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Research Project Independent or group project: You can complete this project by yourself OR as a group. The maximum number of members allowed in each group is three (including yourself). A group project is held to a higher standard than an independent project. Members from the same group receive the same grade. Requirement: Identify a real merger/acquisition case using free online resources: (e.g. google, Yahoo finance, library databases, EDGAR). Make sure that the acquisition has been successfully completed before 1/1/2013. Write a 5-10 page paper, in which the following issues should be addressed: 1. Acquirer company name, industry, business model 2. Acquire company name and industry, business model 3. Consideration given by the acquirer. You need to pay attention to the components of the consideration (cash, stocks, bonds, etc., as you have learned in homework problems). 4. Did the merger/acquisition raise antitrust concerns? 5. If you were the decision maker for the acquirer, how can you convince the shareholders that the proposed acquisition is a good deal. 6. Provide an objective evaluation of the acquisition deal. Use your own words and explain why you think it is a good or bad deal. 7. Download annual reports (at least one year's) from the parent company after the merger/acquisition. Are there any topics covered in our class that help you better understand the annual reports? Please illustrate. Grading: 20% writing; 20% correctness; 20% logic; 40% original thinking. Deadline: Final Exam Date. MERGER AND ACQUISITION OF HUTCH ESSAR AND VODAFONE. INTRODUCTION Merger is the coming together of two or more discrete companies which has been operating independently to form one entity. Merger and acquisition happens when one company gets sufficient resources or shares in another company in order to get larger control or ownership of the other. The firm with little controlling powers becomes the subsidiary, while the firm with a larger controlling power becomes the parent company. The merger and acquisition of Hutch Essar and Vodafone is a good example of successful mergers . Auerbach, (2008) 1 .1 The Acquire Company Hutch Essar ,this is an Indian telecommunication company ,under the Hutchison International Telecommunication Limited, India's second largest telecommunication company with high numbers of subscribers of 23.3 million as at the financial year ending December 2006.Its headquarters in Mumbai India. The company was previously known as Hutchison Esaar, bearing the name of its founders, was later named Hutch Esaar. It is a major of the player of the telecommunications industry in Indian with the revenue amount of US $1282 Million before interest and taxes, an operating profit of US$226 million for the year ending December 2005Hutchison Esaar controls 16.4% of the national market share in India. Business model Its main revenue sources are the mobile networks. Hutchison Essar generates its revenue through the provision of mobile network services to its customers. These include the internet services products like 3G internet speed in June 2011.International roaming packages for using the mobile networks while in another country. Hutchison Esaar customer base is mainly in India with over twenty three million subscribers, forming a market share of about 16% in India. In addition to this, Hutch has twelve operating circles and over six licensed ones. Hutch Esaar's other business interest include the energy sector, construction and transport sector. All this generates its revenue and contributes to its financing to all its activities 1.2 The Acquire Company Vodafone Group plc is British telecommunications giant with its head office based in London in the United Kingdom. The word Vodafone was adopted from voice data fone. It is one of the largest tecommunications companies in the world, fifth largest ranked by revenue in the world, second largest ranked by the number o connections of its subscribers. The company had changed its name to Vodafone Air touch plc in 1991 and later changed to Vodafone group in 2000. It had in operations in 25 countries among the five continents and customers adding up to over 200 million by the year 2007.it also has 36 partners working with them and many subsidiaries. Business model It only concentrates its business in the telecommunications industry. Its vision is to be world's leading mobile communication, listed in the London stock exchange. Its products include; partner networks ,which involves of its services international services to locals without needed of investment.Vodafon has also acquired many other telecommunication companies like, Eircell a wireless communication company. Other products include mobile phones such as j-phone in Japan and airtime. Vodafone is also financed by equity investors who own shares in it's a listed company in the London stock exchange. 1.3 CONSIDERATIONS BY THE ACQUIRER Hutch Esaar was valued to be to be a total of US $11.08 billion: -Its 100% enterprise value of US $18.8 Billion, -it had a debt amounting to US $ 1.33 billion -Equity value of US% 17.47 -67% value of the stake US $ 11.10 -Other debt US $ 0.6 -Net value US $ 11.08 billion Hutchison had to put the structure of its shareholders in place so that to prevent the ownership of to be 74% foreign. Vodafone was made to assume the liability of Hutch and the value had to be reduced in order to cater for this. Vodafone had agreed to purchase 67% interest in Hutch Esaar from Hutchison Telecommunications Limited for a cash consideration of US $ 11.1 billion. The sharing of infrastructure is expected to reduce the total cost of enhancing the provision of telecommunication services. The transaction will imply that Hutch Esaar would have a value of US$18.8 billion It will assume a net debt of approximately US $ 2 billion. 10% economic interest in the area of Bharti. Vodafone was to make US$350 million less in the amount of the controlling stake in Esaar.Since the deal was made in February; US$ 140 million was to offset interest payment. Infrastructure sharing will help reduce the cost of providing telecommunication services. Both parties will be able to expand their networks for wider connectivity. Financial times, (2007) MISTRUST ISSUES IN THE MERGER There were rumored statements about the rift between Hutch and Esaar.Esaar wanted to buy another stake in the joint venture in order to make it to be the controlling partner, but this didn't happen because some Egyptian firm bought some 19.8% in the Hutchison Esaar,without its knowledge. This mistrust spearheaded the acquisition. Hutchison Esaar didn't want the company to be fully foreign owned; they had to put in structures to prevent it to be 74% control by foreign country in order to protect its shareholders. ISSUES EMERGED IN THE MERGER -Tax planning tax issue The Indian tax department differed with them by stating that the income should have been paid to the Indian tax department. It argued that the capital gains tax deducted by Vodafone paid by most people should have been paid to the Indian tax department. The matter was heard in the Indian Supreme court, where there was a landmark ruling in favor of Vodafone. It argued that the deal was not struck in India and neither did the payment made in India. Since it was an offshore deal, and the tax liability should have been borne by Hutch. The tax man argued that since the company acquired was based in India; they could have paid tax on the profits made from the sale. Vodafone as a buyer was liable to deduct from the source. The taxability of Hutch would occur, if it would have decided to file its files returns in India. -Hutchison did want a foreign company to own the company fully, so they had to put in place structures for its shareholders. ADVANTAGES OF THE PROPOSED ACQUISITION 1. Vodafone proposed to introduce cheap cell phones in the Indian market using the Vodafone name brand. This will help increase the number of customers hence improving its revenue. 2. Vodafone has plans to inject more capital for the network expansion for the future. This will help to help to boost is revenue and customer satisfaction.E.xpansion will enable then to gain the market share of the telecommunications industry. 3. There will be additional value in Esaar e.g., through technical expertise.Aquisition will help improve the skills of the current staff and bring in more experts that will improve the operations and generation of ideas. 4. The proposed acquisition will increase growth using the existing platform. Through the merger, the company will gain more market share hence generating more revenue, making it more profitable. 5. There will be additional value in Vodafone ownership e.g., through technical expertise.Aquisition will help improve the skills of the current staff and bring in more experts that will improve the operations and generation of ideas. 6. Vodafone will have a chance to enter the growing Indian market. This will help boost its revenue strategically. 7. The sharing of infrastructure costs will help reduce the operations costs. 8. Synergy effect This is an expected gain through the combinations of entities. It maybe in terms of revenue, production facilities or in terms of economies of scale. 3G internet will take off in India. Vodafone has already invested in the 3G mobile networks in the countries that it operates. The 3G will allow mobile phone s to access internet connections faster. Bleek j, (1993) OBJECTIVE EVALUATION OF THE ACQUISITION DEAL -Expanding distribution and network and network accessibility -Focusing on a customer focus approach -The Memorandum of understanding recognizes the possibility of sharing the current mobile infrastructure with other mobile operators in India to allow efficiencies in operations. -The Memorandum of Understanding recognizes the possibility of regulatory approval and commercial development, to extend the sharing of infrastructure agreement to radio access network and access t transmission. -site sharing. -Expand the market share. -Reducing or cutting down the cost of network ownership. The deal is good to take from the evaluation of the objectives stated in the deal. Vodafone help to inject more capital that will help expand the business for example the expanding the network distribution .This will help to get more customers hence increasing the market share. Vodafone would have a lot of financial implications; it will have to wait for about two financial years in order to realize its returns on investment. Vodafone will create more value in India, which is through its advanced network. Vodafone will also increase the value under its ownership. India will be privileged to host top global telecommunications players in their market, this will assist in opening more deals and investments for India. ANALYSIS OF THE ANNUAL REPORT AFTER THE ACQUISITION PERFORMANCE INDICATORS; -Revenue After the acquisition in 2007, the revenue increase at 55%.This shows that the deal was good and Vodafone was gaining a lot at the Indian market. -Customer additions The number of customers increased by 16.4 million by March 2008.This is a good number, it shows that its gaining ground in India, this may be mainly attributed by the cheap handsets and lower tariffs that had need launched. Many people were attracted by this hence contributing to increased revenue. -Connectivity The number of connections increased significantly, this was mainly contributed by the cheap handsets and lower r tariffs. -Profitability The overall profitability of the parent company improved from a loss of; 4806 million Euros to a profit of 6756 million Euros. -Earnings per share [EPS] or Loss increased from 11.26 to 12.50, an 11.0% increase. From the annual reports, the acquisition was a good deal for both parties, they had reached on most of the stated objectives. [vod081] Auerbach. (2008). Auerbach, A. J. (Ed.). (2008). Mergers and acquisitions. University of Chicago Press. bleek j. (1993). Bleeke, J., & Ernst, D. (1993). Collaborating to compete: using strategic alliances and acquisitions in the global marketplace (No. HD69. S8 C65 1993). financial times. (2007). https://www.google.com/url? sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwja9mBipXQAhXDVxoKHcKNDPUQFggqMAI&url=https%3A%2F%2Fwww.ft.com%2Fcontent%2F0c6cb68afdb1-11db-8d62-000b5df10621&usg=AFQjCNH9uNZV-1VhecJ8fWlVTahNm2fJ8A&sig2=Dd2nu77Z-. vodafone group plc. (2008). https://www.google.com/url? sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwj0146ciJXQAhVGSBQKHUGz BJUQFggcMAA&url=https%3A%2F%2Fwww.vodafone.com%2Fcontent%2Fdam%2Fvodafone %2Finvestors%2Fannual_reports%2Fannual_report_accounts_2008.pdf&usg=AF