Maxis Communication Berhad Merger with Airasia Finance Essay

The meaning of merger which is combination of two or more firms, in which the objectives are enhanced and increase shareholders wealth, increase company profit and allow the company move into a rapidly growing market place. Maxis Communication Berhad (MCB) leading the mobile provider and has mostly subscribers in Malaysia, The company provides mobile, fixed line telephony, data and network services and also a largest IPO ever in Malaysia and South East Asia. Although MCB having a strong financial background, but it's competitor which are Celcom Berhad and Digi Telecommunication also considered as a very strong background and advantages competitor, how to prevent exceed by those company? Our suggestion for the MCB is merger with the Airsia (Malaysia low-cost airlines). Airasia operates scheduled domestic and international flights and is Asia's largest low-fare, no-frills airline. These mergers are considering as "conglomerate merger" which means combination of company in unrelated business. We choose Airasia as a target, because Airasia has keep growing around the Asia and it been chooses become a World's Best Low-Cost Airline for 2009. According our research, Airasia are also finding more subsidiary and partnership to expand their business, which does will be an opportunity for MCB as well and the key benefit of that merger is ability reduce risk by MCB. Unfortunately, Airasia are still under a huge debt, but that become the main motive why we suggestion that MCB merger with it, because of tax consideration are a key motive for merging. Under that situation, will increase profit and increase shareholders wealth of MCB as well. Beside that, because of Airasia have a strong management team, which teams can keep minimize net loss of capital and maximize profit at a same time, operation their borrowing asset well and keep growing under the situation of debt.

Strength

From our suggestion, if MCB successfully merger with Airasia, it definitely bring much advantages than the disadvantages such as because of Airasia brand's name, it will easily make advertising for the MCB. Regarding the MCB perspective, they are keeping advertising about their product which is broadband, 3G network, Iphone package, postpaid, prepaid and so on. Because of those advertising for the product, according for the MCB annual report mentioned that under the sales and marketing parts, it cost around 4.6% from their of revenue driven by year-end promotions, although it does not costly than other, but if MCB merger with airasia, they can saves those expenses for expands business or doing investment on the future. Because of Airasia brand's name are well establishment in Asia pacific and advantages, strong brand name recognition of global market by organization, and Airasia are highly frequency linked with country such as Brunei, Cambonia, Hong Kong, China, Indonesia, India, Iran, Singapore, South Korea, Taiwan and Australia and so on, it will bring the benefit and increase reputation, brand name recognition of MCB. It easily makes advertising through their aircraft. At a same time, it will increase MCB's recognition by other organization with under a very rapidly growing market situation than other strongest competitor. Furthermore, successfully merger between the both companies, MCB will continuously become the strong leading mobile phone service provider in Malaysia, and Airasia will become a leading airline industry in Asia. Those will have a strongly financial background, will attract more investor to do investment and attract more people using Maxis network. In addition, MCB will have good potential increase managerial skill and technology from Airasia, because of their stronger management team. From Airasia perspective, company merger will enhance their fund-raising ability, company may be unable to obtain funds for its own internal expansion because of highly debt background but to obtain funds for external from (MCB) combination, and because of MCB has high liquid asset and low level of liabilities, it considered benefit for Airasia as well, it immediately decreasing financial leverage and allow funds to be raised externally at lower cost and reduce their debt in the future. These reasons mentioned that Airasia must accept suggestion merger by MCB.

Weakness

Although if merger with Airasia will bring along of advantages and benefit, but also does to consideration about the disadvantages for the merger. MCB can control significantly larger amount of assets than could acquire through merger, but major disadvantages of MCB which will increase risk resulting of the leverage effect, and must be pay attention that Airasia are having the bigger amount of debt on the future in 12 years repayment period, MCB may help Airasia covers its debt on that moments which means MCB immediately having debt at a same time. In addition, if MCB successfully merger with Airasia, it will become difficult to analyze by the MCB, and investor of MCB have difficulty understanding because of these complexity. In addition, effect of a merger on the earning per share of the MCB initial decrease in the per-share earnings of stock is expected. MCB will sell at low earning per share, its shareholders value may suffer of that merger at a short-term period. So, we define this merger as a long-term investment by MCB. From financial perspective, higher risks are higher return, that's why we suggest that MCB merger with Airasia, although these have few disadvantages.

Opportunities

According the annual report by the Airasia, we know that Airasia are still under the huge amount of debt. The tax loss can be applied against a limited amount of future income of the MCB, that is a consideration by the purpose of merger, if successfully merger with Airasia, it will bring a lot of benefit and after-tax earning by reducing the taxable income of the MCB. Although Airasia having a huge debt, but they have a strong management team which are control their debt as well. As the information, we know that borrowings of AirAsia are all in USD, it will benefit from the depreciation of USD because of this recent years economics crisis, USD are getting depreciation day by day, Airasia may having the foreign exchange gain from the repayment of debt. However, the foreign exchange gains just an accounting gain, which won't generate any real cash flow or economic value. Furthermore, fast expansion of AirAsia, leveraging on financing facilities, is one of the factors that enable AirAsia to maintain its profitability in the highly competitive airlines industry. Regarding the economics of the world this few years, only the lowest cost player through effectively cost reduction, economic scale, and growing market place will survive. Those reasons are become the main purpose why MCB needs merger with them and we feel that Airasia are getting growing with rapidly, and way of expansion which are through borrowings instead of issuing new shares is the best way to benefit the shareholders as well. From MCB perspectives, maybe can follow their way and management to increase asset by borrowing from others although include the interest, but MCB will have more cash flow in hand, it can be use for expand business by highly return area or diversification investment. Beside that, Although the earnings per share of Airasia is quite low, RM 20.6, compare to the MCB earnings per share, RM 27.25, it allow investors believe that this merger will increase the wealth of the shareholders due to the high value of both companies in the market now on the future. Those reasons are becomes the way to keep growing and expands the businesses of MCB.

Threat

From Airasia perspectives, increasing competition because of increasing number of low cost airline competitors, and aggressive competition against the large or traditional airline companies under airlines industry such as Malaysian Airlines (MAS). Those threats will directly affect Airasia performances, profit, advantages, and indirectly affect to the holding company which is MCB as well. These are the problem that MCB must consideration after merger with Airasia. In addition, monitoring the foreign currency and adjust the profit against non-operating income are the important, because of exchange currency may cause company having the debt or gain. After MCB merger with Airasia, if MCB unable to pay Airasia's liabilities, will cause both of them faced the challenge and seriously problem to become merger failure.

Conclusion

As a conclusion, we strongly suggest that MCB merger with Airasia. Because of those benefit are highly exceed the disadvantages of the merger. If successfully merger, MCB will have advantages of competitive between Celcom and Digi and other telecommunication network. As our information, because recent months, Celcom and Digi are plans to explore long-term network and infrastructure collaboration in Malaysia which are sign the Memorandum of Understanding (MOU). They plan to corporation; it will threaten to MCB position in Malaysia. That's why MCB must prepare himself and merging the target which are Airasia. Mainly reason that merger is about the tax loss carryforward for the MCB. The tax loss can be applied against a limited amount of future income of the MCB over 12years (Airasia debt period) or until the total tax loss has been fully recovered. MCB using those tax loss carryforward to expand its business at a same time. Beside that, increasing managerial skill or technology, and advertising through airline, those reason become the situation why MCB needs merger with Airasia. Furthermore, increasing profit on the long-term perspectives as well and because of its more pros than cons.

Cite this page