U.S. Telecom Mergers and Acquisitions: A Bad Idea or a Good Idea
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In general, communication means any information exchange between two people or more. The definition is slightly different from that of telecommunication. According to National Telecommunication and Information Administration in United States, telecommunication refers to any transmission of signals (voice, images, video, and text) to designated recepients through optical, wireless radio, and other electromagnetic systems. In fact, telecommunication supports the way people communicate and vice versa, especially in digital era.
The coming of digital technology, as represented by a series of two binary digits: ‘0’ and ‘1’, few decades ago has enabled people to convert any kind of information (voice, text, data, and video) into other forms. This advantage of digital age, in turn, enables us to experience the era where people can communicate in many forms: voice (through telephone, handy talky etc), data (short message services/SMS, facsimile etc), and video (video streaming, video conference etc). This situation refers to the era people call as the convergence in digital technologies.
The convergence of digital technologies including television, telephony, and computers has supported the growing number of innovations of the Internet that grew from inter-university computer networks in United States. The situation explains that telecommunication has vital role in helping organization to bring down costs of communications.
Concerning the role of telecommunications in business, Ciborra (2002) reveals that telecommunications network existence does not only enable people to communicate but also to reduce transaction costs by aligning business process within and between organizations. The situation does not occur at medium-size companies but also to large and small companies as well.
Currently, the development of telecommunication services and systems grow at extreme speed. The use of voice-centric network like traditional telephony has been replaced to some degree by the emerging data-centric network like VoIP (voice over internet protocol). Other systems that attract network developers’ attention are 3G (Third Generation), Private Automatic Branch Exchange, Virtual PBX System, WiMax, Centrex, latest design on network redundancy, and many others.
All advanced technology is useless if carriers or operators cannot employ the benefits of the technology to serve the market. In order to serve the market well, a carrier should understand what the customers want and needs including their expectation and the affordability, representing the price that customers want to buy for a service or product.
Because customers have different kinds of telecommunication services, the situation encourages service providers to merge and acquire competing or complementary companies so that they gain competitive advantages.
Concerning the wave of mergers and acquisitions that happen within telecommunication companies in the U.S., this paper will discuss whether the merger and acquisition present benefits or vice versa. In other terms, the paper highlights whether U.S. telecom mergers and acquisitions is a bad idea or a good idea.
- Statement of the Problem
The fierce competition of business in a particular market has driven corporations to expand into new market in order to take benefits of their well-recognized brands, thus finding new revenue well and generate profits. In addition, there are many strategies to expand into new markets such as through conducting joint ventures, franchising, or merging with other companies in order to target customers effectively and efficiently.
Concerning business expansion strategy, we witness that currently there are many corporations perform merger in order to become multinational enterprises. Such action also provides wide opportunity since the corporations may obtain several benefits such as cost reduction, better product development and management, widened distribution channels, and strong market presence.
Concerning the benefits of conducting merger, Vadim Kotelnikov (2006) in his article Mergers & Acquisitions reveals that at least there are four main reasons why nowadays many enterprises carry out mergers and acquisitions as following:
- gaining advantages of broadening product lines by acquiring complementary products
- Strengthening presences in a particular market and taking over distribution channels
- taking advantages of economies of scale
- Acquiring technology that complement or replace existing one
Due to mergers do not have to lead to favorable outcome, therefore, the research statement regarding the U.S. telecom mergers and acquisitions is”…as telecommunication industry continues shows fierce competition, is merger and acquisition among U.S. telecom companies are good or bad ideas from customers point of view and from the telecom industry standpoint.
- Setting of the Problem
Recently, mergers and acquisitions relating main players in telecom industries, together with several of the biggest and most famous companies, are emerging in the United States. The businesses that have an effect on customers across the United States repeatedly submit new and multifaceted problems and must be analyzed with awareness. As the global leader in the scope and complexity of the telecommunications system, United States, currently is an established laggard next to every significant measurement of system operation (Borland, J., 1999).
The same as competition changes rule in the telecommunications business, the merger and acquisition action is probable to maintain, and strong antitrust implementation is essential if people desire to go on to a route that will present development to the vital customer advantages, such as cheaper prices, better alternatives, advanced value, and more revolutionary product presents well (ITU, 2002).
Whilst quick improvements in communications technology are extremely significant in a worldwide market, managers are supposed to be worried that the merged company perhaps so great that modernizations will be smothered. Merger, fundamentally, is producing a duopoly when it appears toward main telecommunications companies. The companies can also struggle forcefully. Otherwise, they can take action as close monopolists in their individual areas (Borland, J., 1999).
- History and Background of the Problem
Mergers are regularly the fastest, cheapest, or simply method to achieve these advantages. Acquisitions aspire to put together the network communications and substance of the merging companies along with improving the capability to organize highly developed technologies (Le Blanc, G., and Shelanski, H., 2002).
Unlike mergers that happen in 1990s that some of which came from telecommunication industry, mergers in the last six year of 21st century come from several industries evenly. The industries that conduct many mergers are pharmaceuticals like merger between Glaxo and SmithKline Beecham for US$75 billion; entertainment like occurred between AOL and Time Warner for US$164 billion; and telecommunication such as merger between AT&T and BellSouth for US$72 billion. Table 1 shows the ten largest mergers that happen within 21st century.
Table 1 Top Ten Mergers in 21st century
In telecommunication industry, the merger between Sprint and Nextel in December 2004 represented an attractive merger in telecommunication industry since it is the merger between 2 US mobile phone carriers that positioned in number 3 and number 5, respectively.
The merger between the two-telecommunication companies accounted for US$36 Billion. Moreover, the mergers also highlight the corporate strategy of Sprint that grows their business through a series of merger and acquisition since its establishment in 1986 in which Sprint has conducted several mergers including the acquisition of Centel to provide local service in 18 states in the US (‘History’, 2006).
Many telecom companies in the U.S. set out on a company strategy to place themselves having the status of main partakers in local and global marketplaces by developing promptly in the course of mergers and acquisitions. It is supposed to have placed these companies splendidly for the upcoming generation authorizations that will be auctioned off in the U.S. The major problem is to answering the question, whether these merger and acquisition strategies were doing well overall, and especially, which companies gained the largest part from this business strategy well (ITU, 2002).
The stock price performance for particular companies should be investigated. These categorizations make known several motivating perception into the problem who achieved from these mergers and who is well placed coming up. Besides, the market awareness of telecom mergers’ synergies can be approximated by appraising the alteration in united market values of bidders and targets subsequent to the merger notices. As a final point, the possibility that mergers would continue by assessment of the alteration in the comparative movement of bidders and targets prices before and after the merger need to be reviewed well (ITU, 2002).
- Scope of the Research Project
Along with the spreading out of the rapid telecom industries, it seems sensible to many telecom companies to consider about a merger, which would unite two of the biggest companies.
Ordinarily, the two companies have a product range that possibly will build an excellent complimentary. More to the point, the integration has several challenges, such as the power of government on the company’s dealings area and other significant troubles for the agreement (Geimann, S., 2000).
Many viewers are examining whether every merger action is beneficial for the financial system and customers. Several have stated that the Telecom action was passed with the purpose of raise competition, however as a substitute, people are distinguishing a merger impulse. These announcements are a sign of disturbance with the reality that expansions in the telecom industry have not pursued the succession or the agenda, which several of the action’s benefactors forecasted they are comprehensible (Fair Isaac, 2004).
Merger presents an effective structure that will carry competition to the regional marketplace and ultimately do well to U.S. consumers. It will spend time, some endurance, and much insistence. Peoples who involved are committed to attempting and build the action complete its competitive assurance. Reports that comparing competition with mergers and reorganizing possibly will be understood to propose that the two are intrinsically mismatched in some way. Mergers can be a usual reaction by companies in a business that is going through adjusts (Borland, J., 1999).
Moreover, the telecommunications business is amid not merely thoughtful technological modification, but exceptional regulatory adjustment too. Therefore, an expansion in merger action is to be estimated in this big business. The largest part of mergers and acquisitions look after competence and as a result produce improved advantages to customers and industries (Le Blanc, G., and Shelanski, H., 2000).
- Importance of the Research
Telecom mergers increase effectiveness and advance the technological communications and, eventually, consumer’s advantage. Merger will definitely enhance the public interest by carrying jointly two companies with complementary benefits and strong points, thus making a more competent, more advanced company able to speed up and enlarge the distribution of best well-designed technologies and services to every class of consumers (Le Blanc, G., and Shelanski, H., 2002).
Occasionally, naturally, a specific merger is mismatched with competition. It is company and government’s responsibilities to recognize anticompetitive mergers and perform whatever corrective movement is essential. They should carry out that by cautiously observing every merger on its specific facts (“How Telecom Providers Can Improve Their Customer Acquisition Process”, 2004).
They need to investigate mergers in the telecommunications business by means of the equal standards that they apply in other businesses. Inherently, they should look to perceive if the projected merger would get rid of existing competition or upcoming latent competition in a method that damages customers. They must examine and scrutinize aspects for example market intensity, potential unfavorable results, simplicity of access into the marketplace under consideration, and effectiveness expected to be built by the merger well (ITU, 2002).
These should accomplished by a methodical investigation of the reports restricted from a wide-ranging variety of resources, consisting of the business strategies of the merging companies and other participants, their expected techniques of access, the products and services to be provided, market segment prediction s, and possible influences on the marketplace (Le Blanc, G., and Shelanski, H., 2000).
Regardless of continual dissimilarities, synchronization of U.S. telecom merger assessment is supported by corresponding actions further than specific competition rule. Nevertheless, essential dissimilarities in marketplaces and rule continue, which will influence the rapidity and scale of synchronization in the upcoming era (Borland, J., 1999).
In addition, the research on U.S. telecom companies’ mergers and acquisitions are important since it provides customers with information regarding the underlying reasons behind the massive mergers that occurs in telecommunication industries. There are three major issues associated with any mergers and acquisitions; they are related to importance, negative impacts, and vicious circle.
- Importance of Mergers and Acquisitions
Commonly, M & A are performed to obtain better and more profitable business conditions. It is a reaction toward market conditions, which called for increased value of customer relationship, new services and solutions of problems, and larger source of capitals. Its potential benefits are widely recognized (Beyond, 2000).
- Negative Impacts
Despite the potential advantages, M & A contained enormous financial and business risks. Failed M & A transactions could be very disruptive, costly and emotionally frustrating (Beyond, 2000). Various studies have addressed this problem, providing explanation of the condition. T Roland (1999), has elaborate that despite its enormous benefits written on paper, two thirds of the activities never reached its core objectives, which is the creation of value. He even stated that M & A activities are often found destroying existing company values (“Mergers”, 2001).
Managers and decision makers often neglected delicate factors such as employee’s acceptance and the working culture of would be merged companies. Financial calculations such as cost saving, increasing stock values and the rising calculated profit often become very convincing illusions rather than dependable calculations. The under estimative assumptions that lower managers and employees from different companies would automatically “mixed” and continue to produce similar performance have cost many merged companies their ability to produce profit (Di Giacomo & Associates, 2001).
- Vicious Circle
Due to (usually) insufficient socializations, the employees actually knows very little of the M & A plans until its conducted, creating hard times to accept and adapting to different cultures and different management style. In Europe, big mergers averagely cause 10% of their employees suppressed. Morale degradation and increasing amount of distrust caused the best parts of the company leave, leaving only the least motivated and the incompetent. Finding themselves inside uncalculated problems, the managers become firefighters, forgetting important activity for company survival, looking ahead. The vicious circle is then started, fueled by confusion and frustration to its final ending, failure (Di Giacomo & Associates, 2001).
In relation to corporate governance, the elaborated impacts of M & A have obviously disrupted company’s practices of good governance. However, as mentioned before, M & A is in nature, a problem solving activity rather than sources of problem. Companies have applied the strategy and survived trough the disruptions, resulting a stronger and more beneficial companies.
- Definition of Terms
- Network Redundancy
Telecommunication industry becomes vital parts in an organization since it helps the enterprise to perform daily tasks that are critical to the success of business. There are many applications that a company may use including voice communication by using telephone, data (file sharing, SAP-based system etc), and Internet. For some industry like banking, telecommunication services are critical parts that they cannot perform their business without them.
Figure 1 Network Redundancy
Since the use of telecommunication networks is critical, therefore, the continuity of services (COS) should be maintained to prevent huge operation losses as the result of broken networks. The situation highlights the needs to set up redundant networks that prevent any communication losses when a link is broken.
According to Nicoud (2003), in order to provide network redundancy in IP (Internet Protocol)-based connection, a company must have two different IP addresses that deliver information or data via different route. Concerning the provision of no-downtime system or network redundancy, figure 1 shows how a company can set up redundant network in which when a fault happen at satellite communication, the system will automatically deliver information via fiber optics communications.
- Private Automatic Branch Exchange (PABX)
The oldest non-ISDN communication system within complex organization used a manual switchboard, where operators plug cables into sockets to keep people around the company connected to one another. This system is known as the Private Manual Branch Exchange (PMBX). As we all know, this manual communication system became obsolete because they were replaced by automated electromechanical and then electronic switching systems, known as the Private Automatic Branch Exchange (PABX).
The system is vastly becoming popular because it is obviously cheaper and more efficient than the PSTN or ISDN set-ups. Without the PBX, each call, even the internal ones, must have its own line, which requires monthly payments. In other words, internal calls would have to be routed out of the building to the central district telephone system, just to be routed-in again. Besides telephone, fax machines, modems and other communication devices can also be connected to a PBX.
The Centrex system is a slight modification of the PBX system. A standard PBX system is generally installed at a business’s site and connects telephones installed there. It may also have trunk lines to connect several external calls. However, the Centrex systems provide services similar to the PBX system, but from equipment located outside the premises, at a central provider. The services are delivered over public telephone networks.
The standard features and capabilities of the Centrex system are: call forwarding, key system emulation, call hold, call pick-up, call park, call waiting, voice mail, automatic callback, automatic recall, call transfer, conference calling, music on hold, speed calling, intercom and message light.
Many corporations apply the Centrex System mainly because they do not want to purchase and manage their own telephone lines due to the considerable capital investment, technical requirements or time limitations. Practically, there are several benefits of the Centrex system for organizations:
- It is not necessary to buy corporate telephone system
- Capability to forward any calls to offsite receivers like rural offices, telecommuters, and home workers
- Ability to grow or shrink the office as needed
- The service is guaranteed by the telephone company
In addition to several benefits that Centrex system provides, there are also several shortcomings of the system as following:
- No automated attendant
- No automated call Queuing
- Moving, adding or changing orders require calling the phone company
- Limited call management services where several value added features that a centre has are not available in Centrex, the features include selective call forwarding, do not disturb, and follow me
(Centrex vs PBX’, 2003)
- Virtual PBX System
Virtual PBX System is a breakthrough service, which provides highly sophisticated call management services for companies and organizations. The product is not suitable for companies working on multiple locations, having many mobile workers and dealing with telecommuters. It is stated to be the Centrex of the 21st century.
In addition to the standard Centrex system, the virtual PBX system also uses several new technologies including VoIP and CCCP. The Virtual PBX system is said to be able to provide users with a phone system of almost infinite size in one or multiple locations, with a huge feature list (Marcus, 2005).
The standard features of the system are similar to those provided by cell phone carriers, including caller ID, voicemail, text messaging and conference call. There are also capabilities such as data file transfer, video intercom, video voicemail and video broadcasting (Marcus, 2005).
The prospective effectiveness advantages from mergers and acquisitions consist of operating competencies that occur from economies level and range, better resource distribution, redeploying to the other inexpensive technologies or quality arrangements, better handling of knowledge, concentrate on fundamental abilities, more effectual blend of positive features and reductions in business expenses.
In uniting resources and consumers, companies look forward to build market power by reducing definite or latent competition. The market development might have been a main reason for several of the mergers and acquisitions for the most recent period. Lately, many market analysts observe whether these mergers played a role in the economic improvement and consumer wellbeing well (ITU, 2002).
Counter to the hopes of merger, facts unsuccessful to reveal efficacy benefits or better operating implementation. In reality, subsequent to mergers, research discovered the contradictory of synergy. Moreover, indeed, operating effectiveness constantly illustrated noticeable regressions. Communications upgrading and investment points in innovative technology weakened as well (ITU, 2002).
Post-merger auctions are unsuccessful to develop. In its place, the moderate post-merger achieves in financial accomplishment informed by several Telcos were mainly attributable to improved market power, or, we can say, their capability to enhance prices (Fair Isaac, 2004).
Concerning the role of telecommunications, it is found that some organizations use networks not only to facilitate communication but to reduce costs of transacting by supporting the alignment and interlocking of business processes within and between organizations. The situation suggests that selecting telecommunication equipment should be based on the usability and efficiency so that the objective of deploying the equipments is fulfilled.
Concerning the wave of mergers and acquisitions that happen within telecommunication companies in the U.S., this paper discusses whether the merger and acquisition present benefits or vice versa. In other terms, the paper highlights whether U.S. telecom mergers and acquisitions is a bad idea or a good idea.
Due to mergers do not have to lead to favorable outcome, therefore, the research aims at finding out whether merger and acquisition among U.S. telecom companies are good or bad ideas from customers point of view and from the telecom industry standpoint.
By referring to several literatures, we found that mergers among U.S. telecom companies enable telecom companies (telcos) to gain competitive advantages of broadening product lines by acquiring complementary products, strengthen their presences in a particular market and taking over distribution channels, take advantages of economies of scale, and acquire technology that complement or replace existing one. The investigation founded that the underlying motives for mergers are to reach effectiveness that the combined companies would develop into more technologically advancement.
However, since the mergers and acquisitions tend to monopolize the provision of telecommunication service by a number of service providers/telcos, therefore, every telecommunications merger had essentially harmed the U.S. customer. For this finding, it is recommended not approve every merger, which is jeopardizing effectiveness (Le Blanc, G., and Shelanski, H., 2000).
Based on summary and conclusion, we recommend a further research that focus on assessing the quantitative aspects of U.S companies’ mergers and acquisitions. The quantitative discussion must highlight profitability of the merged companies after the mergers and acquisitions take place.
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