M&A In The Telecommunication Sector

Mergers and Acquisitions in the Telecommunication Sector

The acquisition of O2 by Telefуnica S.A.

International Business - Intercultural Studies

Management

Table of contents

1. Introduction 1

2. Industry 1

3. Telefуnica 3

3.1 Background of the company 3

3.2 Facts and figures 4

4. O2 4

4.1 Background of the company 4

4.2 Facts und figures 5

5. Acquisition 5

5.1 Process 5

5.2 Integration mode 7

5.3 Motives 7

6. Due Diligence 8

6.1 Culture Due Diligence of Telefуnica 9

6.2 HR Due Diligence of Telefуnica 11

6.3 Culture Due Diligence of O2 13

6.4 HR Due Diligence of O2 14

7. National cultures 15

8. Outcome 17

9. Conclusion 18

Bibliography 20

1. Introduction

Over the past ten years most of the growth in international business has been made via gross-border mergers and acquisitions rather than green-field investment (n.n.1, 2000: 10).

M&A activities are very popular both at home and abroad. As a general rule, strategic transactions are only as good as their operational implementation. Therefore, the integration is a very important topic concerning mergers and acquisitions. In terms of cross-border operations not only the different organisational cultures have to be considered but also the dissimilar national cultures. The current mergers and acquisitions of international enterprises are predominantly horizontal and lateral fusions respectively. Their motives are primary an extension of the market share in the core business. It is a matter of developing new markets as well as protecting and increasing market shares in already consisting markets. Another motive is the expected realisation of synergy effects via economies of scale and economies of scope. For industries with a low international degree of consolidation it is particularly difficult. For instance, the telecommunication sector has been protected for decades by governmental regulations. In the last years, the telecommunication sector has started to internationalise. One example is the acquisition of O2 by Telefуnica. The British company O2 which emerged from a separation of the BT Group (former British Telecom) has its main activities, besides the U.K., in Germany and Ireland. O2, with 24.6 million customers, was said to be too small to exist by itself on the European mobile telephone market. The transaction ended years of speculations about the future of O2. Over the past years, the Deutsche Telekom AG as well as the Dutch operator KPN NV were also interested in O2 which performed favorably over the past years. (www.wiso-net.de a/www.legios.de)

2. Industry

Telecommunication companies are mainly providing telecommunication services such as fixed line, mobile or internet services. They are engaged in the transmission of voice, data, text, sound and video. Until the mobile telephony was introduced in the late 20th century the core business of the telecommunication industry was the fixed line service. Now the mobile telephony is more and more substituting the business of fixed lines. With the 21st century the global telecommunications market has moved towards greater liberalization and many of the state-owned monopolies were privatized which lead to increased competition. (http://www.itu.int)

The global telecommunication market witnessed a number of deals between some of the world's largest public operators in this sector. (www.insight-corp.com) For instance, France Tйlйcom acquired the controlling interest of the Spanish Amena. The Deutsche Telekom acquired the Austrian mobile network operator Telering. The Spanish Telefуnica forestalled particularly in South America in the last years but it also bought the British O2 and the majority of the Czech provider Cesky Telecom. (www.welt.de, 2005) There is a crowding out competition in the telecommunication industry at the moment. In markets such as Great Britain or Germany new customers can only be obtained by acquisitions of companies which are already present in the market. (www.wiso-net.de b)

Revenues of the global telecoms industry are reckoned to exceed $1 trillion by the end of 2006. While communication was done before by separate channels such as fax, telephone and computer, the different telecommunication networks grow together to a global, integrated and comprehensive multimedia and multi-service network. The 3G technology is the next generation in wireless mobile communication, which currently allows enhanced multimedia, usability on all popular modes, broadband and high speed as well as mobile internet just to mention a few. (www.insight-corp.com)

The Five Forces model was developed by M. Porter to have an overview of the main forces which influence an industry and show the attractiveness of this industry. (Mawhinney, 2001: 45)

In the telecommunications market the power of private customers is relatively high. As the products are standardized and there are a lot of competitors the customers have a wide choice and therefore go very often for the cheapest offer. The customer loyalty is low. Due to customised products and services the business clients have a higher