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Background of BT and EE

Discuss about the Strategic Management Accounting for British Telecommunication.

The merger and acquisition done by British Telecommunication are the main point of discussion in this study. The study is especially focused on the merger and acquisition between BT (British Telecommunication) and EE. In the beginning of the study, the discussion covers the product market, capital market, organizational architecture of BT before acquiring the EE. After that, the discussion also includes the product market, capital market and organizational architecture of BT after the acquisition. Along with these, the study also discusses and analyzes the effectiveness of the merger and acquisition strategies taken by the management of BT in the recent past.

British Telecommunication or BT is operating its business in the market of UK since 1969 (Btplc.com 2017). The organization is one of the top most organizations in the telecommunication industry in UK. The business of BT is not bounded within UK; the company has expanded its business in different countries in the world (Btplc.com 2017). The company has wide range of products including mobile telephony, digital television, fixed line telephony and broadband internet. As per 2015’s financial report, the company has earned £17.851 billion revenue and £2.135 billion net profit (Btplc.com 2017). The company has taken several merger and acquisition strategies during its long life time.

Everything Everywhere or EE is another company in the telecommunication industry in UK. This is comparatively new company than British Telecommunication (Ee.co.uk 2017). EE has started its business on 1st April 2010 and it provides its services only in United Kingdom. Currently, the company has 15000 employees in different areas in UK (Ee.co.uk 2017).

British Telecommunication acquired EE Limited in the year of 2016. Before acquiring EE Limited, the company was operating its business with wide product range (Samy, Odemilin and Bampton 2010). As stated above, the products of BT includes fixed line telephony, broadband internet, mobile telephony and many others. Before 2016 that means before acquiring EE, the business of BT was quite successful. The products of BT are much popular in the market of United Kingdom as well as in the international telecommunication market (Hsu and Prescott 2016). Except 2015, the company has earned good amount of revenue in each year, which indicates that the products of the company were much popular in the external market. The products of BT are not only popular in the market of UK, but these are also very popular in more 169 countries (Marrewijk 2016). The product range of the company also included the managed networked IT services and it sells this particular product to the multinational companies and the organizational, which are run by the local and national government.

Before Merger and Acquisition

On the other side, before acquiring EE Limited, the debt to equity ratio of the company was much high. This means the debt capital was more in the capital structure of the company. This indicates that the risk involved in the business of the company was more (Weber and Tarba 2016). If the debt to equity ratio of the company is considered, then it can be identified that in 2015 that means before the acquisition of EE, the debt to equity ratio was 10.88 times, which was much high. The company used more debt capital in its capital structure than that of the equity capital.

Before, the acquisition, the management of British Telecommunication built the organizational architecture based on the three legged stool. The management of the company concentrated on three factors – revenue, customers and management (Meghanathan 2016). The management of British Telecommunication was very attentive for increasing the revenue of the company in each year. The annual reports of the company in last few years before the EE acquisition also indicate that the company was able to increase its revenue in each financial year. The company used to enhance its revenue by grabbing the new markets. In order to grab the new markets, the company took the strategy of acquiring small and medium sized telecommunication companies in UK and other countries (Di Giulio 2016). The management believed that if they become successful in expanding the business in the new markets, then the revenue of the company grows automatically. Increasing the revenue is important to keep the organization financially healthy and it is important for maintaining the sustainability of the organization (Long 2016). Due to this, the management considered this particular element or factor as one of the major pillars of the organizational architecture.

The second pillar considered by the organization before the acquisition of EE was customers. The management of BT believed that customers’ satisfaction is one of the main aims of the company. In order to satisfy the customers, the company focused on the quality of the products and services (Evens and Donders 2016). At the same time, the management of the company also concentrated building better relationship with the customers.

The third pillar of the organizational structure of BT before EE acquisition was the management. Nelson (2016) believed that if the management of an organization is not effective or efficient, then it is impossible for the organization to achieve sustainability. In order to operate the business properly, the company considered management as one of the pillar of the organizational architecture.

After Merger and Acquisition

BT acquired EE because of several reasons. However, there were three core strategies that influenced the management of BT acquiring EE. These three core strategies were as follows:

  • Be the market leader by increasing the market share of the company to the highest extent.
  • Increasing the product range to satisfy the customers in a better way and attracting the new customers (Curwen and Whalley 2016).
  • Strengthening the financial health of the company by acquiring new markets or customers

The above mentioned three strategies were the main influencers behind the EE acquisition. Evens and Donders (2016) stated that the management of BT identified that if they acquires EE, then they can gain at least more 30% of the market share, which will help them to become the market leader in the telecommunication industry. Practically, after EE acquisition, BT gained 33.8% of market share (Bbc.com 2017). Another fact that the management at BT understood before acquiring EE was that BT can easily provide ‘quad-play’ service to its existing customers if it acquires the EE, which at that time was providing the ‘quad-play’ (BT.com 2017). Providing this particular service, BT could satisfy its customers in a better was because this particular service included a bundle of services. Moreover, the by acquiring EE, the management of BT could improve the financial strength of the company because by acquiring EE, the number of customers as well as amount of revenue would increase. Therefore, due to these three reasons, the management of BT decided acquiring EE.

After the acquisition of EE, the product range of BT has increased. The company has started to provide ‘quad-play’ service, in which it is providing broadband, home phone, TV and the mobile contracts in a single package. Apart from this, the product range of the company has not changed much. However, the products of BT are as popular as there were before the merger.

The debt to equity ratio of the company has changed much after the acquisition of EE. The company has increased the amount of equity capital in the capital structure (Hassett et al. 2017). The debt to equity ratio shows that after the acquisition of EE, the company has debt to equity ratio of 1.17, which means, the amount of debt capital and equity capital was more or less equal. This again indicates that the extent of risks in the capital structure of the company has reduced after the acquisition of EE (Gerli and Whalley 2016).

After acquiring EE, the organizational architecture of the company has changed bit. The management of the company is now more focusing on employees, customers and management. The management considered that after acquisition, employees are the main pillar of success. If the employees of two different companies do not co-ordinate then it is not possible to operate the business successfully (Obaidat and Nicopolitidis 2016). On the other side, as the customers’ satisfaction is very important, the company considered this element as the major pillar of organizational architecture. Like before, the company has also considered management as the other pillar of organizational architecture.

The share price of BT was bit fluctuating at the initial stage after the acquisition of EE. After acquisition of EE that is in the financial year 2016, the share price of British Telecommunication was in between $490 to $350 (Btplc.com 2017). However, gradually the share price of the company has declined, which is creating a major issue for the management of BT. The statistical data is showing that during March 2016, the share price of the company was $481, which decreased $438.65 in April 2016 (Btplc.com 2017). Again in May 2016, the share price of the company increased to $448.20, which again decreased to $431.15 in June 2016 (Btplc.com 2017). The share price fluctuations of the company can be better understood in the below diagram:

Share prices of BT after acquisition of EE

Figure 1: Share prices of BT after acquisition of EE

(Source: Btplc.com 2017)

The above diagram is disclosing the fact that the share prices of BT was much fluctuating. At the same time, it can also be seen that the trend of the share price movement of the company was downward sloping.

Identifying whether merger and acquisition strategy taken by BT for EE was effective or not

Merger and acquisition are the most important strategies, which help the business organizations building strong financial health and expanding their business in the new markets (Obaidat and Nicopolitidis 2016). However, the success of the merger and acquisitions can be understood by analyzing the financial performances of the company after merger and acquisition. In order to identify whether the merger and acquisition strategies taken by BT for acquiring EE were effective or not, it is very important to analyze the financial performance of the company before and after acquisition of EE (Curwen and Whalley 2016). At the same time, it is also important for the organization analyzing the risks associated with the business before and after the acquisition. The analysis of the financial performance and risks of BT are shown below:

In order to identify the effectiveness of the merger and acquisition through the analysis of the financial performance, it is important to compare the financial performance of the company before and after acquiring EE. The following table and diagram are showing the financial performance of BT before and after acquiring EE:

2014

2015

2016

Net profit (in m£)

2,018

2,135

2,588

Revenue (in m£)

18,287

17,979

19,042

Net Assets (in m£)

9,361

19,483

31,576

Earnings per share

25.7p

26.5p

29.9p

Cash inflow (in m£)

684

407

459

Table 1: Financial performance of BT before and after acquiring EE

(Source: Btplc.com 2017)

Financial performance of BT before and after acquiring EE

Figure 2: Financial performance of BT before and after acquiring EE

(Source: Btplc.com 2017)

The above table and diagram is showing that from 2014 to 2016, the financial performance of the company has improved in terms of net profit, revenue, net assets and earnings per share (Btplc.com 2017). This indicates that after acquiring EE, the financial performance of BT has improved. However, the net cash inflow of the company has decreased. If the financial performance of the company is analyzed critically, then it can be identified that in 2014 that is before the acquisition, the net profit of the company was £2018 million, which increased to £2,588 million in 2016 (Btplc.com 2017). Therefore, it can be said that though the profits of the company has increased, the percentage of increased profit was not so high. In the year 2014, the net profit ratio of the company was 11.03%, which increased to 13.59% in 2016 (Btplc.com 2017). This indicates that the profitability of the company increased by only 2%, which cannot be considered as a good percentage increased. The same thing can also be noticed in case of earnings per share of the company. In 2014, the earnings per share of the company were 25.7p, which was 29.9p in 2016 (Btplc.com 2017). This means that the earnings per share of the company increased by 4.2p, which was not a bit hike. Moreover, the net cash inflow of the company decreased from 2014 to 201, which indicates negative financial performance of BT (Btplc.com 2017).

Therefore, from the above discussion, it can be said that after the merger with EE or after acquiring EE, the financial performance of BT has not improved to the extent, which was expected. However, the company can improve the situation by considering the following recommendations:

  • The management at British Telecommunication can improve the financial performance of the company by concentrating on the customer services. In the surveys, it has been identified that many customers of the company are not satisfied with the after sales service provided by BT. Therefore, it can be said that if the company concentrates on this particular factor, it can satisfy the customers in a better way and if the customers are satisfied, then t can be expected that the annual sales and profitability of the company will also increase.
  • In order to improve the cash flow position, the management of the company must take care of the debtors management techniques. Proper management of debtors will help the company increasing the liquid cash inflow. This will also help to improve the liquidity position of the company.

There are many uncertainties in the market, where British Telecommunication works. Due to the rapid growth in technologies, the level of uncertainties has increased. Introduction of new technologies means the companies require providing better services and introducing new products based on the new technologies. This is important for surviving in the high competitive market (Evens and Donders 2016). Therefore, the rapid growth in the technologies is creating high uncertainties for the business of BT. On the other side, after the incident of Brexit, the level of uncertainties reached to the high level. Due to Brexit, it was uncertain whether BT will be able to operate its business properly in the markets of EU (Hsu and Prescott 2016). This was huge uncertainty because a major portion of BT business was in the market of EU. However, as the Britain left EU, it was possible that the business of BT in EU markets fall down.

Conclusion

In this study, it has been identified that BT is one of the large business organization in the telecommunication industry in UK as well as in the international market. In recent past, the company has acquired the business of EE Limited. Before the acquisition, the financial performance of British Telecommunication was more or less good. The management of the company thought that by acquiring EE Limited, the company will be able to improve its financial performance at the high level. However, actually, the company could not perform well after the acquisition. The study has also identified that there were some uncertainties due to the incident of Brexit and introduction of new technologies.

Reference list:

Bbc.com. 2017. BBC - Homepage. [online] Available at: https://www.bbc.com/ [Accessed 7 Jan. 2017].

BT.com. 2017. BT | Using the power of communication to make a better world. [online] Available at: https://home.bt.com/ [Accessed 7 Jan. 2017].

Btplc.com. 2017. BT Plc. [online] Available at: https://www.btplc.com/ [Accessed 7 Jan. 2017].

Curwen, P. and Whalley, J., 2016. The tangled web of mobile telecommunication mergers: Hutchison Whampoa, Telefónica and BT. info, 18(2), pp.17-37.

Di Giulio, M., 2016. Industrial policies at a time of liberalization: the internationalization of European transport enterprises. International Review of Administrative Sciences, p.0020852315618266.

Ee.co.uk. 2017. EE. [online] Available at: https://ee.co.uk/ [Accessed 7 Jan. 2017].

Evens, T. and Donders, K., 2016. Mergers and acquisitions in TV broadcasting and distribution: Challenges for competition, industrial and media policy. Telematics and Informatics, 33(2), pp.674-682.

Gerli, P. and Whalley, J., 2016. Infrastructure investment on the margins of the market: The role of niche infrastructure providers in the UK.

Hassett, M., Vincze, Z., Urs, U., Angwin, D., Nummela, N. and Zettinig, P., 2017. Cross-border mergers and acquisitions from India: motives and integration strategies of Indian acquirers. In Value Creation in International Business (pp. 109-139). Springer International Publishing.

Hsu, S.T. and Prescott, J.E., 2016. The Alliance Experience Transfer Effect: The Case of Industry Convergence in the Telecommunications Equipment Industry. British Journal of Management.

Long, X., 2016. Comparative Study on the Fortune Global 500—Basing on the 2005-2015 Ranking. Open Journal of Business and Management, 4(04), p.763.

Marrewijk, A., 2016. Conflicting subcultures in mergers and acquisitions: a longitudinal study of integrating a radical internet firm into a bureaucratic telecoms firm. British Journal of Management.

Meghanathan, N. ed., 2016. Advanced Methods for Complex Network Analysis. IGI Global.

Nelson, R., 2016. 5G researchers take aim at moving target. EE-Evaluation Engineering, 55(2), pp.6-9.

Obaidat, M.S. and Nicopolitidis, P., 2016. Smart Cities and Homes: Key Enabling Technologies. Morgan Kaufmann.

Samy, M., Odemilin, G. and Bampton, R., 2010. Corporate social responsibility: a strategy for sustainable business success. An analysis of 20 selected British companies. Corporate Governance: The international journal of business in society, 10(2), pp.203-217.

Weber, Y. and Tarba, S.Y., 2016. Mergers and acquisitions, entrepreneurship and innovation. Emerald Group Publishing.

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