Vodafone and Verizon Merger

Last week I discussed FDI, today I will consider one possible type of investment opportunity: Mergers and Acquisitions. Mergers and acquisitions (M&A) involve the buying, selling, dividing and combining of different companies and legal entities. M&A trends tend to occur in a cyclical pattern in line with changes in domestic and world economies. The last cyclical trend began in 1999 during the tech boom with a significant increase in the number of M&A activities, and their values, compared to previous years. When the tech-bubble burst and economies began to slow, the level of M&As fell. 2004 is believed to be the end of the downturn, and the start of our current cycle.

Despite being in the downturn of our cycle, there are still M&As occurring. Today, the focus is not on the trends of M&A activity, but on the merger of Vodafone and Verizon. Vodafone currently possesses a 45% stake in Verizon, but this week it has been announced that Vodafone hopes to up it's stake and fully purchase the company. The deal, worth $160 billion, will potentially result in the largest M&A activity on record. But what can both parties expect during and after the merger, and is it a good idea?

In Anglo-American organisations, the fundamental principle is to maximise shareholder wealth. But to what extent will this occur? The answer is dependent upon how you view the acquisition. Theoretically, the shareholders of the target company (i.e. Verizon) are likely to see their wealth maximised as their share prices rise by 30%. However, for the shareholders of the bidding company (i.e. Vodafone) they are likely to experience little or no gain on their shareholder wealth. Why? Because investing into Vodafone at that moment in time would be too risky as the success of the activity cannot be predicted. So the question is raised, if the wealth of Vodafone's shareholders is not being maximised then why is the activity being performed?

In my opinion, the reasoning behind the Vodafone and Verizon transaction is to provide synergy between the two organisations. This basically means that the two organisations together are worth more than they are separately. It is argued, that if the merger occurred 70% of Vodafone's total earnings would be from Verizon, a significant increase from the 40% it had in 2010. I believe that by entering into this merger, Vodafone will see an increase in market power and presence, allowing them to receive better economies of scale and easier entrance into new markets and industries.

However, a worrying thought is that there could be some managerial motives behind this merger. It is speculated that Vodafone's management are also pursuing other possible acquisitions and mergers if the Verizon one was to work successfully. Could this be an indication that Vodafone's management are looking to increase their own status and power, and possibly build their own empire? If so, this is very concerning for all parties and stakeholders involved.

For me however, I feel that the most worrying and concerning aspect of this merger is the reaction from Verizon's management, the press and some stakeholder groups. There are a lot of criticisms regarding these discussions, and a lot of reluctance from Verizon to agree to the takeover. This strongly suggests to me that if the acquisition was to occur, it would not occur easily and may damage shareholder wealth in the future.

Studies have found that there are three key reasons why mergers fail; misguided strategy, over-optimism and failure to integrate management. If the Vodafone Verizon transaction was to fail, my bet would be on failure to integrate management being the reason behind it. I feel that there is already too much resistance to the news now, and this will only get worse as talks continue. This is likely to result in damaged morale for the takeover company and won't provide the synergy and savings Vodafone are hoping to benefit from.

Personally, I can see why Vodafone would want to enter into this deal, and I can understand some of the reasons behind why Verizon are against the deal. I don't think there's an easy resolution and at some point one side will have to compromise. For the time being this is a news story I will be closely interested in and hope that whatever happens, it happens successfully. These are two good companies, who need to focus on maintaining their good relations with each other if they hope to continue working together in any way in the future.