"Merger and Acquisition in the Telecom Industry: An

Analysis of Financial Performance of Vodafone Plc

and Hutchison Essar".

Nidhi Nalwaya Rahul Vyas

Assistant Professor Assistant Professor
Pacific University Pacific University
Udaipur Udaipur
Cell: 9309273192
E-mail: [email protected] E-mail: [email protected]

Abstract

The service sector is in the process of an unprecedented restructuring exercise

globally and merger and acquisition are preferred choice for the same. This
phenomenon is prevalent in emerging market economies like India. Companies
like Airtel, Vodafone and Hutchison etc are reckoned as global leaders in their
sectors. These Indian firms have learnt that inorganic growth is the faster
mechanism. M&As are used by corporate sector to eye the units all around the
operational region which, in-turn, will help them restructure financially. The
driving force is restructuring the corporate entities financially through the
medium of M&As.
Mergers and Acquisitions have emerged as a natural process of business
restructuring throughout the world and financial restructuring through mergers
and acquisitions represents the most dynamic facet of corporate strategy the
researchers found it suitable to study the impact of mergers and acquisitions on
financial performance vis-a-vis Value Creation of Indian companies. For the
purpose the researchers have taken the case of merger/acquisition from the
Telecom sector – VODAFONE Plc AND HUTCHISON ESSAR

Key Words: Merger and Acquisition, Telecom Sector, Financial Performance.

Concept of Merger & Acquisition:

Mergers result in the combination of two or more companies into one, wherein
merging entities lose their identities. No fresh investment is made through this
process. However, an exchange of shares takes place between the entities
involved in such process. Generally, the company that survives is the buyer
which retains its identity and the seller company is extinguished.
An acquisition, alternately, is aimed at gaining a controlling interest in the share
capital of the acquired company. It can be enforced through an agreement with
the persons holding majority interest in the company’s management or through
purchasing shares in the open market or purchasing new shares by private treaty
or by making a take-over offer to the general body of shareholders.

Differentiating features of Merger & Acquisition:

Although they are often uttered in the same breath and used as though
they were synonymous, the terms merger and acquisition mean slightly different
things.
When one company takes over another and clearly established itself as the
new owner, the purchase is called an acquisition. In practice actual mergers of
equals don't happen very often. Usually, one company will buy another and, as
part of the deal's terms, simply allow the acquired firm to proclaim that the action
is a merger of equals, even if it is technically an acquisition. Being bought out
often carries negative connotations, therefore, by describing the deal
euphemistically as a merger, deal makers and top managers try to make the
takeover more palatable.

Whether a purchase is considered a merger or an acquisition really

depends on whether the purchase is friendly or hostile and how it is announced.
In other words, the real difference lies in how the purchase is communicated to
and received by the target company's board of directors, employees and
shareholders.

A takeover, which is essentially an acquisition, differs from a merger in

its approach to business combinations. In the process of takeover, the acquiring
company decides the maximum price that is to be offered to the acquired and
hence takes lesser time in completing a transaction than in mergers, provided the
top management of the acquired company is co-operative. In merger transactions,
the consideration is paid for in shares whereas in a takeover, the consideration is
in the form of cash. However, mergers and takeovers can be treated as similar
processes, since both cases at least one set of shareholders looses executive
control over a corporation which they otherwise held.
Objectives of the Study:

The study has been undertaken to contribute towards the following broad
Objectives:

 To gain perspective on Mergers and Acquisitions in Indian telecom Sector

during the last decade.

 To make a comparative analysis of the impact of mergers on financial

performance of the selected entity of telecom industry in India.

Importance of the study:

 Mergers and Acquisitions (M&As) have been for years, the principal tools
of corporate restructuring and one is to witness a sharp increase in both
the number and size of the M&A transactions in the country.

 Financial restructuring through mergers and acquisitions evokes a great

deal of public interest and perhaps represent the most dynamic facet of
corporate strategy.
Taking into consideration these important facts, the researchers have
undertaken this study.

Hypotheses of the Study:

The following hypotheses have been formulated and tested to draw the
conclusions:

 H0: There is no considerable difference between pre and post

merger financial performance.
 H1: There is no considerable difference between pre and post
merger financial performance.

 H0: There is no considerable difference in value addition to

shareholders of merged entities in Indian Telecom Sector.
 H1: There is a considerable difference in value addition to
shareholders of merged entities in Indian Telecom Sector.
  Research Methodology:
VODAFONE AND HUTCHISON ESSAR

Sample Size and Sample Selection:

The researchers have selected a convenient sample of 01 company.

Acquirer Company Year Targeted Deal Value

Company
VODAFONE 2006-07 HUTCHISON 10,900
ESSAR
(in Mn. USD)

Period of Study:

The researchers have made an attempt to study the impact of Mergers on

financial performance of the sample company by using the available information
for the period 2003-04 to 2009-10.

Data Collection:

After defining the objectives & hypotheses we need to look at the type and
sources of data and other specific information needed to attain the said
objectives. The present study is mainly based on secondary data which have
been collected through annual reports of the companies, books & journals,
news papers & magazines and websites etc. The data of just preceding years of
the year the merger took place has been considered for pre-merger study and
the data for the year 2009-2010 has been used for post merger study.

Tools and Techniques:

To analyze the available financial information of the sample company,
various techniques of applied research and accounting tools like
comparative ratios have been employed. The following 6 major financial
ratios and their means were calculated for analyzing the financial
performance of the companies:
 Gross Profit Ratio (GPR)
 Net Profit Ratio (NPR)
 Return on Investment (ROI)
 Earnings Per Share(EPS)
 Debt -Equity Ratio (DER)
 Dividend Payout Ratio (DPR)
These average ratios were compared using Paired Sample‘t’ test. A
confidence interval of 95% has been set for difference in means.
  PRE-POST MERGER FINANCIAL SAMPLE
PERFORMANCE OF SAMPLE MERGER CASE
CASE: VODAFONE AND HUTCHISON ESSAR
(YEAR OF MERGER: 2006-07) 197
Table 1: Table showing the financial results of Vodafone and Hutchison Essar
during pre and post merger period
Pre- Merger Period

Acquirer or Parent Acquired or Target Post- Merger Period

Ratio company Company
s (Vodafone) (Hutchison Essar)

200 200 200 Av 200 200 200 A 200 200 200 Av

3-04 4-05 5-06 g. 3- 4- 5- vg 7- 8- 9- g.
04 05 06 . 08 09 10

Opera - 40.7 41.8 22. 14. 13. 19. 15. 20. 4,3 10. 8.1
ting 14.7 8 4 61 39 48 01 62 21 1 65 7
Profit 9
Ratio
(%)

Net - 27.3 - 16. 7.2 5.9 7.4 6.8 19. 7.5 19. 8.8
Profit 25.0 1 50.6 11 1 3 8 7 04 0 38 5
Ratio 5 0
(%)

Retur - 4.95 - 3.3 3.4 5.4 7.5 5.4 14. 7.6 11. 3.6
n on 3.28 11.7 5 2 6 1 6 11 6 26 7
Invest 2
ment
(%)

Earni - 8.12 - 10. 3.7 3.3 4.7 3.9 2.4 0.8 2.4 2.4
ngs 13.2 27.6 93 8 6 0 5 9 4 9 9
per 4 6
Share

Divid NA 27.3 NA 9.1 45. 51. 36. 44. 55. 16. 51. 40.
end 3 1 73 48 80 67 82 07 00 96
Payou
t
Ratio
(%)

Debt- 0.12 0.17 0.27 0.1 1.0 0.3 0.3 0.5 0.2 0.3 0.3 0.3
Equit 9 3 6 3 7 9 7 2 3
y
 Ratio

ANALYSIS OF THE FINANCIAL RESULTS:

 When we compare the average of operating profit ratio for the acquirer Company (Vodafone)

before merger it was 22.61% while that of the acquiring company (Hutchison Essar) was 15.62%. After

merger the average operating profit ratio has declined to 8.17%. This shows the Company is at the hot

spot as it has realized some losses which might have been due overvaluation of some assets at merger

period.

 There with the average Net ratio for the acquirer Company before merger was

16.11% while the average net profit ratio for the acquiring company was 6.87%. After merger

the average Net profit ratio declined to 8.85% from16.11% for the acquirer company.

 The pre-merger average return on investment for the acquirer Company was 3.35%

while the average of return on investment for the acquiring company was 5.46%. During the

post merger period the average of return on investment indicates a very slight increase to

3.67% from 3.35% by the acquirer company.

 Taking the company’s market value in consideration the average earnings per share

during pre-merger for the Acquirer Company was (10.93) and for the target company it was

(3.95). But post merger the average EPS was (2.49) which is a very huge decline from

(10.93).Based on the explanations from the above parameters which determine the

profitability of the company, it can be concluded that as only return on investment have

indicated an increase after merger while the rest have indicate decline, the company might

have overvalued the cost of the assets to the acquiring company and paid more cost for the

target company acquisition.

 Before Merger the average dividends payout ratio was 19.11% for the acquirer

Company and for the target company average was 44.67%. After Merger the average payout
 ratio was 40.96% which is a huge increase in the post merger period for the acquirer

company.

 If the average of debt-equity ratio before merger is compared, the acquirer

Company had the debt-equity ratio of 0.19%.while for the target company the ratio was

0.57%. Post merger the ratio changed to 0.33% indicating some increase after merger took

place.

 FINANCIAL INDICATOR WISE-ANALYSIS

(A) Operating Profit Ratio of Vodafone

Period N Mean SD t df Result

Pre Merger 3 22.610 32.394

0.565 4 NS
Post Merger 3 11.723 8.004

The mean operating profit ratio for Vodafone was 22.610 for the period of 2003-
04 to 2005-06. After merging Hutchison Essar in to it in 2006-07 this mean operating
profit ratio was decreased to 11.723 for the period of 2006-07 to 2009-10. The test for
difference of mean was applied to check whether the difference in the pre merger and
post merger was significant or not. The test results show that the difference in the pre
merger and post merger period was non-significant because of high variation in the pre
merger period (t = 0.565 < ttab = 2.132 at 5% level of significance).

Hence the hypothesis taken ‘There is a considerable difference between pre &
post merger financial performance’ is proved to be rejected.

The above position has graphically been presented as below:-

Figure 1: Pre & Post merger Operating Profit Ratio position of Vodafone
(B) Net Profit Ratio of Vodafone

Period N Mean SD t df Result

Pre Merger 3 -16.113 39.716

-1.351 4 NS
Post Merger 3 15.307 6.763

The average net profit ratio was for Vodafone was negative and it was -16.113 in
the pre merger period. After merger on merging Hutchison Essar in to it this figure was
increased and become positive to a figure of 15.307. The difference in the pre merger
and post merger period was found to be non significant (t = 1.351 < t tab = 2.132 at 5%
level of significance).

Hence the hypothesis taken ‘There is a considerable difference between pre &
post merger financial performance’ is proved to be rejected.

The above position has graphically been presented as below:-

Figure 2: Pre & Post merger Net Profit Ratio position of Vodafone

15.31

20.00

15.00

10.00

5.00
Net Profit Ratio (%)

0.00

-5.00

-10.00
-16.11

-15.00

-20.00
Pre Merger Post Merger
Period
(C) Return on Investment of Vodafone

Period N Mean SD t df Result

Pre Merger 3 -3.350 8.335

-2.782 4 *
Post Merger 3 11.010 3.232

Return on Investment for Vodafone in the pre merger period was negative and
this figure was -3.350. After merger with Hutchison Essar in the post merger period there
was high increase in ROI, this figure becomes 11.010 in the post merger period. The
difference in the pre merger and post merger period was found to be significant (t =
2.782 > ttab = 2.132 at 5% level of significance).

 Hence the hypothesis taken ‘There is a considerable difference in

value addition to shareholders of merged entities in Indian Telecom
Sector.’ is accepted.

The above position has graphically been presented as below:-

Figure 3: Pre & Post merger ROI Ratio position of Vodafone

11.01

12.00

10.00

8.00
Return on Investment (%)

6.00

4.00

2.00

0.00
-3.35
-2.00

-4.00
Pre Merger Post Merger
Period
(D) Earning Per Share of Vodafone

Period N Mean SD t df Result

Pre Merger 3 -10.927 18.002

-1.236 4 NS
Post Merger 3 1.940 0.953

The earnings per share was -10.927 for Vodafone in the pre merger period with
very high variation. The earnings per share was increased after merger with Hutchison
Essar in the post merger period and it cam e to figure of 1.940. The test for difference in
the pre merger and post merger period was found to be non-significant (t = 1.236 < t tab =
2.132 at 5% level of significance).

 Hence the hypothesis taken ‘There is a considerable difference in

value addition to shareholders of merged entities in Indian Telecom
Sector.’ is rejected.

The above position has graphically been presented as below:-

Figure 4: Pre & Post merger EPS Ratio position of Vodafone

1.94

2.00

0.00

-2.00
Earning Per Share

-4.00

-6.00

-8.00

-10.93
-10.00

-12.00
Pre Merger Post Merger
Period
(E) Dividend Payout Ratio of Vodafone

Period N Mean SD t df Result

Pre Merger 3 9.110 15.779

-2.057 4 NS
Post Merger 3 40.963 21.693

The mean dividend payout ratio for Vodafone was 9.110 before merger, after
merger this ratio was increased to 40.693, but the difference in the pre merger and post
merger period was found to be non-significant (t = 2.057 < t tab = 2.132 at 5% level of
significance).

 Though there was sharp increased in the value of dividend payout ratio but
this was accompanied by larger variation in the values of DPR in the post
merger period hence the difference in the pre and post merger period was
non-significant.
Hence the hypothesis taken ‘There is a considerable difference in value
addition to shareholders of merged entities in Indian Telecom Sector ’ is
rejected.
The above position has graphically been presented as below:-

Figure 5: Pre & Post merger Return on Dividend Payout Ratio position of
Vodafone

40.96

45.00

40.00

35.00

30.00
Dividend Pay Out Ratio (%)

25.00

20.00
9.11
15.00

10.00

5.00

0.00
Pre Merger Post Merger
Period
(F) Debt Equity Ratio of Vodafone

Period N Mean SD t df Result

Pre Merger 3 0.187 0.076

-2.806 4 *
Post Merger 3 0.327 0.040

The mean debt equity ratio before merger for Vodafone was 0.187. After merger
with Hutchison Essar this ration becomes 0.327 in the post merger period. The difference
in the pre merger and post merger was found to be significant (t = 2.806 > t tab = 2.132 at
5% level of significance).

Hence the hypothesis taken ‘There is a considerable difference between pre &
post merger financial performance’ is proved to be accepted.

The above position has graphically been presented as below:-

Figure 6: Pre & Post merger Return on Debt equity Ratio position of Vodafone

0.33

0.35

0.30

0.19
0.25
Debt Equity Ratio

0.20

0.15

0.10

0.05

0.00
Pre Merger Post Merger
Period

LIMITATIONS OF THE STUDY:

Though researchers have made a humble attempt to encompass the pre and post
merger performance of the selected sample merger case, it is difficult to narrate
all incidents and changes brought up due to mergers and acquisitions and
therefore necessary inferences are inserted wherever required.
Secondly, the study is based purely on secondary data which are taken from the
financial statements of the case through Internet only and therefore can't be
denied for any ambiguity in data used for the analysis.

CONCLUSIONS:
To analyze the financial performance of sample case during pre & post merger
period, 6 major financial ratios were used as financial indicators. On the basis of
analytical study of the sample case, the following conclusions have been drawn
which are perfectly in the line of objectives predetermined:

 The earnings growth after merger was found at the much higher rate
resulted in value addition to shareholders.
 A substantial dividend growth was observed after merger of the Sample
Company.

SUGGESTIONS:
After concluding the results of this study, it is found appropriate to put the
following suggestions:

1. It is observed on the basis sample study that telecom entities are working
under threat from economic environment like inadequacy of resources,
outdated technology, non-systematized management pattern, faltering
marketing efforts and weak financial structure etc. It is therefore advised
to re-organize such industries through merger/acquisitions .
2. It is also suggested that corporate mergers/acquisitions are bound to
change drastically and rapidly in size and performance through re-
organized undertakings, combined resources and united efforts of
experienced executives and skilled workforce.

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WEBSITES:

 www.thehindubusinessline.com
 www.vodafone.com
 www.investegate.co.uk
 www.hotstocked.com
 http://wiki.answers.com/q/advantage of a merger
 http://www.economicshelp.org/microessays/competiti
on/benefits-merger.html
 http://www.economywatch.com/merger-
acquisition/history.html
 http://en.wikipedia.org/wiki/merger and
acquisition#motives behind M.26A
 http://www.investopedia,com/ask/answers/05/merger
vstakeover.asp
 http://www.associatedcontent.com/article/1189676/th
e advantages and disadvantages of mergers pg2.html?
cat=3