Infonet also had bad experiences on its parents and got amount of debts need to be paid. Therefore, many people had the different view about this acquisition.
Some industry analysis said that, “For a start, the merger means less choice for users,” said Camille Mendler, an analyst at the London office of The Yankee Group. “For another, BT has been gaining good momentum and an acquisition could slow down the operator. BT has not been good at integrating its acquisitions.”
“Like Verwaayen, Julian Hewitt, chief analyst with Ovum, views the acquisition as a positive move for BT. BT's Global Services unit and Infonet lacked adequate scale to operate as a genuinely global network player, he wrote in a research report. Together they could create enough synergies to become one.” (1)
On the other hand, after the announcement on Monday, the shares in BT went down 2.34% at $3.48 on the London Stock Exchange. Infonet shares fell 7% to $2.00 in morning trading on the New York Stock Exchange. This move will bring more difficulties to make the combination work, plus the deal was made based on the cash sales, and concerns with the debts BT own before, the shareholders of BT may worry about that, it will lead a reduction of return on cash to them. Indeed, they will lose confidences and ask for more dividends, which will make BT harder on the cash flow.
Dollar against Pound Sterling
Based on the current exchange rate, the dollar is at record lows against the pound sterling, which is comes out at $1.83. Therefore, it made American companies worth less with a declining dollar. From this point of view, BT took the advantage, and made the acquisition easier and cheaper for them. However, nobody knows whether this kindness will bring success to the combination.
Financial Aspect
Although, there are some uncertain aspects about this combination, but BT still got positive view with it. BT plans to have significant cost savings from combining the two businesses. The saving will come from the reduction in annual cash costs of the combined businesses, and have cash synergies by $150 million (£80 million) in the third year following the acquisition. Then annual cash costs can be the elimination of overlapping network leasing, operating and maintenance costs, the reduction of Infonet's in-country access costs through BT's scale and purchasing power, and the generation of efficiencies in sales costs, administrative functions and back-office operations.
Synergy can be defined as “The two firms together are worth more than the value of the firms apart.” (Arnold, 2002, P. 872)
Infonet's net cash balance as at 31 March 2004 of $390m (£210m), the offered price represents a premium of 23% to the average price per Infonet share over the past three months of $1.68, and its net tax asset of £100m will add further value. Infonet has reported average annual growth in core revenues of 11% over the past two years to $620m in 2003/04, so it has indicated that it expects to be cash flow positive by the end of the current financial year.
On the other hand, BT expects the transaction to be cash flow-neutral in the first year and positive thereafter, after financing costs but before restructuring costs. It will be dilutive to net earnings by around 0.5% share in the first year but will increase BT's earnings per share thereafter. (3)
Benefits
“The increasing internationalisation of commerce has led to mergers between firms in different countries.” (McLaney, 2002, P. 335)
Infonet Services Corporation, known for its quality of service, global reach and customer base and all their strengths will complement BT’s strengths in the managed network services market. That is also one of the motives for this acquisition: combining complementary resources. It can be defined as: two firms can absorb/take advantages from each other to minimize or filling of own disadvantages.
BT Global Services CEO Andy Green added: “Infonet brings us specialist skills, a great customer base, increased global reach and additional local presence where we need it. By combining the strengths of both companies, we will substantially improve our ability to help our new and existing customers address the challenges and opportunities of the digital networked economy.” (2) Moreover, it also greatly extends BT’s global reach and will deepen the company’s presence in North America and Asia Pacific.
In addition, Jose A. Collazo, Infonet chief executive, commented: “This transaction is great news for Infonet’s customers, employees and partners. Our combination with BT will improve our ability to supply mission-critical services to our customers, by bringing a commitment to the long term development of IP-based services backed by financial strength and true global scale. While continuing to take full advantage of our existing services and delivery platform, our customers will also be able to access the whole breadth of BT’s product and solutions capabilities.”(2)
Conclusion
“Neither BT Global Services nor Infonet has adequate scale as a genuinely global networking player. Both organisations have been loss making, but together they should have sufficient scale to generate a profit when the synergies kick in. It seems that they both realized this point and doing the right thing according to the tending of the market. ” (3)
However, the right choice of the tending does not guarantee the success. To be successful, the combined company will have to effectively integrate and rationalize back-office systems and service portfolios, which also must be essentially transparent to customers. After the discussion above, the priced looked sensible, and those two companies can get great benefits from this move.
References
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Arnold, G., (2002) Corporate Financial Management, (2nd Edition), FT Prentice Hall, London.
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McLaney, E j., (2002) Business Finance - Theory and Practice, (4th Edition), Pitman Publishing, London.
Internet References