MERGERS, ACQUISITIONS AND CONTROL OF

TELECOMMUNICATIONS FIRMS IN EUROPE

Francesc Trillas

ftrillas@london.edu

August 2000

Regulation Initiative (www.london.edu/ri)

London Business School

Sussex Place

Regent’s Park

London NW1 4SA

U.K.

Telephone: +44-(0)20-72625050x3362

Fax: +44-(0)20-74020718

1
 MERGERS, ACQUISITIONS AND CONTROL OF

TELECOMMUNICATIONS FIRMS IN EUROPE1

Francesc Trillas

Abstract

Evidence is presented on twelve large acquisitions by telecommunications firms in

Europe. Although the average effect on acquirers’ shareholder value is not significantly

different from zero, there is high dispersion in the results. This suggests that detailed

studies may uncover important aspects of the constraints that exist in the corporate

control market of telecommunications firms. A case study of the Spanish firm

Telefonica suggests that corporate governance problems and political intervention are

significant components of these constraints.

1
I thank Len Waverman for his comments and encouragement. I received helpful suggestions by

workshop participants at a Global Communications Consortium meeting in London and at a session in the

Conference of the International Telecommunications Society in Buenos Aires. The usual disclaimer

applies.

2
 1. Introduction

Mergers, acquisitions and corporate control issues have shaken European

telecommunications in the recent past. The takeover of Telecom Italia by Olivetti in

1999 and of Mannesmann by Vodafone in 2000 are examples of such developments.

The objective here is to find patterns of transactions in the market of corporate

control in this period of deregulation 2 and technological change. Similar research has

been undertaken for other industries (Kaplan, 2000), such as banking (see Houston

and Ryngaert,1994) or the airline industry in the US (Kole and Lehn,1997).

This paper3 tries to answer the following questions: Did the strategies of large

telecommunications companies in the market for corporate control create value for

their shareholders? Which are the constraints faced by telecommunications firms in

the control market of and what is their impact?

A preliminary answer is provided by presenting evidence on the 12 largest

acquisitions made by European telecommunications firms up to June 2000, and by

presenting a related case study of Telefonica. The case study sheds light on the

corporate governance and political constraints suggested by the diversity of outcomes

in the analysis of the 12 acquisitions. These constraints are difficult to perceive with

2
Deregulation is a common trigger of takeover waves (see Mitchell and Muhlerin, 1996).

3
Other papers analyze mergers and acquisitions from the point of view of antitrust policy. See for

example, Cox and Portes (1998).This type of analysis is beyond the scope of my paper.

3
 comparartive studies that use averaging techniques. Although there is a wide variety

of cases, on average the acquisitions had an impact on shareholder value that does not

significantly differ from zero.4 The Spanish firm shows that the incentives provided

by stock markets and political constraints both interact in shaping the control

structure of the sector.

The structure of the remainder of the paper is as follows. Section 2 discusses the

theoretical developments that may shed light on acquisitions and control of

telecommunications firms, and it presents a typology of deals, as well as some of the

constraints faced by the potential transactions. Section 3 shows the quantitative

evidence on the effects of twelve large acquisitions on the shareholder value of

bidding European telecommunication firms. Section 4 analyzes in depth the case of

Telefonica. Conclusions are presented in Section 5.

2. The Control Market of Telecommunications Firms: Theory, Typology and

Constraints

Deregulation of telecommunications in Europe has been characterized by the

liberalization of entry since 1998, which coincided with rapid technological change,

the creation of the single currency and the consolidation of the single market. These

important changes in the environment of telecommunication firms change industry

boundaries and the optimal scale and scope of activities (see Laffont and Tirole,

2000). An important difference between Europe and the US is the absence in Europe

4
Sirower (1997) shows how acquirers must face the almost impossible task of achiving synergy levels

that more than compensate for the acquisition premium in order to create value for shareholders. The

same book reviews the previous research on mergers and acquisitions.

4
of line of business restrictions. The American control market has been better studied,

both through case studies (Lys and Vincent, 1995) and more general overviews

(Ware, 1998).

The main benefits of mergers and acquisitions in telecommunications are the

achievement of scale through consumer base and scope through convergence or

vetical integration. It may also be beneficial for shareholders, although socially

inefficient, to increase market power. However, mergers and acquisitions may also be

value destroying from the shareholders’ point of view for reasons that are well known

to the empirical literature: agency problems, hubrys, lack of focus (see Oxera, 1995).

Firms may grow beyond their original markets through a variety of transactions,

which may be carried out nationally or internationally. The following is a non-

exhaustive list of potential deals:

-Acquisitions of non-controlling stakes.

-Global Alliances.

-Joint Ventures.

-Spin-off (of the “new economy” segments or of the network assets) plus merger.

-Mergers of equals.

-Acquisitions of controlling stakes.

The following general trend has been observed over time. Until the mid 90s the

usual strategy for the largest companies was to seek Global Alliances. These were

abandoned and in the middle of the decade the most usual deal was to acquire non-

controlling stakes. In the second half of the nineties some attempted mergers of

equals took place, but most of them were stopped for a variety of reasons, frequently

of a political nature. In 1999 and 2000 it can be observed that the acquisition of

controlling stakes has increased in the companies under study.

5
 However, the market for corporate control of telecommunications firms in

Europe faces significant constraints. Some large scale mergers that where announced

at a time, were not completed due to different kinds of problems, in many cases

derived from political constraints. Here are some examples of failed mergers in the

last five years (that were announced or about which there were intense rumours

according to the Financial Times database):

· Telewest/NTL.

· BT/C&W.

· BT/MCI.

· BT/Telefonica.

· Deutsche Telekom/Telecom Italia.

· Telia/Telenor.

· Mannesmann/Vivendi.

· KPN/Telefonica.

Golden shares and partial public ownership

Except Telecom Italia, British Telecom, Telefonica of Spain and Telecom

Eirearn of Ireland, the remaining incumbent operators of fixed telephony in Western

Europe still have the state as the controlling shareholder at the beginning of 2000.

Spain and Italy, although they have fully privatized their telecommunications

incumbent, still hold a golden share on the companies. This places a significant

constraint on the market of corporate control.5

5
In some cases, the antitrust authorities may place serious constraints on a merger or an acquisition.

6
 Golden Shares prevent that bad bidders become good targets. In an

unsconstrained control market an acquirer that failed to achieve synergy would run

into difficulties and would become a prey of other acquiring companies. Golden

shares protect potential bad bidders. Partial public ownership also protects potentially

bad acquirers, since governments may value control of the company for political

reasons more than the cash flows derived from selling ownership rights.

There seems to be an asymmetry in that some firms still controlled by the

public sector (through partial public ownership or golden shares) are active acquirers

abroad while their governments keep important restrictions at home. The Spanish

government vetoed the merger betweek KPN and Telefonica and the Italian

government vetoed the merger between Telecom Italia and Deutsche Telekom. In the

US, the market for corporate control also faces important political constraints derived

from interest group mobilization. The constraints in the US, however, have not

stopped a more rapid concentration of the telecommunications sector.6

3. Acquisitions by Large European Telecommunications Companies

Table 1 summarizes the evidence collected about the effects of acquisitions on

the stock price of acquiring firms. For each deal, it shows when it did take place, the

6
The example of DT trying to enter the US mobile telephony market with the acquisition of VoiceStream

(see FT July 24 2000) shows however that political opposition to foreign public control is also present in

the US (and the example is also an instance that some acquisitions by European firms may not be the best

deals for shareholders).

7
 value of the transaction, and the abnormal stock price return, computed following

standard event study techniques.7

(Table 1 about here)

On average, these acquisitions produced an abnormal return of 2.71% on the

stock price of the acquiring firms, which is not significantly different from zero. 8

The variance of the distribution of abnormal returns is high. There are two

acquisitions with a significant negative abnormal return at the 99% level (the two by

Telefonica) and one of them with a significant positive abnormal return, the

acquisition of E-plus by KPN. In all other cases, the abnormal returns are not

significantly different from zero. The t-statistics used to test for statistical

significance are based on the standard deviation of the time series of market adjusted

returns for each security in a way that is standard in the event study literature.

As opposed to other studies that only take into account the announcement

effects, the table reflects the impact on shareholder value of all information released

7
See Fama et al. (1969), Armitage (1995) and Binder (1998).

8
Zero or negative average bidder’s abnormal returns are consistent with two theories of managerial

behaviour. The hubrys hypothesis argues that managers overestimate their abilities and overpay for the

target. The agency hypothesis argues that acquisitions reflect that the optimal size of the firm from the

manager’s point of view is larger than the optimal size from the shareholder’s point of view. See Weston

et al. (1998). The agency hypothesis is further explored below for the case of Telefonica.

8
between announcement and completion of the deals, in a way similar to Houston and

Ryngaert (1994).

Dynamic issues

The evidence analyzed reveals that many questions can only be answered taking

a dynamic perspective. For example, some deals are the trigger for other deals. The

takeover of Telecom Italia by Olivetti triggered the acquisition of Omnitel and

Infostrada by Mannesmann. The takeover of Mannesmann by Vodafone triggered the

takeover of Orange by France Telecom. Kaplan (2000) addresses the methodolical

issues that are raised by this. The main implication is that evidence from individual

deals are only partially revealing of the wealth effects on shareholder value.

Two phenomena are worth mentioning in this respect:

1)Bad bidders may become good targets (see Mitchell and Lehn, 1990). For

example, Telecom Italia had accumulated several failed alliances, top management

changes and a messy acquisitions policy before it was taken over by Olivetti in 1999.

2)Firms that have been taken over by acquirers may be divested and the spun off

segments may be important participants in the corporate control market both as

bidders or as targets (e.g. Mannesmann). Viceversa, spin-offs may be subsequent to

acquiring groups of firms in the same segment. For example, Telefonica acquired

Internet companies and then decided to spin-off Terra as a global Internet company.

9
 Takeovers (see Bhagat et al., 1990), privatization (Joskow and Schmalensee,

1995) and regulation9 interact in determining the ownership structure of

telecommunications firms and the industry structure of the whole sector. The

influence of politics in the history of corporate finance is a well known phenomenon

(see for example Cantillo, 1998).

4. The Case of Telefonica

It is interesting to analyze more in depth the case of Telefonica, because it has

been deemed one of the examples of success in an acquisitions strategy (see de

Figueiredo and Spiller, 2000). Also, because it was under a corporate governance

regime that made it significantly different from other telecommunications operators

in Europe, since it was fully privatized with a highly dispersed shareholding but was

under a 10 year golden share. Telefonica is the first Spanish firm in profits, income,

and equity value. As of 1999, it had 50 million clients in 11 countries (Europe and

Latin America).

I show the impact on shareholder value of its diversification strategy and the

mechanisms of managerial discipline that constraned such strategy. The behaviour of

the company is consistent with the hypothesis that the government was de facto the

large blockholder.

9
According to Sidak and Spulber (1997) the regulatory burdens on the incumbents imposed by the 1996

Telecommunications Act in the US forced them to a spin-off strategy of the value creating segments,

separating the network assets. Similarly, stringent regulation has forced British Telecom to study the spin-

off of its network assets (FT, 28-7-00).

10
 (Table 2 about here)

Table 2 summarizes data on the three last privatizations tranches of the company. Just

before the last tranch, the government appointed Juan Villalonga as Chairman of the

company (June 1996). Villalonga has stayed in this position until July 2000. It offers

thus an excellent time window to analyze the behaviour of this very significant firm.

The remainder of this section focuses on this period.

After complete privatization, Telefonica's shareholders base widened. A look at

the technical design of 1995 and 1997 POs shows the mechanisms through which this

happened. Both offers included discounts on the final price for small investors (4

percent for general investors and 8 percent for employees). Also, both POs included

fidelity bonuses for small investors: that is, the promise of getting 1 free share for

every 20 shares bought provided that the investor did not sell the shares during one

year after the PO). Rationing was needed in both POs, since small investors demand

was largely in excess of the supply directed to them. The ratio demand/offer was 7.3

in 1995 and 7.2 in 1997.

The previous management of Telefonica had already started a very ambitious

investment activity in Latin America, with controlling stakes in Chile, Argentina and

Peru's largest telecommunications operators when they were privatized. The new

management maintained this policy. However, it shifted international alliances,

leaving Unisource to reach an agreement with WorldCom and MCI.

11
 The activities of the new management in the media sector triggered accusations

of collusion with the government in its aim to create a media holding to compete with

Prisa, a dominant media holding with important stakes in radio, TV and newspapers.

Beyond the operations of Lycos and Endemol analyzed above, the following table

analyzes previous deals. The abnormal returns are computed using a three day event

window and t-statistics have been computed using the standard deviation of the time

series of residuals using a market model.

(Table 3 about here)

The picture that arises from the data is somehow contrary to expectations.

Investors welcomed the new alliances strategy of Telefonica, namely its agreements

with BT first10 and WorldCom/MCI later (the previous merger between MCI and

WorldCom created the first world provider of Internet services). But they

systematically reacted negatively although not always significantly to direct

investments in Latin America, probably influenced by the turmoil in emerging

markets in the last two years. Investors find more value creation in strategic alliances,

while they discount negatively or at least not positively direct investments in risky

regions that may be motivated by empire-building purposes. There is a positive

reaction when deals (in these cases, not completed) implied control of Telefonica by

10
When Telefonica signed its agreement with BT, this company was in merger talks with MCI. The

takeover of MCI by WorldCom stopped this talks and BT reoriented its alliances strategy, hence

announcing the end of its alliance with Telefonica in February 1998.

12
someone else: MCI, KPN. And there is a negative or zero reaction when it was

Telefonica that tried to control.

From this evidence, the most that can be said is that investors may value the

scope economies in a frontier business such as media, but also that some of the moves

into this sector may have been motivated by non-economic reasons. There is probably

a trade off between productive synergies and private benefits from control (which are

potentially substantial in a high profile industry such as media, where these benefits

can additionally be shared collusively with politicians).

In 1999, Telefonica was the first operator in Latin America, being present in

Argentina, Chile, Peru, Puerto Rico, Venezuela, El Salvador, Guatemala and Brazil.

In the media sector, it participates in Antena3TV and Via Digital in television, in the

newspapers Expansion and Marca and in the radio network Onda Cero, among others.

In the four years that Villalonga had been Chairman of the company (June 1996

to July 2000), Telefonica had made the transition from being a Spanish telephony

incumbent to become a global operator in the new economy. The company had

international subsidiaries in the Internet sector, in mobile telephony and in media. As

the floatation of the Internet subsidiary Terra in 1999 and its subsequent acquisition

of US Lycos shows, its strategy was to spin off the value creating subsidiaries without

losing control and establish alliances and mergers with the spun off segments.

The fact that the specific acquisition events analyzed failed to create value for

shareholders in a positive and significant way suggests two possible explanations.

The first one is that the new borders of the company had been anticipated by the stock

market participants and its final details did not add substantial new information. And

the second one is that the motivation for most of the deals revealed an agency

problem in the firm. In this case, the managerial team would be interested in

13
 expansion projects that are not necessarily positive net present value projects for

shareholders, but that may maximize some managerial objective. Next I probe the

effectiveness in Telefonica of the usual mechanisms that the literature has identified

to discipline managers. In case these mechanisms are proved to be ineffective, it will

be evidence of a potential agency problem in the firm.

-Takeovers.

The government announced a 10 year Golden Share on Telefonica on 8/11/96.

The golden share is a departure from the one share one vote rule that implicitly gives

incentives to the government to behave as the main blockholder. On 24/6/97 an

extraordinary shareholders meeting approved defensive measures according to which,

1) a candidate for the Board of Directors must have held more than 1000 shares of

Telefonica for at least three years before nomination, unless 85% of the members of

the Board agree to remove such condition; 2) a candidate to become Chairman must

have held a position in the Board of Directors for at least three years before

nomination, also with the 85% rule; 3) independently of his holdings, no shareholder

can issue votes for more than 10% of the total votes.11

-Board of Directors.

11
Given this restrictions, Crespi and Garcia-Cestona (1999) argue that

“Given the existent dilution for this company, these measures create an added power for the managerial

team. (…) Through these measures, we are breaking the one-share-one vote rule, giving more

discretionary power to managers and seriously affecting the governance of the firm.”

14
 The appointment of nine ''independent'' directors was also interpreted as a move

to a more controlled Board by the Chairman, Juan Villalonga. In addition to that, a

leaner hierarchy was achieved by eliminating the position of CEO. On 15/1/97

Telefonica announced that coinciding with total privatization it would reduce to 18

the number of Directors.

-Hard core.

Besides the enlargement of the shareholders base, a 'hard core' of financial

investors had been constituted since the mid nineties, although it has been losing

importance over time. Three financial institutions (two banks and one saving bank)

held stakes around 5 percent of total capital: Banco Bilbao Vizcaya, Argentaria and

La Caixa.

The hard core of shareholders was kept in place after appointment of the new

management and full privatization. However, these institutions remained passive in

all the changes that undertook the company during these years. They did not show

opposition to Villalonga until the government showed its own opposition in 2000,

first with the KPN merger and subsequently with the forced departure of the

Chairman.

-Large block holders.

The shareholding of Telefonica in 1996 was as follows (El Pais, 27-7-00). The

state had 20.9% of shares. The bank BBV, 5%. The savings bank La Caixa, 5%. The

(at that moment in the public sector) bank Argentaria, 3%. The bank Banco

Santander, 2%. And the savings bank Caja Madrid, 3%. 61.1% of the shares were

dispersed among stock market participants. In July 2000, the merged bank between

15
Argentaria and BBV (BBVA) had 9.1%. La Caixa, 5%. Chase Manhattan Bank,

5.06%. Portugal Telecom 1.50%. 79.3% of the shares were dispersed among stock

market participants. The new merged bank BBVA has become the largest private

blockholder, and especially so since the alliance between BBVA and Telefonica to

share products and services in the Internet. The company lacks a technological

strategic investor. The stock market welcomed the alliance with MCI-Worldcom and

the announced (and subsequently cancelled) merger with KPN in May 2000. This

may be an indication that shareholder value would increase with a more active role by

a strategic telecommunications investor. Such a strategic investor does not exist now,

since the alliance with MCI-Worldcom has not have a significant impact in practice.

As it will be seen when we analyze the forced departure of Villalonga, it is the

government who acts as a blockholder in practice, using the threat to use the golden

share and using its especial relationship with the hard core of shareholders.

-The managers’ labour market

When Villalonga was appointed, his background signalled a move to a strategy

focused on the creation of shareholder value. Investors might also have welcomed the

appointment because of political reasons: the close ties of the new Chairman with the

government would be a guarantee for the firm's returns. The replacement by Alierta

in July 2000 (see below) shows that potential alternative top managers must fulfill a

very narrow set of characteristics: satisfy the government, the banks, and be coopted

from the Board of Directors, due to the rules fixed in 1997. Hence, an open market

for top executives in Telefonica does not exist, although predictably Villalonga was

constrained by a broader managerial market that could allow him to pursue his career

in the future.

16
-Institutional investors activism.

The internationalization of the company had increased the participation of

European and US mutual and pension funds. However, these funds have not been

active in campaigns to change the strategy of the company or to replace the

managerial team.

-Best practice in corporate governance.

Villalonga had pledged upon appointment to introduce corporate governance

reforms ''including recommendations of the most prestigious reports''. However, the

stock exchange regulator (Comision Nacional del Mercado de Valores) has failed to

include Telefonica amongst the firms that fulfill the best practice corporate

governance recommendations in Spain (Codigo Olivencia). However, Telefonica’s

shares are traded in 11 different stock exchanges, including the NYSE. This suggests

that the company is subject to an important degree of financial discipline and

transparency.

-Financial Policy

The most significant change in the recent past has been the new dividend policy

announced in 1998. Telefonica announced that it would not distribute dividends, with

the objective of having more funds available for an aggressive investment policy.

The stock prices reacted positively to the new dividend policy. Increasing cash-

17
 flow for investment was deemed value-enhancing at that point.12 Telefonica ceased to

be committed to regular payments to external investors to a significant degree. To

this extent, it fits an important condition for the company to be analyzed under the

lens of the “free cash flow theory” (see Jensen, 1986).13

-Incentive pay.

An incentive plan to reward 100 high executives with stock options was

approved in 1997 and it was extended to 450 executives in 1997. All Telefonica’

workers were promised similar plans in 2000, when the plans were being most

controversial in the public opinion.

12
The comparison between Telecom Italia and other European incumbents after TI was taken over by

Olivetti illustrates the costs and benefits of acquisition strategies. TI has adopted a very different strategy

from Telefonica or other incumbents. Its highly leveraged structure after the takeover has the virtue of

instilling strict discipline at TI, not unlike that of a classic 1980s leveraged buy-out.

TI's new management has cut costs, pruned wasteful investment, geared up and made

great efforts to sweat the company's assets, achieving the highest return on capital of all

the big European telecom com-panies. First quarter capital

expenditure was 19 per cent lower than the year before - possibly too low.

(FT: Lex Column: July 16 2000)

13
See also Thompson (1999).

18
 With the exception of the incentive pay and the pressure of several stock

markets, most of the internal and external mechanisms to discipline the managers in

Telefonica are largely ineffective.

Some of the executives who have left the company argue (FT, 25July 2000) that

“Mr Villalonga's compulsive deal-making and intoxication with success have led to

strategic mistakes - notably, the costly acquisition of a stable of media companies

which they believe could dent future profitability.” The final straw was his inability

to mend fences with the government when Telefónica was negotiating internet

connection charges, local telephone tariffs and liberalisation of the domestic market.

Figure 1 compares Telefonica’s stock price since Villalonga was apponited as

manager with a portfolio of other European telecommunications companies. The

companies in the value weighted portfolio are British Telecom, Telecom Italia,

Deutsche Telekom, Vodafone, KPN, France Telecom, Cable and Wireless.

(Figure 1 about here)

This is the relevant benchmark, since European companies face a similar regulatory

context, which distinguishes them for example from their US counterparts. See de

Figueiredo and Spiller (2000) on this. It can be seen that, on average, the Spanish

19
 company’s performance outperformed the portfolio until 1998, but cannot be

distinguished from other comparable firms in the recent past.

However, it must be borne in mind that comparing stock price performance of

regulated firms for a long period of time does not reflect only managerial ability, but

also regulatory actions and national factors. Nevertheless, this similar performance

suggests that there are more similarities than differences between Telefonica and

other large European telecommunications firms. The incumbents are vertically

integrated firms and they face similar political constraints. Although the specifics

vary according to different institutional endowments, the nature and effects of the

limits to best practice corporate governance are similar.

The replacement of Villalonga14 is a clear example of the presence of political

constraints in the company’s control. Villalonga eventually resigned on 26 July 2000.

His forced replacement is similar to a typical management change forced by a block

14
A few days before the Chairman’s resignation, the financial press argued that the campaign to remove

Juan Villalonga, Telefonica's chairman, was unsettling investors and could harm the company. A coup by

BBVA and La Caixa would signal that Telefonica had other masters to serve.

Looking beyond personalities, the basic problem is that Telefonica has its roots as a Spanish company.

Spain's government and national banks are unwilling to surrender their influence over what is

increasingly a genuine multinational. But surrender they must if Spain's new breed of globally

ambitious companies is to compete successfully on the world stage.

FT: Lex Column: July 18 2000

20
shareholder, although in this case the block shareholder is de facto the government,

through the threat to use its golden share and through its relationship with the core de

iure shareholders (see Warner et al., 1988).

Villalonga had been appointed by the Spanish government when the company

had still the state as the largest shareholder in 1996. For a long time, the Chairman

had been understood to be the government’s man in the company, and the hard core

of shareholders did nothing to undermine his powerful position. However, since late

1999, the high profile of Villalonga, the stock options plan and his unrelenting deal-

making, were starting to be politically costly for his political principals. The

government first let it know its disagreement with the stock option plan of Villalonga

and his team, which had caused heavy political upheaval in the run-up to the March

2000 general election. Then it forced changes in the alliance with BBVA in May

2000, which also caused controversy in the run-up to the election, and which was

seen by some as an attempt of Villalonga to protect his personal role in the company.

Subsequently, the government blocked the merger with KPN on the grounds that this

would place the Dutch government as the main shareholder of Telefonica. Finally, the

government encouraged an inquiry by the Spanish stock exchange regulator to probe

whether Villalonga could be charged with illegal insider trading for a minor stock

options operations prior to the deal with WorldCom-MCI two years ago (the probe

found no evidence of irregular dealing). There were rumours revealed by The Wall

Street Journal that ministers were furious because Telefonica were having

conversations with the media group PRISA. Villalonga was eventually replaced in a

board meeting by Cesar Alierta, himself a member of the board of Telefonica and

former Chairman of the privatized tobacco firm Altadis (see FT, 27 July 2000).

21
 To summarize the constraints derived from the government’s influence, there

was a system of bad corporate governance (too dispersed shareholding, inoperative

board due to weak hard core and “independent” shareholders) driven by the wish to

leave the managerial team a broad room of manoeuvre to pursue government-related

objectives; the golden share prevented the operation of an efficient control market;

the electoral cycle clearly interfered with the operations of the company. The policy

of managerial discretion decided upon privatization eventually backfired to the

government: the managerial team was so autonomous that it no longer served its

political masters. The European Commission had made it clear its opposition to the

golden shares, and the Spanish shareholders were a minority after completion of

Latin American takeovers. The Spanish government wanted to reassert its control

before it was too late.

The company was still successful because it could use its very large customer

base and generous cash flows in Spain and Latin American to pursue an ambitious

expansion policy in the new economy (de Figueiredo and Spiller, 2000) but political

factors still constrained its behaviour, as it has been shown. Such political constraints

should amount to a heavier burden in other companies that do not start with such a

solid starting point.

5. Conclusions

The costs and benefits of acquisitions compensate each other on average for

the 12 largest telecommunications acquisitions in Europe in the recent past. The

22
variety of outcomes suggests that detailed company studies may uncover the

constraints that the control market faces and that may prevent it from achieving

results that have positive wealth effects for shareholders. The case of Telefonica

reveals that political constraints play a crucial role in shaping the market for corporate

control in European telecommunications.

In practice, a golden share regime does not seem to be very different from a

partial privatization regime, since the government still operates as the main

blockholder. However, it is probably better some government control than no control

at all.

Newbery (2000) has suggested that public and private regulated firms with

similar industrial structures deliver similar outcomes. First mover advantages (e.g.,

being a vertically integrated incumbent, presence of Telefonica in Latin America) and

regulation, e.g., line of business restrictions, are important determinants of the final

boundaries of the firm and clearly affect the role of the corporate control market. De

Figueiredo and Spiller (2000) convincingly attach a high importance to having a large

customer base and being allowed to exploit it through vertical and horizontal

integration.

The results of this research suggest that:

-There is no evidence of a significantly positive average effect on acquirers’ market

value of the completed transactions in the market for corporate control of European

telecommunications firms.

-Some potentially positive net present value acquisitions are stopped for political

reasons. Many deals that are not positive net present value projects are undertaken

anyway because disciplinary mechanisms to control managers, especially in recently

privatized firms, may be ineffective.

23
-The industry seems to be looking for its equilibrium structure in a context of high

uncertainty. Although the overall concentration process may be efficient (due to scale

and scope economies), this does not imply that individual transactions all create value

for shareholders, given that there is a huge separation between ownership and control

in these firms, and that some of them have flawed mechanisms of corporate

governance. This is especially accute in firms that are still under state control or that

have been recently privatized.

European authorities face a trade-off between leaving the control market operate

to better capture the efficiency gains of consolidation (subject to anti-trust policy) or

maintaining some degree of control on telecommunications incumbents. While the

European Commission seems to be pushing for a freer market, the national

governments are still reluctant to give up some (formal or informal) key control

mechanisms.

References

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27
Table 1

Acquirer Target Dates Value Abnormal

Returns

(t-statistic)

Mannesmann Orange 19-22/10/99 GBP -8.88%

19.86bn. (-1.01)

Vodafone Airtouch 6-15/1/99 USD 62bn. 14.29%

(1.65)

Vodafone Mannesmann 13/11/99- USD 190bn. -10.78%

4/2/00 (-0.51)

Deutsche One2One 29/7-7/8/99 GBP 7.5bn. -1.61%

Telekom (-0.17)

Cable and IDC 8/3-10/6/99 USD 572m. -11.36%

Wireless (-0.54)

KPN E-Plus 8-11/12/99 USD 19bn. 33.35%

(14.83)

NTL CWC 15-27/7/99 USD 12.4bn. 13.47%

(1.15)

France Orange 24-30/5/00 GBP 31bn. 13.60%

Telecom (1.62)

British ESAT 11/1-30/3/00 USD 2.4bn. -7.62%

Telecom (-0.37)

NTL Cablecom 13/12/98 USD 3.7bn. 3.26%

(0.66)

28
Telefonica Endemol 16-17/3/00 USD 5bn. -11.57%

(-3.12)

Telefonica Lycos 16-18/5/00 USD 12bn. -11.36%

(-2.51)

Note: the Abnormal Returns are computed using the standard market model technique with parameters estimated

over the 250-day period beginning 290 days prior to the announcement of each event. The event window varies in

each case, and goes from one day before the first announcement was made until one day after the deal was

announced to be concluded. Sources: Financial Times database, Sequencer.

29
Table 2

Privatization of Telefonica and Public Offerings

Date Revenues % capital sold % state-stake

( 10 6 Euros) after PO

June 1987 283.7 6 32

October 1995 1,000.2 11 21

February 1997 3,885.5 21 0

Source: Bel (1999)

30
Table 3

Date Event Description AR

(t)

8/11/96 Telefonica breaks up with Sogecable, with which it had a 1.63

strategic agreement to operate in cable TV
(0.88)

29/11/96 Telefonica reaches an agreement with other corporations, -2.36

both public and private, to develop a new digital TV
(-1.28)
platform

18/12/96 TISA obtains a 35% stake in Companhia Riograndense de -0.77

Telecomunicacoes (CRT) of Brazil.
(-042)

18/4/97 Telefonica announces a strategic alliance with BT and 2.70

reconsiders its participation in the European Alliance
(1.46)
Unisource

27/6/97 The European Union rules that the Spanish government's − 3.19**
decisions on Digital TV violate the Treaty of Rome.
(-1.73)

24/7/97 Telefonica informs that it is negotiating the acquisition of a -1.04

participation in Antena 3
(-0.56)

29/7/97 Telefonica acquires 25% of Antena 3 TV 2.21

(1.20)

8/8/97 Telefonica announces that it will take control of Antena 3 0.32

TV and through it of 40\% in the company that has the
(0.17)
rights of the pay per view football games

14/8/97 The Competition Policy authorities of the European 0.04

Commission start an investigation about the participation of
(0.02)
Telefonica in the TV sector

24/9/97 Telefonica reaches a strategic agreement with the Group 0.91

Recoletos/Pearson. Telefonica will acquire 20\% of
(0.85)
Recoletos Compañia Editorial

6/2/98 Telefonica sells its 39.83% in Compañia Celular de -1.27

Colombia, S.A. to the controlling group
(-0.69)

31
9/3/98 Telefonica reaches a strategic agreement with 3.96**
WorldCom/MCI
(2.14)

19/6/98 A consortium participated by Telefonica acquires the -0.98

Brazilian company CRT for US$ 1.018 million
(-0.53)

22/7/98 Telefonica and Sogecable, the controlling groups of the two -0.70
digital TV platform in Spain, reach an agreement to work
(-0.38)
for a common digital TV

23/7/98 Telefonica wins the contest for 51% of voting shares of -2.40
Compañia Intel from El Salvador
(-1.30)

30/7/98 In an auction that took place in the stock exchange of Rio de − 3.56*
Janeiro, a consortium leaded by Telefonica obtains the
(-1.93)
operating companies Telesp, Telerj and Tele Sudeste

Celular

8/9/98 Telefonica buys 100 hundred radio stations in Spain. -1.99

(-1.08)

Note: the abnormal returns have been computed using a market model with a three day
event window (day before, announcement day and day after). The t-statistics are
computed using the standard deviation of the time series of residuals.

32
Figure 1: Telefonica compared to other European telcos

33