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Literature Review

Investigation into Merger between T-mobile and Orange

STUDENT NAME: MS THU ZAR HLA KYI

STUDENT ID: 0855920

PROGRAMME: BA (Hons) Business Administration and Management

DATE SUBMITTED: 01/03/2010


Abstract

In September 2009, Deutsche Telekom (DT) and France Telecom (FT) were

agreed to merge their UK operators T-Mobile and Orange. It is worth £3.5 billion and

would become a largest mobile communication operator in the UK. At the present

time of this literature review, the proposed merger is not completed yet due to the

power struggle between UK and EU authorities. The Analysis of the future of

proposed merger is to find out the fundamental theories behind merging process and

learn the strategies for a successful merge between two companies.

Summary

This Literature Review consists of theoretical background of merger

strategy (how companies merge), their branding strategy (same brand or new brand

after merging), how the new brand would affect the market and also marketing

strategy for new brand. This is the synthesis of theories and practical situations to

focus the positive outcome of proposed merger.

The main purpose is to provide the necessary theoretical information for

analysis and investigation into merger between Orange and T-Mobile.


1. Introduction

Only strategic analysis and strategic planning can lead a business to its target.

It is obvious that Strategic Business Analysis (SBA) is the most primitive planning

tool for the future direction and scope of a business organization. Strategic analysis is

the process of conducting research on the business environment within which an

organization operates and on the organization itself, in order to plan strategies.

TARGET
ACHIEVEMENT

STRATEGIC
OPERATION

STRATEGIC PLANING

STRATEGIC ANALYSIS

Fig1.Hierachy of strategic business process

The figure above shows that how strategic analysis is related to planning and

operation management in business. Without the observation of internal and external

influence factors, it is impossible to evaluate the company’s position in market and

hard to move forward on the right track.

There are several definitions can be found in general, but in order to define the

most appropriate one to this project is:

“Strategic business analysis is defined as a critical evaluation of a


company's current position, internal strengths and weaknesses, and

external threats and opportunities.” 1

In other term, Strategic Business Analysis is a study of how internal

capabilities and external environment equally influence each other which is still

believed to be an unfulfilled need as for today (Handerson and Mitchell, 1997). It

involves a discussion of what is most important to company, how company create

value for customers, positive and negative forces at work, critical issues to be

managed, visions for the future, and other vital elements. It is also the ideal way to get

a practical understanding of how to boost business success.

2. Overview of UK mobile communication market

The first mobile communication service was launched in 1985. The overall

UK mobile phone market is dominated by four major operators O2, Vodafone, Orange

and T-Mobile. The UK mobile market is one of the competitive markets in Europe.

During the past twenty five years, mobile communication industry in UK has growth

rapidly.

3. Overview of T-Orange merger

Deutsche Telekom (DT) has 150 million mobile subscribers in approximately

50 countries and generated €32.1 billion in revenue in the first half of 2009. France

Telecom (FT) has a customer base of nearly 129 million mobile subscribers in 32

countries and revenue for the first nine months of the year 2009 is €38.1 billion. 2

DT and FT completed a final agreement after announcing the merger of the

UK operations of T-Mobile and Orange into a joint venture company. T-mobile and
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www.planningskill.com
2
http://www.telecomtv.com/
Orange has 12 million and 16.4 million subscribers each before the merger. After

combining two companies, there are 28.4 million customers in total and will have

revenues of approximately £7.7 billion. It will lead the UK market with around 37

per cent of total UK mobile subscribers. The new formed T-Orange will over take

leader O2 by nearly 10% of whole UK market.

4. Current Situation of Proposed Merger

At the present time of this literature review, merger proposal has been delayed

by the office of fair trading. Richard Wray reported that: “UK competition authorities

have asked the European Union for the permission to investigate the proposed merger

themselves under Article 9 of the EU merger regulations, because it was a deal that

affected UK consumers. If the request is granted, the Office of Fair Trading would

conduct its own analysis of the situation before deciding whether to refer the tie-up to

the Competition Commission for a detailed investigation that could last as long as six

months.” FT and DT are pressing for regulators in EU rather than UK telecom

regulator Ofcom to scrutinise the proposed merger.

5. Business Analysis Techniques

This is a section to describe how the business is analysed. Due to the nature of

competitive market and situation of proposed merger, it is required to perform two

different forms of techniques in this project. They are SWOT and PEST analysis.

5.1 SWOT Analysis


The SWOT (strengths, weaknesses, opportunities, threats) analysis involves

looking at the strengths and weaknesses of your business' capabilities, and any

opportunities and threats to your business.3 It is important to conduct SWOT analysis

in first place as it covers every aspect of the business including finance and revenue,

service delivery, skill level, client base, market condition, competitors’ activity and

regulatory issue (Richard Clarke, n.d.).

5.2 PEST Analysis

It is a useful tool for the complete understanding of the environment in which

business is operating. It measures external factors (opportunities and threats) to the

business. It is used within a SWOT analysis in this project. There are different factors

under each area in PEST analysis as follow.

• Political factors are tax policy, labour law, environmental law, trade

restrictions, tariffs, and political stability.

• Economic factors are GDP, GNP, per capita income, interest rate, exchange

rates and the inflation rate. These factors have major impacts on how

businesses operate and make decisions.

• Social factors are the cultural background, consumer behaviour, population

growth rate, life expectancy, career attitudes and emphasis on health and

safety.

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Models for your strategic analysis, www.busimesslink.gov.uk
• Technological factors include ecological and environmental aspects, such as

research & development, technology incentives and the rate of technological

change.

6. Different types of business combination

There are different names and types of business combination method. The

following are some distinct and familiar forms:

1. Merger and acquisition

2. Take over

3. Joint venture

4. Strategic alliance

6.1 Mergers and Acquisitions

Mergers and Acquisitions (M&A) became the popular business combination

techniques after the first merger wave since the depression of 1883. After a century,

M&A of this time (the fifth wave) emphasized longer term business strategies and are

usually part of an expansion strategy.

6.1.1 Mergers

Merger is defined as the combination of two or more existing companies into a

completely new company. All assets, liabilities and the stock of one company stand

transferred to Transferee Company in consideration of payment in the form of:

1. Equity shares in the transferee company,

2. Debentures in the transferee company,

3. Cash,
4. A mix of the all above modes.

The purpose of the majority mergers is to improve company performance and

shareholder value over the long-term.4 Significant operational advantages can be

obtained when two firms are combined. The followings are the most typical basis of

merger,

• To increase Market Share: A merger enables a firm to have more market

share and therefore make more profit. Increasing market share may be

necessary in this downturn.

• Economies of scale: A merger can enable greater efficiency because the larger

firms can share fixed costs. This is important for industries with high fixed

costs.

• Profit for research and development: A merger enables a firm to make more

investment. This is important for risky investments in industries.

6.1.2 Different Types of Merger

It is necessary to differentiate the various types of merger before the process

of strategic analysis.

There are three main types of merger distinguished by the relationship

between the two companies from the perspective of business structure,

• Horizontal merger: The consolidation two or more companies that are in

direct competition and share the same product lines and markets. E.g. T-

Orange (or) Or-T

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http://www.investopedia.com/
• Vertical merger: The consolidation of firms that have potential or actual

buyer-seller relationships.

• Conglomeration: Consolidated firms may share marketing and distribution

channels and perhaps production processes; or they may be wholly unrelated.

Two companies that have no common business areas.

From the point of how the merger is financed there are two types of merger,

• Purchase Merger: This type of merger is formed when one company

purchases another company.

• Consolidation mergers: A brand new company is formed and both

companies are bought and combined under the new entity.

6.2 Acquisition

Acquisition in general sense is acquiring the ownership in the property. In the

context of business combinations, an acquisition is the purchase by one company of a

controlling interest in the share capital of another existing company. An acquisition

may be affected by

• Agreement with the persons holding majority interest in the company

management like members of the board or major shareholders commanding

majority of voting power;

• Purchase of shares in open market;

• To make takeover offer to the general body of shareholders;

• Purchase of new shares by private treaty;

• Acquisition of share capital through the following forms of considerations viz.

Means of cash, issuance of loan capital, or insurance of share capital.


6.3 Takeover

When two companies join to form one new firm by force is “take over”. A

takeover is acquisition and both the terms are used interchangeably. It differs from

merger in approach to business combinations.

7. Success and failure of Merger

This is the most important point in the whole analysing program. The

following diagram shows the successful merging process.

Pre Transition Integration

• Preparation • Identify current • Create a new vision and


• Valuation product, service and mission
• Finical analysis process • Refine and consolidate
• Risk analysis • Select the new goals the
• Developing measurement • Determination of a new process/system/tactics
tools plan • Establish control to
• Clarifying process • Identify the gap in monitor new
process resources organization
• Establish a showcase performance

Table 1 Strategic process of merger5

Mergers can fail for many reasons including a lack of management foresight,

the inability to overcome practical challenges and loss of revenue momentum from a

neglect of day-to-day operations.6

8. Conclusion

Although there are some delays and objections, the merger is expected to be

complete in July 2010. There are enough evidences to prove that this is going to be a
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Source from http://www.thompsondunn.com
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http://www.investopedia.com/
successful merger, when the deal is approved. Although problems like job cuts and

some shortages are expected but there are more significant advantages for mother

companies, UK business and retailers. Majority of customers welcome this proposed

merger for the lower prices, improved network connection and better service.
9. References

1. Patrick A. Gaughan (2001), “Mergers and acquisitions: An Overview.”

College of Business. Fairleigh Dickinson University. Economatrix Research

Associates Inc.

http://media.wiley.com/product_data/excerpt/79/04714143/0471414379.pdf

[Accessed 20/02/2010]

2. Andrew J. Sherman, Milledge A. Hart (2006), ‘‘Mergers and Acquisitions

from A to Z, 2nd Ed”. American Management Association, New York.

3. Richard Wray (2010), ‘Orange/T-Mobile merger threatened with UK

inquiry’, 2nd Feb. www.guardian.co.uk/business [ accessed 10/02/2010]

4. Mikael Ricknäs(2010), ‘T-Mobile, Orange merger hits a snag’3rd Feb.

http://news.techworld.com/ [Accessed 12/02/2010]

5. Alexander P. and Daniel J. Power (Ed), Strategic Business Analysis.

www.planningskills.com (a web-based knowledge repository)

[Accessed 20/02/2010]

6. Martyn Warwick (2010), “UK merger of T-Mobile and Orange gets the

regulatory thumbs-up”. 22nd Feb 2010. http://www.telecomtv.com/

[Assessed 27/02/2010]