which were as a result of a number repayments which were accumulated ad used in the second and third year of Vodafone merging with Telsim (www.telsim.com). Additionally, the dividend payment and the debt repayment of the company totaled to US $ 342.2. This resulted into cash flow which approximately amounted to US $ 496.2 which the company used in financing a number of companies activities. In addition to that, the cash position of the company before the merger was at US $ 629.5 million (Vodafone official website). The consolidated statements and current ratios of Vodafone company before the merger. 2007 2008 2009 Monthly fixed fees 14.3 13.9 27.3 Communication fees 1.095 1.047 9.60 Revenues Sim card sales 1 3 6 5 8 6 Call center revenues and other revenues 2 1 4 9 6 Total revenues 1.152 1 1.132 2 1 .165 Direct cost of revenues 681.9 667.4 647.0 Gross profit Administrative expenses Selling & marketing expenses 176.5 206.1 196 Other operating income/expenses 3.4 4 5 Financial expense 40.1 20.2 88 Share of profit of associates 1 2 9 1 5 8 19 Gain on net monetary services 4.2 5.8 6.8 Income before minority interest Minority interest 1.2 1 0 10.8 Consolidated current ratios of the Vodafone Company before and after merging with Telsim Company Current ratios Cash equivalents and cash Long term debts 859,7 830,6 Total liabilities 1.983,9 1.696,1 Net assets 3.177,7 3.880,6 Success of the merger The merger between Vodafone and Telsim company turkey proved to be successful. This can be attributed to good leadership in addition to effective management systems (www.telsim.com). The merger was further made a success due to Turkish economy recording a number of developments (Vodafone official website). The revenue and the capital structures of the two companies also changed. This made the company to sell approximately 50% of their shares an aspect that can be attributed to the merger. Additionally due to the fact that the merger between the two companies impact positively on the economy of turkey, it is clear that the acquisition and the merger was not a failure but rather a success (www.telsim.com). According to the chief executive Vodafone company was delighted to win the tender for Telsim Company. This is despite the tender being competitive and being contested by all nations within Europe except German. In addition to that, the degree of market penetration was approximately 53%. Moreover, the Turkish market represents a larger percentage of market growth (Brigham & Houston, 2009, p. 124). The company was in a position to win the tender successfully due to the fact the company does not only have unique services and products but also extensive experience in terms of operation. Additionally, the due to the aforementioned elements the company was in a position not only to compete favorably but also to provide the customers within the Turkish market with high quality market services. The merger has proven to be a great success for not Vodafone Company but for the telecommunication sector in turkey as a whole. References Brigham, E.F & Houston, J.F (2009). Fundamentals of Financial Management. London: university press. The economist. Financial analysis of acquisitions and mergers Volume 387. London: Economist Newspaper Ltd., 2008 Vodafone official website: About Vodafone (2011) retrieved from http://www.vodafone.com/content/index.html on January 31, 2011. Www.Telsim. com. About Telsim. Retrieved from on www.telsim.com on January 3,2010 Read More