Cross Border Mergers and Acquisitions Finance Essay

Merger and acquisition aim at facilitating two companies achieve certain financial objectives. The dissertation aims at giving an insight about the motives of mergers and acquisitions which includes motives that aim at increase or decrease of the shareholders’ value and also its impact on the shareholders’ value. The motives of the mergers and acquisitions include synergy, diversification, growth, economies of scale and scope, improvement of managerial efficiency, reduces competition, market expansion and acquiring new technology etc. Further, studying the effect of motives on Mergers and Acquisitions and also providing a deeper knowledge about it and examining them from the point of view of the four approaches involved in the literature review. Lastly, this dissertation includes the study of two cases involving a merger and an acquisition of two companies using the quantitative method i.e. an accounting study which examines the pre and the post M&A financial performance of the companies involved. It also includes comparing the post financial performance with a competitive company in the same industry. The two cases studied involved acquisition of BellSouth by AT&T and merger of T-Mobile and Orange Mobile with their financial performance being compared with their competitors i.e. Verizon and O2 respectively. According to the findings in the literature review, the company performs better before a merger and acquisition but the acquiring company has to bear loss after the M&A.

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INTRODUCTION

M&A are almost the same corporate actions. It is a process of combining two previously individual firms into a single entity. To improve company’s performance and long term value of the shareholders’ funds are the significant operational advantages that can be obtained by mergers and acquisitions.

A company’s motivation to pursue a merger or acquisition benefits from economies of scale; higher revenues and market share in the market, higher tax efficiency and broadened diversification. However the underlying business rationale and financial methodologies are substantially different for mergers and acquisitions.

A mutual decision of two “equal” companies coming together and becoming one entity is called a MERGER. It helps in cutting cost, increasing profits, increasing shareholders value for both the companies’ shareholders. Therefore, a typical merger involves two equal companies coming together with a goal of forming a company which has a value more than the sum of the two companies individually. In this process the shareholders get the equal amount of shares in the new entity as they had in the old entity.

Whereas a takeover or an acquisition is the purchase of a smaller company by a much larger one. Even a non-mutual decision and a concept on “unequal” can produce many benefits similar to a merger. The larger company can initiate a hostile takeover of a smaller firm and then essentially buy it from the smaller company’s management. Unlike in merger, in acquisition, according to the conversion ratio the acquiring firm either offers cash price per share to the shareholders or the acquiring firm’s shares.

MERGER AND ACQUISITIONS

The great Merger Movement happened from 1895 to 1905.It was a U.S. business phenomenon. During this period small firms consolidated with the large firms as they had a bigger market share and dominated the small companies. Around 1800 of the firms disappeared in these consolidations. Trust was used as a vehicle. This movement was very big, in the year 1900 the firms that merged had the value as 20% of the GDP,then it decreased in 1990 to 3% ,further leading to a rate of 10-11% of GDP in around 1998-2000.By 1929 smaller competitors joined forces with each other which disintegrate ,this was observed by the organisations that had the greatest share in the market in 1905.Due to growing technological advances of their products, patents and brand recognition by their customers some companies like DuPont,Nabisco,US steel and General Electric have been able to keep their dominance in their respected sectors. The consistent mass producers of homogenous goods were the companies that merged; they could lead to exploiting the efficiencies of the large volume production. Companies with fine products didn’t take part in the Great Movement other than that they earned high profits and margin on the fine products like fine writing paper.

SHORT RUN FACTORS

The desire to keep the prices high is one of the short run factors in The Great Merger Movement that is why with so many firms the supply of the products remains high with the high prices in the market. In 1893, the demand for the goods declined, thus, according to the classic demand and supply model with the fall in demand the prices of the goods fall. By colluding and manipulating supply to counter the changes in the demand for a good, the firm could avoid the decline in prices. This lead to horizontal integration. Mass production lead to reduction in the unit costs to a lower rate. The new machines were usually financed by bonds, which lead to a panic in 1893 as the interest rate on bond was very high even then no firm agreed to reduce the quantity as they were capital intensive and worked on fixed cost basis.

LONG RUN FACTORS

In long run, companies work on reducing the cost thus it was better for the firm to reduce the transportation cost by producing and transporting products from the same location. Also, the technological changes lead to increase in the efficient size of plants which are capital intensive and allow economies of scale. The initial successful mergers were dismantled eventually due to the part of the government and also the competitors. “The US government passed the Sherman Act in 1890 setting rules against price fixing and monopolies.” The large companies were attacked for strategizing with others or within the companies with the aim of maximising profits. A great incentive for companies to unite and merge resulting in them not being competitors anymore was created by fixing prices with competitors.

CROSS BORDER MERGERS AND ACQUISITIONS

The currency of the target corporation appreciates by 1% as compared to the acquirer’s, as a result of the large M&A’s, this being the result of the study done by Lehman brothers in the year 2000.It was observed that after a merger there is a big upward shift in the currency rate, then after fifty days it stabilizes to 1% stronger average rate.

The cross border M&A increased because of the rise in the globalization. There were 2000 cross border M&A’s in the year 1996, these transactions were worth $256 billion. Majority of small and mid-sized firms didn’t consider Cross border intermediation due lacking of significance and strict national mindset.This was the reason that did not let the academic work develop much. This has mostly been unsuccessful because of the broad term. It is a very complex term, where corporate governance, power of average employee, company regulations, political factors and countries culture are the crucial factors that spoil the transactions. The cross border M&A helps in expanding the companies at the global front and create high performing businesses and cultures across national boundaries. Even companies with headquarters in the same country that merge are of this type. Swiss drug makers Sandoz and Ciba-Geigy were a $27 billion merger which is supposedly “single mergers” and was also a cross border merger.

Based on the merger activities the business world is divided into six merger waves as detailed below:

TYPES OF MERGERS:

Horizontal Mergers: Two companies that share the same product lines and market, in direct competition. For example. Unilever acquired Lipton tea in 1972; ICICI bank acquired Bank of Madura Limited in all stock deal in 2001.

Vertical Mergers: It’s when a company and a customer or a supplier and a company merge. For example: Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming. In this merger, the Federal Trade Commission (FTC) was alarmed by the fact that such a merger would allow Time Warner to monopolize much of the programming on television. Ultimately, the FTC voted to allow the merger but stipulated that the merger could not act in the interests of anti-competitiveness to the point at which the public good was harmed.

Market Extension Merger: When two companies that merge together sell same products in different markets. For example: market extension merger i.e. the acquisition of Eagle Bancshares Inc. by the RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion.

Conglomeration: When two companies with uncommon business areas merge. For example: DCM and Modi Industries.

Mergers can be distinguished on the basis of how they are financed. They have implications on the company and the investors involved; which is discussed as follows:

Purchase Mergers: This kind of merger occurs when one company purchases another company either by the means of cash or by issuing some debt instrument. Acquiring companies get the tax benefit from this merger, thus prefer it over the rest. The taxes can be reduced annually as the difference between the book value and the purchase value depreciates annually.

Consolidation Mergers: In this a brand new entity is formed, where two companies are bought and combined under this. This merger is also taxable.

ACQUISITIONS

Acquiring the ownership in the property is known as acquisition. In business context, an acquisition is one company purchasing the controlling interest in the share capital of another existing company. It is an attempt of one firm to gain majority interest in the other i.e. the target firm and by small group of investors take the target firm private or either disposes off its assets. The target company can be bought by the company either by the means of cash, stock or the combination of both. Whereas it is also possible, common in small deals, that is, when one company acquires all the assets of the other.

Factors that affect an acquisition:

Purchasing shares in an open market

Make takeover to the general body of shareholders

Private treaty purchasing new shares

Acquisition of share capital by the means on cash, issuance of loan capital or insurance of share capital.

Agreement with the members of board, major shareholders commanding voting power, i.e. the people holding the major interest in the company’s management.

Issue of dividends i.e. had to release as said that it would not pay dividend but released it due to potential threat of acquisition.

Benefits of Mergers and Acquisitions:

M&A benefit the shareholders in the buying company by offering premium to induce the mergers and acquisitions. This premium increases with the growth of the company.

Mergers and acquisitions are a joint decision of the managers, shareholders and the promoters of the combined company. The advantages and the disadvantages of a merger or an acquisition is discussed as follows:

From Shareholders point of view :

As the owner of the company, shareholders should benefit from the mergers and acquisitions. Shareholders expect that when the companies have merged the investments made by them enhance depends as the shareholders may not precise the other company as a benefit. As they give rise to greater values by sale of shares from one company’s shareholders to another and holding investment in shares.

Advantages to a shareholder on merger or acquisitions are as follows:

Increased face value of the shares if no dilution.

Increased return to the shareholders i.e. increasing shareholders wealth.

One company’s shareholders can sell their shares to another company’s shareholders.

Better investment opportunities for the shareholders.

Expenditure of other companies.

Barriers to entry should be using the forecasts.

From Managers point of view :

They are concerned with improving the operations of the company, growth of the company providing better deals to raise their status, perks; they might have shares in the company and fringe benefits. When there’s a guaranteed outcome of the stated things, the managers support the merger.

From Promoters point of view :

Increase the size of the company, financial structures and the financial strength.

The closely held private limited companies can get converted into public limited companies due to mergers without contributing much of wealth and promoters losing control over the company.

From consumers point of view:

We can measure the benefit of the merger by the increase or decrease of the economic and productive activities which directly affect the degree of welfare i.e. provision of minimal wellbeing of the consumers by changes in the quality of products, price level and after sales service. The aim is not always increasing market growth it can depend on the level life cycle production is at.

Advantages to a consumer from mergers and acquisitions are:

Lower price and better quality goods :

The economic benefits that a company get from mergers and acquisitions lead to low price, also the promotional changes and better quality goods for consumers.

Improved standard of living of the consumers :

Low price of products and improvement in quality automatically improves the standard of living of the consumers.

DRAWBACKS:

M&A lead to concentration of economic power and these merged entities lead to a dominant position of market power. Also, after merger because of the dominance the entity suffers from deterioration in the performance over the years.

The disadvantages of mergers and acquisitions are as follows:

Monopoly: Two companies that merge together tend to lead to reach the domination position hence create a monopoly in the market.

Corporate debt levels can rise to dangerous levels as it might have a backer and also the amount of loans taken by the company.

Damages the morale and the productivity of the firms.

Managers have to forego long term investments to get short term profits.

It is possible that lesser dividend is given to the shareholders if the company is making losses, also less returns on investments if the company is not making enough profits.

Corporate raiders control to make quick profits, strip assets from the target and destroying company leading to throwing people out of work. It is possible that a company doesn’t throw the people out for example Virgin doing low cost flights to North of England when used to do trains, they instead became unemployed.

Aim of the dissertation;

The various aims of the dissertation are as follows:

Firstly, to know the basic meaning of a merger and an acquisition.

Secondly, to know why would two companies opt for a merger or an acquisition i.e. the motive behind a merger or an acquisition. This explains the factors that would lead two companies to merge or take over another company. Thus, I will look at the various factors like role of synergy, agency problem, cash flow, and increase in the market power, regulation, economic factors and government influence which influence the managers to merger their company with another company or acquire another one.

There are different motives like growth, synergy, and economies of scale etc. to shareholders, managers, promoters and customers which are also discussed in this report.

Also, the effects of the motive of Mergers and Acquisitions on the company post it are also investigated.

To do the investigation I’ll take into consideration two case studies ,which are as follows :

RESEARCH METHODOLOGY

The research methodology used in the dissertation is an accounting study, which is explained further. The company’s i.e. T-Mobile, BellSouth, AT&T, O2, Orange Mobile and Verizon’s annual reports and some online data are used for the analysis of the company before and after the merger. This research also involves the study of the changes in financial performance due to Mergers and Acquisitions. Thus, this involves calculation of these three financial ratios i.e. profitability ratios, liquidity ratios and activity ratios and then comparing the company after the merger or acquisition with another company in the same industry; this is done to control the factors like firm specific, industry specific and economic worldwide.

LITERATURE REVIEW

Motives behind Mergers and Acquisitions:

The past studies and researches done show that Mergers and Acquisitions have various motives, where Andrade et al. (2001) summarised it as ” Efficiency-related reasons that often involve economies of scale or other synergies; attempts to create market power, perhaps by forming monopolies or oligopolies; market discipline, as in the case of the removal of incompetent target management; self-serving attempts by acquirer management to over-expand and other agency costs; and to take advantage of opportunities of diversification, like by exploiting external capital markets and managing risk for undiversified managers”

George Coontz’04 states “The motive is to increase profitability and shareholder wealth by an increase in the price of the stock. An increase in price means an increase in the shareholders wealth.”

There are various reasons for mergers and acquisitions, which are as follows:

Growth:

The most common reason for merger is growth. It can be divided into two broadways:

Internal growth:

It is much cheaper and less risky for a company to merge and expand internally. It is much faster to grow by acquisition than internally.

External growth:

Diversification is an external growth strategy. If an organisation operates in a volatile industry then it might opt to hedge the fluctuations by undertaking a merger. This also involves geographical diversification i.e. when one company acquires or merges with another company in some other country or location. It means expansion in the current market and in the new market, also by increasing the product range and services.

Synergy:

Another reason for merger is synergic benefits. This is the most commonly used word in Mergers and Acquisitions, for increasing performance and reducing cost of operations by combining the business activities. Two businesses merge together if they have complementary strengths and weaknesses i.e. It follows the financial maths 1+1=3. This shows that the value of the two firms combined is much more than the two of them operating independently.

Can be written as,

Val (A+B) > Val (A) + Val (B)

There are two forms of synergies derived from:

Cost economies: They help eliminating duplicate cost factors such as redundant personnel and overhead. These lead to lower per unit costs.

Revenue enhancement: This is when one company’s marketing skills combine with the other company’s research process to significantly increase the combined revenue.

Synergies are positively correlated to Mergers and Acquisition. This means higher the synergy, higher the target gains as well as the acquiring firm’s shareholders benefits (Berkovitch & Narayanan, 1993).

Operational synergy:

This is achieved by earning operational profits which is done by linking assets of the companies together to be used for various purposes. Operational synergy can be achieved by one company by opting for a merger or an acquisition by eliminating its weakness i.e. for example if a company has a strong production department it can acquire a company with a good supply chain thus resulting in the company to be stronger. As stated in Copeland et al. (2005, p 762) ,”The theory based on operating synergies assumes that economies of scale and scope do exist in the industry and that prior to the merger the firms are operating at levels of activity that fall short of achieving the potential of economies of scale”. In other words, operational synergy can be achieved by economies of scale or economies of scope.

Financial synergy:

This includes when two companies after a merger or an acquisition achieve high return on equity, right to use larger and cheaper capital market. Mergers and acquisitions also provide tax benefits, which is a financial synergy. Example of financial synergy: Mitsubishi and Bank of Tokyo. When the capital of two unrelated companies is combined and results in the reduction of cost and a higher cash flow that is also called financial synergy (Fluck & Lynch, 1999; Chatterjee, 1986).It is stated that “financial synergy, on average, tends to be associated with more values than do operational synergies “(Chatterjee, 1986, pg. 120)

Managerial Synergy:

When two companies come together it is possible that one of the company’s has better and well skilled managers than the other company. Thus, the managerial synergy helps in forming a new firm with expertise and thus leading to an improved performance of the company.

Diversification:

Diversification is when that a company goes through a Merger or Acquisition with a company which is from an unrelated industry. This helps in reducing the impact of one particular industry on the profitability of the new entity and also spreads risk in terms of climatic change and consumers tastes. Diversification has not been very successful except for a few companies like General electric, which grew and enhanced the shareholders wealth.

The reason of engaging in M&A is to reduce the top managers’ employment risk, such as the risk of losing job and risk of losing professional reputation (Amihud & Lev, 1981). Many large firms seek to achieve diversification by M&A, rather than internal growth. (Thompson, 1984; Levy & Sarnat, 1970).According to Seth et al. (2000.p 391) ” In an integrated capital market, firm level diversification activities to reduce risk are generally considered non-value maximising as individual shareholders may duplicate the benefit from such activities at lower cost.”

Economies of scale & Economies of scope :

Size is one of the important factors in M&A. A larger company benefits more from a merger in the form of cost reduction than a small company. The purchasing power and the company’s negotiation power improves after the merger i.e. the larger the company higher the chance to negotiate the price of products with suppliers and to ensure to not spoil the relations with the suppliers although the orders maybe inbuilt. This basically concludes that new entity reduce the duplicate operations lowers costs thus higher profits. The economies of scale refers to the average unit cost of production going down as production unit increases (Brealey et al. ,2006 ;Seth,1990).The economies of scale is the goal of horizontal and conglomerate M&A.

An economy of scope implies higher the number of products the less is the cost of production. The feature of economies of scope is more suitable for vertical M&A in seeking vertical integration (Brealey et al., 2006). In addition, complementary resources between two firms are also the motive for M&A.It means that smaller firms sometimes have components that larger ones need, so the large company’s acquisition of the small company often take place (Brealey et al., 2006).

Increase market share and revenue:

M&A leading to an increased power of the new entity in the market. This helps in increasing market share. It also improves the investment opportunities of the firm; a bigger firm has an easier time raising capital.eg. Premier and Apollo tyres.

According to Seth (1990, p.101), market power is “The ability of a market participant or group of participants to control the price, the quantity or the nature of products sold, thereby generating extra-normal profits”. According to Zheer & Souder (2004) ,increased market power and increased revenue growth are the most common objectives for the firms participating in M&A.They can be achieved through horizontal M&A.Andrade et al.(2001) stated market power may be increased by forming monopolies or oligopolies. Increased power results in being more competitive in the market and increased the revenue growth is achieved by taking the highly elastic products and lowering their prices. New growth opportunities come from the creation of new technologies, products and markets (Sudarsanam, 2003).Thus, these results in strengthening the financial position resulting in an increase in the profitability of the firm along with shareholders’ wealth.

Increase supply chain pricing power:

If a company buys its supplier it helps in reducing the cost of the company to a large extent which is due to the profits of the suppliers being absorbed, increases efficiency only producing products required (“Just in time” process). This is known as a vertical merger and leads to company buying products from the distributors at a lower price.

Eliminate competition:

Mergers and acquisitions eliminate the competition and increases firms’ market share. A drawback is that shareholders need to be paid a huge amount of premium to convince the other company to accept the offer. It is very common that the acquiring company’s shareholders sell their shares which leads to reducing the price the company pays for the target company.

THE EFFECTS OF MOTIVES ON

After studying the various motives of Mergers and Acquisitions, now I further study the effect of the motives on Mergers and Acquisitions, i.e. the post-Merger and Acquisition. According to Burner (2002), there are four approaches (i.e. accounting studies, event studies, survey of executives and clinical studies) to measure post M&A performance. Accounting and event studies are quantitative approaches and survey of executives and clinical studies are qualitative approaches.

EMPERICAL EVIDENCE BASED ON ACCOUNTING STUDIES

Accounting studies is one of the methods used to examine the changes in the financial performance of the companies before and after a merger or an acquisition. More specifically, the changes of net income, profit margin, growth rates, return on equity (ROE), and return on asset (ROA) and liquidity of the firm are the focus of accounting studies (Bruner 2002; Pilloff, 1996).

Dickerson et al. (1997) are the first researchers to study the relationship between M&A and the profitability for the UK firms (1948-1977).According to their findings there is no evidence available to prove that M&A brought any benefits to the financial performance of firms based on the measurement of profitability. Conversely the growth rate and the profitability was lower after the M&A than before M&A.Also, after controlling some uncertain factors that might affect profitability, Dickerson et al.(1997) found that M&A had a negative effect on the acquirer’s profitability by measuring return on assets (ROA) in both the short term and long term period. This is consistent with Meeks (1977), whose studies indicated that the ROA for firms decreased after M&A in the UK.However Dickerson et al did not investigate the nature of the acquired firm i.e. whether it is horizontal, vertical or conglomerate. Firth (1980), after studying the various other researchers results, concluded that based on accounting studies, generally speaking, acquired companies don’t have great profitability and have low stock market ratings before M&A, but obtain a great deal of profit after engaging in M&A.In contrast, acquiring companies generally have average or above average profitability prior to M&A, whereas they suffer a reduction in profitability after M&A.

Ghosh (1997) is the first researcher to examine the correlation between post-merger operating cash flow and the method of payment used in M&A for the acquiring company for 315 mergers over the period from 1985 to 1995.His research showed that the acquiring firm paid with cash and then it was compared with the company in the same industry, the cash flow increased significantly with an improved asset turnover after the M&A.

EMPERICAL EVIDENCE BASED ON EVENT STUDIES:

According to Bodie, et al. (2005, p381), an event study “Describes a technique of empirical financial research that enables an observer to assess the impact of a particular event on a firm’s stock price”. For example study of share and dividend changes. The standard event study includes the use of Sharpe’s (1963) market model and capital asset pricing model (CAPM) (Dimson &Marsh, 1986).Based on event studies , Firth (1980) studied 496 targets and 434 acquirers in the during the period from 1969-1975and the result stated a conflict in terms of shareholders returns to acquiring firms. He found that in the UK after the takeover the share price and the profitability of an acquiring firm declines.Langeteig (1978) used a three factor performance index to measure long term stockholders gains from M&A.He concluded that post-merger the excess returns were insignificantly different from zero and provided no support for mergers. The acquired and the bidder had an average excess return of 12.9% and 6.11% respectively.

EMPERICAL EVIDENCE BASED ON CLINICAL STUDIES:

It provides a blueprint for comparing the discounted value of cash flows and divestiture to the pre-acquisition value. They originate from anthropology, sociology and clinical methods in the 1920’s.It is also called a case study, which is an in- depth study by one person through field interviews with executives and knowledgeable observers and is a form of quantitative descriptive research (Bruner, 2002).

EMPERICAL EVIDENCE BASED ON SURVEYS OF EXECUTIVES STUDIES:

The surveys of executives in the form of a questionnaire, asking questions regarding motives of M&A or whether they are beneficial for shareholders or not. The post-merger performance can be inferred from the questionnaire (Bruner, 2002).As in CFERF( Canadian financial executive research foundation) executive research report, “Finance executives have shown in this study that organizations can improve their chances of successfully merging firms by incorporating people related risks into the evaluation, due diligence and deal structuring phases of M&A activity”. In Ingham et al. (1992), where they surveyed 146 of UK’s top 500 companies during the period from 1984-1988 on the basis of a questionnaire. However in case of the profitability of acquiring firms, whether it increased or not post M&A, they found different results. From the short term point (0-3years), 77% of the managers claimed that short term profitability increased whereas long term i.e. over 3 years, 68% said the profitability increased. There is one problem in this survey, which is that it considers only private companies other than the other financing companies.

Analysis:

The key indicators of the growth rate are sales, net profit and the changes in the turnover. As in the figure 1 the sales increase from the year 2004 to 2005 by $247 million but there is a decrease in the profits of the company where profit before interest and tax and profit after tax both decrease by $619 million and $1465 million respectively.

The profitability can be studied by looking at the gross profit margin, ROE (Return on equity) and ROA (Return on asset), all the figures are decreasing from the year 2004 to 2005, thus showing that the company suffers losses. This ratio indicates the effect of changes in sales, equity and assets on the gross profit, PBIT and PAT respectively. According to Walton & Aerts (2006), the margin ratios are used to study the trend analysis and to do comparisons among companies and also helps in studying the operating profitability and efficiency. Hence the figure shows inefficient operating profitability and efficiency.

The liquidity ratio i.e. the current ratio studies how a company meets its creditor’s demands. There is a decrease in the current ratio from 0.54 to 0.37 .the ideal current ratio is 2:1, thus by a decrease in this ratio we observe that the company is unable to meet its short term debt i.e. the demand of the creditors which is due to the decrease in the current asset and an increase in the current liability from the year 2004 to 2005.

The activity ratio which is the total asset turnover ratio is increasing from 0.342 to 0.363, thus showing that the company’s assets are used efficiently by the management.

To summarize, BellSouth didn’t perform good financially before the merger.

From the above figures 6a and 6b, it is observed that the total asset turnover ratio of both the companies Verizon and AT&T are steadily increasing with an average total asset turnover to be 0.48 and 0.35 respectively.However the average of AT&T was lower than that of Verizon thus proving that AT&T did not utilize its total assets efficiently after the acquisition.

Summary

According to the Verizon’s annual report, there is a good operating and financial discipline seen in the business, with maximising the cash flow and the return to the shareowners. Also, by the end of this year there is an extraordinary growth seen by introducing video sharing, conferencing and 4G connections.

According to the AT&T annual report, the company did improve increasing the efficiencies over the board, adjusting cost structure, increasing cash flow and raising dividends as compared to the last year.

By comparing the various financial performance indicators of AT&T with its competitor Verizon, it has been concluded that AT&T did not show a commendable performance after the acquisition. It has a consistent revenue growth, net profit margin and gross profit margin, but it underperformed its competitor in ROE, ROA, liquidity ratios and total asset turnover. Thus proving the results of Dickerson et al. (1997), Meeks (1977), Firth (1980) and Caves (1989) to be consistent as in the empirical literature review claiming that the profitability of the acquiring company is lower after the M&A than before the M&A.

 T-MOBILE AND ORANGE MOBILE MEGER AN OVERVIEW

In December 2009, Consumer Focus and the Communications Consumer Panel had sent a joint letter to the Competition Commissioner, Neelie Kroes asking for the merger by the authorities in the UK.On 1st March 2010, the European Commission approved the merger with a condition that the combined company sells the 25% of the spectrum it owns on the 1800 MHz radio band and amend a network sharing agreement with smaller rival.

In 2010, Deutsche Telekom’s T mobile and Orange mobile combined together by becoming a part of the joint venture with France Telecom’s UK mobile network provider. They merged under the new parent company called “Everything Elsewhere” on 11th may 2010, which was announced on the British High Streets. Despite the merger they continued to co-exist in the UK market. This took place on the 1st April 2010.On 8th September 2009 the BBC news stated that “It would be UK’s largest provider overtaking the Telefonica’s O2, with about 37% of the mobile market.”

According to the financial times “The mobile phone operator formed by the merger of Orange and T-Mobile two years ago has been forced to sell the spectrum by European competition authorities.”

It covers around 30million customers, i.e. more than half of the UK’s adult population. The CEO of the company Tom Alexander said that “This is the first major consumer benefit of the merger between Orange and T-Mobile, and it delivers an unrivalled and unique experience that no other operator can offer.”

The motives of T-Mobile and Orange Mobile merger

The main aim behind the merger was to create the country’s largest mobile phone operator covering 37% of the market, leapfrogging rivals Vodafone and O2.This deal lead to unemployment as the two companies rationalised their networks. Also, it helped in cost saving by closing down the high street retail stores worth £3.5bn.

France Telecom’s chief financial officer Gervais Pellissier said the deal would “on the one hand fundamentally change our respective positions in the UK and on the other hand bring substantial benefits to consumers in the UK”. His opposite number at Deutsche Telekom, Timotheus Höttges, added that the merger was “the first step towards creating the new mobile champion in the UK”.

On August 21, 2012, according to the financial times, 4G mobile broadband will reach Britain the next month and also the company aims at providing 4G mobile and phones broadband devices in UK by the next year

The deal helped the T-Mobile to be at par with its competitors and helps Orange to improve its margins by pooling its wireless assets with T-Mobile. Prior to

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