Week Four Case Study
Nobody would deny the fact that communication business is one of the most dynamic industries in the current business environment. Communication companies are required to continually introduce innovative services to survive in the fierce competition. Each day they sign a great number of corporate deals to ensure revenue raise and organizational health. Needless to say, such deals can dramatically affect a company’s organization, and not always in a positive way. Thus, the purpose of the following paper is to discuss and analyze the Verizon Vodafone sale from Vodafone’s perspective.
Before proceeding to any discussion of the impact of sales on Vodafone’s performance, it is appropriate to address how this deal is judged from the CAGE perspective. Since the Vodafone’s major markets are located in Europe, the company wants to get rid of the U.S. segment, thereby creating new business opportunities locally. In this case, cultural distance becomes an important consideration, as it affects consumers’ service preferences. While an average European resident needs faster networks and 4G coverage, American customers opt for universal connectivity where the wireless and wireline businesses are merged together (Vodafone Group Plc, 2013). Nevertheless, the United Kingdom shares relative similar culture and has the common language with the United States, which ease communication and hence facilitate the trade. Therefore, convenience of telecommunication services attracts both types of consumers. Other dimensions that are taken into account during the transaction are administrative and geographic distances. As local supervision in the telecommunication companies is relatively high, physical distances negatively affect the deliverance of high-quality services. This deal results in diminishing administrative distances among trading partners, as Vodafone focuses its resources on the expansion in the European Union. It is worth admitting that the following deal is not highly sensitive to economic distance, since the wealth of income of American and European consumers is virtually similar.
In this case, the Better-Off and Best Alternative tests cannot be applied, since the companies started to perform as standalone businesses. Though this sale offered the potential to both companies, it makes Verizon no longer beholden to its partner and, hence, the corporate value added was not created. Regarding that, the Best Alternative tests do not fit the transaction as well. The deal does not presuppose the common ownership by a single corporation. Vodafone rejected the partnership it cannot fully control and is currently expecting solid revenue growth in its main European markets.
Consideration of a strategic choice and the degree of prioritization affected Vodafone’s executives decision-making while pondering this sale. Given its historical emphasis on aggregation, certain difficulties arose when an attempt had been made to implement a new strategy. The executives found that two AA strategies, adaptation and aggregation, would be more promising for the future of the company. This emphasis across the AAA strategies can be explained by Vodafone’s competitive position within the market. The Vodafone was boosted by the emerging markets in Africa and Middle East, where only 6% revenue growth was generated during that year. The sale was viewed as a solution to the escalating financial problem. The money received from Verizon helped Vodafone to pay the debts and invest in a new network campaign (Worstall, 2013).
In fact, Vodafone still had the expansion plans in mind, so that it focused on spreading itself all over European countries. Giving the U.S. asset in exchange for cash promised to improve Vodafone’s competitive strength ensuring the market domination. Additionally, lucrative investments in Europe were supposed to help in this regard. Meanwhile, Vodafone’s main task was to reassure European investors that with that cash flow adequacy, the company is on the verge of the expansion campaign that would guarantee return on the investments (Worstall, 2013).
Since the telecommunication company has a 45% stake in Verizon Wireless, its market is too large to be workable. That is why Vodafone urgently needs to avoid sizeism to improve profitability and cash flow. What is attractive to the U.S. market is not so important in Europe. Shifting focus from the U.S. asset to its major markets is viewed as an attempt to improve business efficiency. Besides, it would help to win price competition the company faces from smaller players. Thus, the scale of business requires serious reconsideration and re-examination.
As a matter of fact, the disposition of Verizon fits well to Vodafone’s strategic plans. The company intends to grow independently without heavy reliance on partners. More specifically, the company aims at providing the 4G capability in Europe and 3G coverage in the emerging markets, which would ensure its monopoly in the business area. The financial resources obtained from the deal with Verizon would help to build infrastructure in the new markets and pay the existing debts. New target segments and sources of investments became major strategic tools to increase its market value (Vodafone Group Plc., 2013). The sale was considered an excellent opportunity to concentrate on the company’s major markets and, therefore, remain the most valuable telecommunication stock in Europe.
Nevertheless, the decision to sale a stake in Verizon Wireless has received critical attention from risk managers and analysts. It has become abundantly clear that Vodafone and Verizon did not benefit equally in the long run by this transaction. Part of the reason for this is that since the deal Vodafone’s market share was drastically affected (Worstall, 2013). Financial problems hinder the implementation of Vodafone’s expansion campaign, which, in turn, presents serious concerns for investors. The potential of the emerging markets seemed attractive at the beginning, but it is important to remember that each sale has to be considered from different perspectives. Vodafone’s strategic growth plan is the time consuming process that requires solid investments to be properly implemented. Importantly, it can take two years before the company starts generating profit. For now, Vodafone’s performance leaves much to be desired and little has been changed since the sale (Worstall, 2013). Heavy dependence on the investments exceedingly aggravates the situation.
Meanwhile, the deal presents an excellent opportunity for the Verizon side, as the company achieved monopoly and more financial flexibility. Expenses on the transaction were immediately covered by an increase in profit (Worstall, 2013). Clearly, margins on the wireless side exceed the ones in wireless. Vodafone got rid of the U.S. asset with wide and expanding margins, which would guarantee positive cash flow and generate high profits years afterwards. In other words, Vodafone is likely to regret selling Verizon Wireless, which is the largest telecommunication provider in the United States.
It is appropriate to make a general comment on Verizon Vodafone sale from Vodafone’s perspective. It has become increasingly apparent that the transaction is not equally beneficial for both sides of the trade. Though expectations about monopoly in the emerging markets are within reach, abundant resources are needed to successfully implement Vodafone’s expansion plan. The sale was seen as an effective strategic tool to improve the competitive position within European segment and achieve dominance in the emerging markets. In reality, the company suffers greatly from selling a stake to Verizon. It becomes difficult to ignore the fact that the loss of share value and lack of financial resources make it difficult for Vodafone to achieve performance excellence. Verizon Wireless could have brought to the company stable income and cash flow adequacy. Selling its 45% stake to Verizon Communication only postponed Vodafone’s growth, thereby increasing its dependence on investors.