Indian telecom industry
Telecom in the real sense means transfer of information between two distant points in space. The popular meaning of telecom always involves electrical signals and nowadays people exclude postal or any other raw telecommunication methods from its meaning. The Indian telecommunication industry, with about 525 million mobile phone connections (Dec 2009)[update], is the third largest telecommunication network in the world and the second largest in terms of number of wireless connections. The Indian telecom industry is one of the fastest growing in the world and is projected that India will have 'billion plus' mobile users by 2015. Projection by several leading global consultancies is that India's telecom network will overtake China's in the next 10 years. For the past decade or so, telecommunication activities have gained momentum in India. Efforts have been made from both governmental and non-governmental platforms to enhance the infrastructure. The idea is to help modern telecommunication technologies to serve all segments of India's culturally diverse society, and to transform it into a country of technologically aware people.
Telecommunication sector in India can be divided into two segments: Fixed Service Provider (FSPs), and Cellular Services. Fixed line services consist of basic services, national or domestic long distance and international long distance services. The state operators (BSNL and MTNL), account for almost 90 per cent of revenues from basic services. Private sector services are presently available in selective urban areas, and collectively account for less than 5 per cent of subscriptions. However, private services focus on the business/corporate sector, and offer reliable, high- end services, such as leased lines, ISDN, closed user group and videoconferencing.
Cellular services can be further divided into two categories: Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA). The GSM sector is dominated by Airtel, Vodfone-Hutch, and Idea Cellular, while the CDMA sector is dominated by Reliance and Tata Indicom. Opening up of international and domestic long distance telephony services are the major growth drivers for cellular industry. Cellular operators get substantial revenue from these services, and compensate them for reduction in tariffs on airtime, which along with rental was the main source of revenue. The reduction in tariffs for airtime, national long distance, international long distance, and handset prices has driven demand. In the field of international communications, India's overseas service carrier Videsh Sanchar Nigam Ltd. (VSNL) has made tremendous progress by using extensive infrastructure of satellite earth stations, state-of-the-art digital gateways, Optical Fiber Multi Media submarine Cables and Multi Media Data Switches. Fully automatic international subscriber dialing (ISD) service is provided to almost all the countries in the world. The telecommunications initiative in the country is led by Ministry of Communications through the Department of Telecommunication & Department Telecom Services and its undertakings for provision of basic telephone services, national and international long distance communications, manufacture of complete range of telecom equipment, research and development, and consultancy services. The Telecom Commission performs the Executive and Policy making functions. The Telecom Regulatory Authority of India performs the functions of an independent regulatory body.
Today the Indian telecommunications network with over 375 Million subscribers is second largest network in the world after China. India is also the fastest growing telecom market in the world with an addition of 9- 10 million monthly subscribers. The tele-density of the Country has increased from 18% in 2006 to 33% in December 2008, showing a stupendous annual growth of about 50%, one of the highest in any sector of the Indian Economy. The Department of Telecommunications has been able to provide state of the art world-class infrastructure at globally competitive tariffs and reduce the digital divide by extending connectivity to the unconnected areas. India has emerged as a major base for the telecom industry worldwide. Thus Indian telecom sector has come a long way in achieving its dream of providing affordable and effective communication facilities to Indian citizens. As a result common man today has access to this most needed facility. The reform measures coupled with the proactive policies of the Department of Telecommunications have resulted in an unprecedented growth of the telecom sector.
India's telecom sector has shown massive upsurge in the recent years in all respects of industrial growth. From the status of state monopoly with very limited growth, it has grown in to the level of an industry. Telephone, whether fixed landline or mobile, is an essential necessity for the people of India. This changing phase was possible with the economic development that followed the process of structuring the economy in the capitalistic pattern. Removal of restrictions on foreign capital investment and industrial de-licensing resulted in fast growth of this sector. At present the country's telecom industry has achieved a growth rate of 14 per cent. Till 2000, though cellular phone companies were present, fixed landlines were popular in most parts of the country, with government of India setting up the Telecom Regulatory Authority of India, and measures to allow new players country, the featured products in the segment came in to prominence. Today the industry offers services such as fixed landlines, WLL, GSM mobiles, CDMA and IP services to customers. Increasing competition among players allowed the prices drastically down by making the mobile facility accessible to the urban middle class population, and to a great extend in the rural areas. Even for small shopkeepers and factory workers a phone connection is not an unreachable luxury. Major players in the sector are BSNL, MTNL, Bharti Teleservices, Hutchison Essar, BPL, Tata, Idea, etc. With the growth of telecom services, telecom equipment and accessories manufacturing has also grown in a big way.Indian Telecom sector, like any other industrial sector in the country, has gone through many phases of growth and diversification. Starting from telegraphic and telephonic systems in the 19th century, the field of telephonic communication has now expanded to make use of advanced technologies like GSM, CDMA, and WLL to the great 3G Technology in mobile phones. Day by day, both the Public Players and the Private Players are putting in their resources and efforts to improve the telecommunication technology so as to give the maximum to their customers.HISTORY OF TELECOMMUNICATION INDUSTRY
The history of telecommunication industry started with the first public demonstration of Morse's electric telegraph, Baltimore to Washington in 1844. In 1876 Alexander Graham Bell filed his patent application and the first telephone patent was issued to him on 7th of March.
In 1913, telegraph was popular way of communication. AT&T commits to dispose its telegraph stocks and agreed to provide long distance connection to independence telephone system.
In 1956, the final judgment limited the Bell System to Common Carrier Communications and Government projects but preserving the long-standing relationships between the manufacturing, researches and operating arms of the Bell System. In this judgment AT&T retained bell laboratories and Western Electric Company. This final judgment brought to a close the justice departments seven -year-old antitrust suit against AT&T and Western Electric which sought separation of the Bell Systems Manufacturing from its operating and research functions. AT&T was still controlling the telecommunication industry.
In 1982 , AT&T was requested to divestiture its stock ownership in Western Electric; termination of exclusive relationship between AT&T and Western Electric; divestiture by Western Electric of its fifty percent interest in Bell Telephone Laboratories, AT&T 's telecommunication research and development facility, is a jointly owned subsidiary in which AT&T and Western Electric each own 50% of the stock; separation of telephone manufacturing from provision of telephone service and the compulsory licensing of patents owned by AT&T on a non-discriminatory basis.
It was telecommunication act of 1996 that true competition was allowed. The act of 1996 opened the market to all competitors. AT&T being the first telecommunication company paved the road for the telecommunication industry as well as set the policy and standards for others to follow.Beginning of telecommunication in India
Year Evolution of the industry-Important Milestones
1851 First operational land lines were laid by the government near Calcutta (seat of British power)
1881 Telephone service introduced in India
1883 Merger with the postal system
1923 Formation of Indian Radio Telegraph Company (IRT)
1932 Merger of ETC and IRT into the Indian Radio and Cable Communication Company (IRCC)
1947 Nationalization of all foreign telecommunication companies to form the Posts, Telephone and Telegraph (PTT), a monopoly run by the government's Ministry of Communications
1985 Department of Telecommunications (DOT) established, an exclusive provider of domestic and long-distance service that would be its own regulator (separate from the postal system)
1986 Conversion of DOT into two wholly government-owned companies: the Videsh Sanchar Nigam Limited (VSNL) for international telecommunications and Mahanagar Telephone Nigam Limited (MTNL) for service in metropolitan areas.
1997 Telecom Regulatory Authority of India created.
1999 Cellular Services are launched in India. New National Telecom Policy is adopted.
2000 DoT becomes a corporation, BSNL
Telecommunication is important not only because of its role in bringing the benefits of communication to every corner of India but also in serving the new policy objectives of improving the global competitiveness of the Indian economy and stimulating and attracting foreign direct investment.
Indian Telecom industry is one of the fastest growing telecom markets in the world. In telecom industry, service providers are the main drivers; whereas equipment manufacturers are witnessing growth and decline in successive quarters as sales is dependent on order undertaken by the companies.MAJOR PLAYERS IN INDIAN TELECOM INDUTRY
There are three types of players in telecom services:
- State owned companies (BSNL and MTNL)
- Private Indian owned companies (Reliance Infocomm, Tata Teleservices, Shyam)
- Foreign invested companies (Vodafone, Aircel, Bharti Tele-Ventures, Escotel, Siestema Idea Cellular, BPL Mobile, Spice Communications)
The number of telephone subscribers in India increased to 581.81 Million at the end of January-2010 from 562.21 Million in December-09, thereby registering a growth rate of 3.49%. With this, the overall Tele-density in India reaches 49.50.Wireless Segment (GSM, CDMA & FWP)
Wireless subscriber base increased from 525.15 Million in December-09 to 545.05 Million at the end of January-2010 at a monthly growth rate of 3.79%. Wireless Tele-density stands at 46.37.Wireless Service:
Service Providers' share in net additions during the month SOURCE: http://pib.nic.in/archieve/others/2010/feb/r2010022476.pdf
Service Provider wise Market Share as on 31-1-2010 SOURCE: http://pib.nic.in/archieve/others/2010/feb/r2010022476.pdfBroadband (= 256 Kbps download)
Total Broadband subscriber base has increased from 7.83 million in December-09 to 8.03 million in January-2010, there by showing a growth of 2.42%.Wireline Segment
Wireline subscriber base declined from 37.06 Million in December-2009 to 36.76 Million at the end of January-2010. BSNL/MTNL, two PSU operators hold 84.96% of the Wireline market share. However, they lost 0.36 Million subscribers in the month of January-2010. Overall Wireline teledensity is 3.13.Telecom Regulatory Authority of India (TRAI)
The Telecom Regulatory Authority of India (TRAI) was established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier vested in the Central Government.TRAI's mission
To create and nurture conditions for growth of telecommunications in the country in manner and at a pace, which will enable India to play a leading role in emerging global information society.Main objectives of TRAI
- TRAI has provided a fair and transparent policy environment, which promotes a level playing field and facilitates fair competition.
- TRAI has issued from time to time a large number of regulations, orders and directives to deal with issues coming before it and provided the required direction to the evolution of Indian telecom market from a Government owned monopoly to a multi operator multi service open competitive market.
- The directions, orders and regulations issued cover a wide range of subjects including tariff, interconnection and quality of service as well as governance of the Authority.
The TRAI Act was amended by an ordinance, effective from 24 January 2000, establishing a Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) to take over the adjudicatory and disputes functions from TRAI. TDSAT was set up to adjudicate any dispute between a licensor and a licensee, between two or more service providers, between a service provider and a group of consumers, and to hear and dispose of appeals against any direction, decision or order of TRAI.POLICY INITIATIVES
The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry.
- 100% foreign direct investment (FDI) is permitted through the automatic route in telecom equipment manufacturing
- FDI ceiling in telecom services has been raised to 74%
- Introduction of a unified access licensing regime for telecom services on a pan-India basis ·
- Plan to introduce mobile number portability in a phased manner
- The government is implementing a program of connecting 66,822 uncovered villages under the Bharat Nirman programme. The government will invest US$ 2 billion to set up 112,000 community service centres in rural India to provide broadband connectivity in 2008-09.
- The Department of Telecommunications (DoT) has stated that foreign telecom companies can bid for 3G spectrum without partnering with Indian companies. Only after winning a bid, would they need to apply for unified access service licence (UASL) and partner with an Indian company in accordance with the FDI regulations.
Mergers and acquisitions in the telecommunication industry have grown by substantial proportions in India since the mid 1990s. Economic reforms undertaken in the 1990s in India opened up the telecom sector which used to be a predominantly state controlled one. Private investment in the telecom sector in India not only facilitated the rapid expansion of telecom services in the urban, as well as rural parts of India, it also provided the opportunity for mergers and acquisitions in this sector.
Even as the slowdown has taken toll on the merger and acquisition space, the Indian telecom growth story continues to buy investors' confidence as the sector has accounted for 33 per cent of the total M&A deals in the fiscal so far with the valuations crossing $9.15 billion.
The Assocham Eco Pulse (AEP) Study on "Mergers and Acquisitions in Telecom Sector", has found that telecom sector has proved to be one of the biggest growth booster for the Indian economy as around twenty deals worth more than $9.15 billion have been announced with the dominant objective of expansion and growth.
The Study revealed that maximum of the telecom deals were inbound with foreign companies infusing money to the tune of $8.065 billion in order to gain grounds on the Indian soil which is adding average eight million subscribers every month.
The deal valuations at domestic front, however, remained relatively less.
The Study done by Assocham Research Bureau states while the Indian firms spent $408 million in offshore buyouts, mergers worth $ 679 million were announced during the period April to November 2008. The robust deal activity in the telecom sector gains significance specifically in the backdrop of decline in the global merger volume by almost a third in 2008 due lack of credit, plunging stock markets and financial crisis enveloping most of the developed countries. "Indian telecom growth story seems to have remained unaffected by the global liquidity crisis, with unabated interest in the sector from global operators. 
The sector is expected to continue to grow at rapid momentum despite all odds prevailing in the economy", said Mr. D S Rawat, Secretary General, Assocham. Indian telecom market is the fastest growing in the world, where total outstanding cellular subscribers have grown at the rate of 51.7 per cent during the period April to September 2008, over and above the growth rate of 70 per cent for the same period last year. New cellular subscribers have been added at the rate of 26.1 per cent.
The telecom industry players have shown outstanding results in their income statements as well .Sales for the top telecom firms have increased by 30 per cent for the quarter ended September 2008.
- The largest deal during the period was the buy out of 26 per cent stake in Tata Teleservices by Japanese company NTT DoCoMo Inc. The $ 2.7 billion deal makes the Japanese giant's entry into the world's fastest growing telecom market, which has over three times Japan's subscribers.
- Another deal of considerable valuations was by Turkcell, which is a leading Turkish telecom company and Europe's third-largest operator by subscribers, to buy 51 per cent stake in Datacom Solutions. Though the deal is in process, the expected value is around $2.2 billion.
- The Italian multinational, Telecom Italia has entered into a joint venture with Unitech Telecom to acquire 49 per cent stake in latter at the cost consideration of $2 billion. The fund garnered from the deal would be used for laying down the network, rolling out operations as well as bidding for 3G spectrum.
- In another deal, Dubai based Emirates Telecommunications Corp (Etisalat) bought out 45 per cent stake in Swan Telecom Private Ltd. for cash up to $900 million (Rs 4,113 crore). The acquirer multinational aimed at setting foothold in the Indian telecom market through the Indian firm which had got spectrum in ten out of the 22 circles.
- The major telecom deal in the domestic market to take place in last eight months was that the acquisition of 40.8 per cent stake in Spice Communications by the Idea Cellular for Rs. 2716 crore ($679 million).
- Among the offshore deals, the largest one included the acquisition of Vanco Group, London based global managed network services provider, for $ 365 million (Rs.1550 crore) by Reliance Globalcom Limited, subsidiary of India's largest integrated telecom Service provider Reliance Communications.
- Tanla Solutions has shed $18.6 million to acquire Finland based Openbit OY in order to strengthen its hold in mobile payment vertical.
- A Bangalore-based OnMobile Global had signed an agreement to acquire 100 per cent stake of Telisma SA France, Europe's leading speech recognition software Company for euro 11 million.
- Zylog System Ltd has shelled out $7.5 million acquired Ducont FZ LLC leading application provider in internet and wireless applications in Dubai. 
- Infrastructure - Building infrastructure for telecommunications is not easy. Moreover it consumes much time. Mergers and acquisition provides access to infrastructure much easily.
- Network - Benefits of existing network are available much easily through mergers and acquisitions
- License - In certain region there may be restrictions on getting new license. In such a case mergers and acquisitions provide an option to run services in that region.
- Customer base.
- Brand value. 
Merger and Acquisition (M&A) norms of telecom service providers within a circle have been tightened by the Indian government. From now onwards, the telecom service providers need to fulfill four criteria for any kind of merger.
- Firstly, for any kind of merger, approval by the department of telecom (DoT) is required.
- Secondly, the combined market share of the merged entity shouldn't be more than 40 %, which currently stands at 67%.
- Thirdly, the service provider must have operated for a period of three years before considering any sort of merger and fourthly, the merged identity needs to pay extra for the spectrum.
The government has revised norms and regulations for merging & acquisition (M&A) between telecommunication companies within a same circle. Declaring the guidelines and regulations, the Department of Telecommunication (DoT) said that prior approval for merger of telecommunication companies is necessary. It is emphasize that the total market share after merging should not exceed to more than 40% in terms of both subscriber base and revenue. Prior it was held at 67 per cent. It has been made clear that no merger would be allowed unless and until there are minimum four service providers left after such merging process.
The government's revised norms and regulations concerning to merger has tightened the merging and acquisitions between telecommunication companies in the circle. From now consolidation between telecommunication companies within same circle would have means facing difficulty and high cost also. Idea has recently acquired license only for 9 circles. Therefore, it is not possible for an existing licensee to get the Idea in these nine circles. Similarly other licensees if they want to sell, needs to search for some other suitor which should be outside the purview of group of licensed operators in their circles. This new step from the government side has opened up a new gateway for new players, which would have till now facing lots of troubles in absence of any license.
The new government regulations are more stringent and left less room for air to pass. Less flexibility is allowed while designing all four phases - for any merging pre consent of government is required to take, the market share of merging entity beyond which any merging will not be allowed, has been brought down from 67% to 40%, before contemplating any merging process it is imperative that the license must go from through 3 years of operation and last the merged entity is required to pay extra amount for every spectrum.
The new norms issued are somewhere deviated from the TRAI's regulations. The TRAI had ruled out merging and acquisition procedure unless and until rollout recommendations were not full filled. But in the revised guidelines issued by government for merging process, nothing has been mention in respect of rollout obligations. It is kept silent for it. Now a clause has been inserted which have made license operation of three years obligatory. In new guidelines issued by the government 'acquisition' word has been dropped. The removal in the recent issued guidelines will somewhere create ambiguity to the extent that it will not be clear as whether these norms are specifically for merger or acquisition.
The regulations are looking as a pill of relief for new entrants. As now they can bring strategic investors, which means they can sell maximum 74% stake to all those new global companies or domestic entities which are keen to make entry into the India's fastest growing telecommunication sector. Earlier existing telecommunication players purchased new entrants for reducing spectrum crunch. But now all new entrants who have received license in recent years can be merged or purchased by others only after January 2011.
The new issued guideline also makes it clear that 'merger of licenses shall be restricted to the same service area'. It means if an operator has its services only in eastern regions it can't undergone into merging process with another telecommunication company who is offering services only in Himachal Pradesh and Punjab. Further it clears that no buoyant or merging process can be taken place among top 3 service providers. It makes clear that as long as these new norms are into operation, Vodafone can never be able to purchase Bharti or Reliance and vice versa, nor can ever the Idea Cellular purchase Vodafone. However, such big companies- Reliance, Bharti, Vodafone, and Idea Cellular can purchase small players like Spice.
The DoT also explicitly mentioned out that the spectrum transfer charges are needed to be pay in case of any merging between existing telecommunication companies. The amount which will be paid is decided by government. However, if number of service providers falls below 4 in circle during process then no merging will take place.
The government's motto behind issuing new principles and guidelines is to ensure that one of the fastest growing telecommunication sectors in near future will continually to have more than 8 operators in circles. This step in turns bolsters competition and helps in earning more bucks. It will also lead to optimum utilization of resources.REVIEW OF LITERATURE
Mandelkr (1974) examined risk and return in the case of merging by using the two-factor market model. He concluded that the stockholders of the acquiring and the acquired firms earn abnormal return and proved the perfectly competitive acquisition market hypothesis: the market was independent of information on acquisition. However there were restrictions to his result. Eighty-five percent of acquired firms in his sample were delisted in the month of the merger and he selected list announcement date as the effective date of merger, so the market reaction in the month of merger for acquired firms could be identified.
Higgins and Schall (1975) measured the effects of conglomerate mergers as a result of corporate bankruptcy. Conglomerate mergers did not affect aggregate firm value when leverage was constant. If the existing debt could be recalled without penalty, equity value would be increased. Also, the value of conglomerate merger on aggregate firms "was dependent on the bankruptcy transaction cost included. If the capital asset pricing model was appropriate to value returns, the results of: conglomerate merger about aggregate firm value could be predicted by such model.
Dodd and Ruback (1977) analyzed abnormal returns around the time of the announcement of a takeover and showed taxget and bidding firms shareholders earning positive and / significant gain from the successful takeover. About 20 percent of target firms stockholders for successful offers and 19 percent for unsuccessful offers earned abnormal return in the month of announcement whereas three percentage only of successful bidding firms. Even if the offer was unsuccessful, there was no loss for the bidding firms.
Franks Broyles and Hecht (1977) estimated the gain to shareholders from 71 mergers in Britain from 1955 to 1972. They found that target fir shareholders gained 26% abnormal return on average over a period of three months prior to the announcement of the merger but the bidding firm gained only 2.5% abnormal return. Langetieg (1978) used the effective date of final approval by target shareholders as the event date. The expected price effects occurred on or before the first public announcement of a takeover. He estimated stockholder gains from mergers. The post-merger excess returns were found to be significant and positive pre-merger excess returns were too small to conclude that the increase of stockholder welfare was the only one motive for merger. Managerial welfare might be seen as an instrumental reason for the merger.
Langetieg et al (1980) investigated the risk from the mergers faced by shareholders. The study indicated that stockholders faced risk of the consolidate firms' mergers because of the aggregate management in the acquiring firms and the increase of leverage.In 1980s, there was an increasing tendency of M&A studies. Most still focused on the examination of risk and return as a result of M&A.
Asquith and Kim (1982) examined return to common stock of target firms around the date of the initial announcement or completion of a merger. They tested the impact of merger bids on the wealth of the participating firms' security holders and concluded that target firms stockholders gained but bidding firms did not The results showed that a conflict of interest between stockholders and bondholders could be resolved by an efficient market.Asquith (1983) measured the impact of merger bids on stock return and found that leakage of information in some cases prior to the initia announcement and uncertainty of the outcome of a proposed merger was not resolved at the initial announcement. The major gainers of mergers were target firms' stockholders but there were no losers in the game.
Jensen and Ruback (1983) reviewed 13 studies looking at abnormal return around takeover announcements. They indicated the effects of takeover regulation and summarized the reasons for managerial actions to corporate control that was harmful to stockholders. They found an average excess return of 30% of target stockholders in successful tender offers and 20% to target stockholders in successful mergers. Bidding firm stockholders gained 4% around tender offers and no abnormal return around the merger.
Odagiri and Hase (1989) examined the trend of mergers and acquisitions in Japan by comparing the profitability and growth rates of 243 merging firms. They found that Japanese acquisition of foreign firms aimed at starting an overseas operation and it became a popular means of diversification in Japan. However, Japanese management preferred internal growth to mergers and acquisitions comparing to US management.
Travlos and Papaioannou (1991) examined effects of the method of payment on bidding firms' stock return at the initial announcement of takeover bids. The result suggested that cash offers generated higher abnormal return than do stock exchange. The bidding firm shareholders on the announcement day earned -1.3% and -0.8% abnormal return for stock exchange and cash offer respectively. On the second day after the announcement, the bidding firm shareholders earned -2.55% and 0.9% abnormal return for stock exchange and cash offer respectively.
Frank, Harris and Titman (1991) studied the corporate takeover part of their findings are consistent with Jensen and Ruback (1983). They indicated that the benchmark error was the main cause of negative post-merger performance. They concluded that negative post merger performance occurred with equally-weight index and positive performance with value-weight index. Also, they furthered test the performance using eight-portfolio benchmark. They found that there was no statistically significant abnormal performance for bidders. They solved the mean-variance inefficiencies of single-factor benchmark by such multifactor benchmark.
Healy et al. (1992) measured post-acquisition performance of US public industrial merged firms. They observed that the asset productivity of merged firms increased relative to their industries. This caused a significant improvement in their operating cash flow returns and abnormal return and long-run capital and R&D investments remain unchanged. They indicated that the expectations of economic improvements was a major reason for the equity revaluation of the merging firms.
Mat-Nor (1993) examined the effect of acquisition announcement on the security prices of bidding and target firms in Malaysia. He concluded that there had been an increase of cooperate takeovers and mergers after the introduction of the new economic policy in 1970. He used daily common stock returns of the Kuala Lumpur Stock Exchange for 200 days before and 200 days after the acquisition announcement date. The study resulted in a significant negative change after the announcement and there was the overestimation of the bidders on the future efficiency of the gains from the merger.
Hoshino (1995) investigated the performance of mergers of Japanese agricultural cooperatives and showed that there was a negative merger effect of Japanese agricultural cooperatives after merger in term of four financial ratios: (1) current ratio, (2) the ratio of cash and deposits to savings, (3) The ratio of personnel expense to operating expense and (4) operating expense per full-time officer and employee, and financial performance of merging cooperatives was inferior to that of non-merging ones after comparison of 58 merging and 12 non-merging cooperatives.
Fama and French (1995) examined size and market factors in earning return. They discovered that high book-to-market-equity (BE/ME) showed poor earnings and low BE/ME showed strong earnings. The market and size factors in earnings were the main factors to explain those in return but BE/ME had no relationship with earning or return. Chang (1998) examined bidders return at the announcement of a takeover proposal when the target firm was privately held.. He indicated that bidders experienced no abnormal return in cash offer but a positive abnormal return in stock offer. It is contrast to typical results. The monitoring activities and information asymmetries were reasons for positive wealth effect .
Tai (1997) performed the pre-post-merger analysis on the audit fee among large audit firms in Hong Kong from 1988 to 1991. The mergers of Arthur Young with Ernst & Whinney, and Deloitte, Haskins Sells with Touche Ross increased competition among the larger firms and increased audit fee. Mishra et al. (1998) examined how capital market and political factors affecting Hong Kong mergers and acquisitions in U.S. from 1975 to 1994. He concluded that a weaker dollar and lower interest rates associated with more acquisitions by Hong Kong firms because of lower costs.
Peng (1997) investigated how executives view M&As as a way to stimulate economic growth in China enterprises. One of results indicated that the firms inability to achieve growth was through expansion and acquisitions. As adequately regulated financial markets supported by property right-based lega framework were still underdeveloped, so the case involved in transfer of ownership such as mergers or acquisition was difficult in China. Managers interviewed thought that acquisitions as an involuntary or mandatory acquisition but not as an efficient way to achieve growth.
Atkins Ralph (1999) states that when Deutsche Telekom merge with Telecom Italia of Italy, their aim was to create the first truely international telecommunications corporation in Europe. The deal was dogged from the beginning by difficulties - not the least by a rival offer for Telecom Italia from Olivetti, the rival Italian telecoms group, and alarm in the Rome government over the German government's 72 per cent shareholding in Deutsche Telekom. Its D2 mobile network is Germany's biggest; Arcor, its fixed line operation, emerged one of the strongest in the sector after the liberalisation of public voice fixed line telephony at the start of last year.
Nairn, Geoff.(1999) stated that the convergenge of voice and data was big issue in telecom industry but when Northern Telecom, the Canadian voice equipment supplier, announced its $9.1bn merger with US data networking company Bay Networks in June 1998, the convergence trend of voice and data was not so obvious. Both companies were dealing with two very different technologies. Northern Telecom was best known as a supplier of traditional circuit-switching equipment and transmission technologies for carriers' backbone networks. Bay Networks, by contrast, sold routers and packet switching equipment for the internet and corporate data networks based on the internet protocol (IP).It is not just the internet that is driving this growth in IP traffic on carriers' networks. Increasingly, voice is being "packetised" and sent over the IP backbones mixed in with regular internet traffic. This voice over IP (VoIP) market is still in its infancy and there remain significant technical challenges in creating IP networks that handle voice traffic as well as today's circuit-switched networks.
Suzman Mark(1999) states that Congress became increasingly critical at the lack of progress since it passed the landmark Telecommunications Act of 1996 to deregulate the industry and is threatening new legislation limiting the FCC's authority. And, if that was not enough, almost every week seems to be bring a giant, new telecoms merger that must be scrutinised, along with a fresh wave of press attention and a new entourage of well-funded lobbyists to the agency's elegant new downtown offices.Despite many problems with Congress , FCC make good progress across the board despite an unprecedented set of challenges and FCC play major role in regulating the internet to open telecommunications markets abroad.
Monie (2002) states that India is the great big oasis most multinational corporations are looking to as they consolidate their position in Indian companies. This was evident during the past year where foreign players accounted for approximately 35% of the value of Indian acquisitions. The telecoms sector dominated the M&A scene accounting for 24% of all deals done last year. The Batata-BPL telecom deal ($662 million) represented 10% of all deals done during 2001. This study show that M&A deal requires active management of desired business synergies, market prospects, price, structure, negotiations and human resources. However, before considering an M&A the acquirer would need to consider the legal and tax aspects of the deal.
Chaki et al. (2003) emphasized that Mergers and acquisitions have gained importance in recent times. Business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition amongst domestic companies and competition against imports have all combined to spur mergers and acquisitions activities in India. It is most important that mergers and acquisitions are backed with strategic objectives and not driven by the hype or selfish motives of the management. It needs proper corporate governance on the part of management. Talent retention becomes very important in the wake of merger or acquisition. The company needs to ensure that the best talent remains in the company. For that it needs to have proper plan at the time making decision of merger or acquisition also needs to ensure that the culture does not change drastically or if it needs to be changed there is proper change management in place. Also, the top management needs to form a clear common vision at the time of making the decision for merger or acquisition. Several Mergers and acquisition have seen failure in recent times due to lack of guiding principles, overly conservative targets, improper change management etc. Even the importance of Valuation has been highlighted .Many mergers that have failed due to difference in the Valuation techniques used by different companies. It has been emphasized that these issues are required to be properly taken care of before going for mergers and acquisition.
Euroweek (2004) The bid takeover by Swisscom's for Telekom Austria worried investors in the Eu325m bond exchangeable into TA's stock. The announcement that OIAG was considering selling its 47.2% stake in Telekom Austria caused TA's shares price to jump 6.8% , as investors speculated about a Swisscom takeover. Separately, the takeover of German telecommunications company Mannesmann by Vodafone, the UK mobile phone operator, offered a lesson in what can happen when a convertible is not protected.
Changi Nam et al (2005) conducted a study to assess the effect of mergers and acquisitions on shareholder wealth when subsequent related significant events are anticipated. They identify a particular merger and acquisition between telecommunication companies in Korea and examine whether it conveys good or bad news to stock market participants. They hypothesize and find that mergers and acquisitions are interpreted as good news by the marketplace when they are expected to be accompanied by a subsequent related significant event, in our case granting of a government license for the IMT-2000 mobile service.
Rieck et al (2005) state that the waves of Mergers and Acquisitions (M&As) dramatically reshaped the market structure of global telecommunications. The telecoms industry in Europe and the United States steadily consolidated and firms oligopolized the regional industry. Telecoms operators frequently engaged in M&As with the objectives to grow bigger and achieve higher earnings. However, the question arises whether and under what conditions they have really been able to achieve these objectives. Through this paper attempt has been made to investigate M&As in the telecoms industry and analyze the conditions under which such M&As can be considered successful. In doing so, the event study method has been used, which traces immediate market reactions to M&A announcements and the corresponding shareholder value effects. Assuming efficient markets, shareholder value effects are taken as a perfect reflection of all future benefits (or cost) arising from M&As. The empirical findings show that there is an overall positive shareholder wealth effect associated to M&A announcements in the telecommunication industry. This is especially true for telecommunication operators engaging in cross-border M&As. They experience positive abnormal returns and outperform firms that expand domestically. In addition, when investigating service diversification and international diversification, mergers that are both non-conglomerate and cross-border are found to add value to the acquiring telecommunications operator, whereas no significant stock reactions are found when acquirers engage in conglomerate domestic mergers.
Westover (2001) states that there are many issues to consider when formulating a telecom's M&A strategy for Asia as each jurisdiction has issues that are unique to it. This study has shown that single strategy could not be applied across the region. By examining some of the M&A transactions of last year and the prevailing market conditions in certain jurisdictions, the aim is to shed some light on what issues should be considered when formulating a regional strategy and to provide some thoughts on future developments. The scope of this review of Asia's M&A telecoms activity has been limited to 3 of the region's powerhouses: Japan, Hong Kong and China.
Wilcox (2001) states that since the 1996 Telecommunications Act, numerous mergers and alliances (M&A) have been consummated within the telecommunications industry. These M&A involve both large and small firms in a variety of different and similar industry segments. In this industry, replete with technological uncertainty, it is useful to evaluate the impact of these activities on the market valuation of the firms involved. This study uses event analysis to examine 44 M&A events involving 89 partners in the telecommunications industry. Drawing on prior literature on diversification and firm size, the study formulates and tests hypotheses relating the impact of near and far diversification, and the size of the firm, on market valuation.
Trillas (2002) presented the new evidence about 12 large acquisitions by telecommunications firms in Europe. The average effect on acquirer's shareholder value is not significantly different from zero, which confirms a paradox found by previous studies: bidding firms' shareholders do not benefit from takeovers. 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 "agency" constraints.
Warf (2003) states that the 1990s witnessed an enormous wave of mergers and acquisitions dramatically reconfigure the market structure of global telecommunications. In Europe and the U.S., telecommunications firms have steadily consolidated into a shrinking pool of providers, rapidly oligopolizing the industry. This paper reviews the number and size of mergers and acquisitions globally in the 1990s and charts the national patterns of purchasers and target firms, noting the overwhelming hegemony of American corporations. The reasons behind this process include globalization, deregulation, the convergence of digital technologies, the search for economies of scale and scope, and U.S. corporate tax laws. It also points to the impacts of this oligopolization on consumer prices, labor, equity of access to telecommunications services, and the political and cultural repercussions of increasingly concentrated ownership.
Tippu (2006) stated that telecom sector is growing at faster rate as millions of new subscribers are added each month and mergers and acquisitions activity are also high in telecom sector. The rapid growth in this sector encouraging more M&A activity and now the major challenge for them is to provide adequate service to the customers and they are pressured to stem up their customer level service. That is why small players are selling out, roping in a foreign investor or teaming up with a large Indian player. Apart from this, some observers believe that consolidation is not taking place to that degree what they expected and they said that consolidation should be done in such a way that it brings a greater value-add to services, which in turn ensures greater return on investment.
Ramakrishna (2006) states that though mergers and Acquisitions have been an important element of corporate strategy all over the globe for several decades, research on M&A has not been able to provide conclusive evidence on whether they enhance efficiency or destroy wealth. There is thus an ongoing debate on the effect of M&A on firms. Mergers and Acquisitions has become common in India today .However very little appears to be known about the long term post -Merger performance of the firms and this study tried to fill that gap and it has been found out that merged firms demonstrate improvement in long term financial performance after controlling for pre-Merger performance, with increased cash flows returns post Merger ,at an annual rete of 4.3%.This improvement in returns is due to improvements in post merger operating Margins of the firms, though not of the efficient utilization of assets to generate higher sales. As far as wealth gains are considered, only the shareholders of acquired firms appear to be enjoying significant positive share price returns and these gains are basically influenced by the relative size and pre Merger performance of the acquired firm.
Sung et al (2006) examine the effects of two horizontal mergers on the performance of the respective operating companies. The effects of the mergers are investigated by comparing the performance of the merging companies with a control group of non merging companies and also the performance of the merging companies before and after merger. This study concludes that mergers did not produce net economies of scale, did not lead to substantial productivity growth or cost reduction, and did not generate significant shareholder wealth effects. It is, to the authors' knowledge, the first study of mergers that combines the analysis of productivity and cost effects, on one hand, with an examination of the effects on financial variables, on the other hand.
Chen.jim(2006) study that the Telecommunications Act of 1996 promised to promote competition and reduce regulation, secure lower prices and higher quality services and encourage the rapid deployment of new telecommunications technologies. One decade later, the Act has drawn sharp criticism for having prompted a wave of mergers among incumbent carriers without having generated a corresponding increase in consumer welfare. For instance, the very sort of merger that was once considered unthinkable - a reunification of AT&T with two former Bell operating companies - is on the verge of completion.The legal fate of these mergers is at once a historical mirror and a harbinger of American telecommunications law beyond the first decade under the 1996 Act. Mergers such as the unions of SBC and AT&T, Verizon and MCI, and Sprint and Nextel have not encountered significant legal obstacles. Since the Bell breakup, no significant telecommunications merger has failed to receive regulatory approval in the United States. The 1996 Act and its implementation have signaled that federal authorities will remain content to extract concessions in exchange for their approval of even the largest mergers within the telecommunications industry. A decade after comprehensive legislative reform of telecommunications, all segments of the industry are highly concentrated. Miniature versions of the old Bell system have emerged on each coast. The cable industry is only slightly less concentrated, and nothing stands between consolidation and integration in that industry except provisions of the 1996 Act that had been designed to protect competition within media rather than telecommunications markets. If Voice over Internet Protocol (VOIP) overcomes every other form of terrestrial telecommunications technology, control of telecommunications will be divided between providers of broadband Internet access and wireless network operators. Firms that are most facile in integrating wireless and wireline services, for residential and business customers alike, will dominate the industry
Shawn Young et al ( 2006) states that deal between AT&T and BellSouth, which would give AT&T full control of its Cingular Wireless joint venture with BellSouth has directly effected to Verizon. Stock investors was favoring San Antonio-based AT&T, which has seen its stock rise 14% , compared with a 12% rise for Verizon, based in New York. AT&T has a market capitalization of $109.9 billion and Verizon has a market capitalization of $98.3 billion. But with AT&T strengthening its grip on wireless, which is a critical source of growth, Verizon compelled to come up with another move, according to industry observers. The AT&T-BellSouth combination also affect other firms in the conventional-landline business, including Denver-based Qwest Communications International Inc. The company, which serves 16 Western and Mountain states, is the smallest of the regional-phone empires, and it doesn't have its own wireless operation. Qwest, which has a market capitalization of about $12 billion become a target for AT&T because it would nearly complete AT&T's geographic footprint.
James A Largay et al (2006) states that as efficient means for reallocating assets within the economy, acquisitions affect both the acquirers and their rivals. When news of a takeover hits the market, the target firm's share price usually rises sharply while the acquiring firm's share price usually falls or remains constant. Understanding returns to rivals' shares may help understand the broader impact of and motives behind acquisitions. As a consequence, there is an urgent need for research that can disentangle the reasons for rivals' share price changes. Fortunately, a recent study by Evrim Akdogu of Koc University in Istanbul does just that in a fascinating examination of the effects on acquirers and rivals of all acquisition announcements in the recent telecom merger wave. Among the many competing explanations for rivals' returns on acquisition announcement dates, this research provides evidence generally supporting the competitive advantage explanation of rivals' returns in the recent telecom merger wave.
Hsi Liu et al (2007) conducted a study which attempts to make an empirical contribution to the understanding of corporate performance in the telecommunications industry. Data envelopment analysis (DEA) is performed to assess corporate performance for the telecommunications sector in Taiwan and the relationships between corporate performance and merger and acquisition (M&A) transactions. The empirical results reveal that M&A strategy does not seem to enhance corporate performance in the telecommunications industry, whilst an internal growth strategy does improve corporate performance.
Jacqueline Doherty (2007) stated that the merger of AT&T and BellSouth, has provided ample opportunity for the company to find cost savings and boost earnings. It increasing the top line to ensure long-term organic growth. The savings so far have kept shareholders happy. In the second quarter, AT&T reported 2% pro forma revenue growth, but a 21% increase in adjusted earnings per share, thanks in part to $1.9 billion of cost trims and a $3.9 billion stock buyback.
Gupta (2008) states that there is slow down in the market but merger and acquisition are happening in the telecom sector .it is showing that its only sector which is on boom .the main thing is its also boosting the Indian economy. near about 20 deals has done in telecom sector and worth $9.15 bn The study reveal that maximum of the telecom deals were inbound with foreign companies infusing money to the tune of $ 8.065 bn .in order to gain ground on the on the Indian soil during April to November 2008 merger worth $676 million was announced. The main considerable thing is that there is not any effect of Global liquidity Crisis on the telecom sector. Indian telecom market is fastest growing market in the world in 2008 the growth of telecom sector was near about 70 %. And cellular companies add their 26.1% subscriber in that year though there was liquidity crunch in the market. The telecom sector showed their 30% growth in September 2008.
Sandra Ward (2009) stated that investment should be made in that company that can deliver reliable, business-as-usual results and can keep its focus on avenues of growth and hold the promise of market-beating returns. Verizon Communications, the New York-based telecommunications giant, fits the bill nicely. For 2008, Verizon posted a profit of $6.4 billion, or $2.26 a share, on $97.4 billion in revenue, compared with $5.5 billion, or $1.90, on $93.5 billion for 2007. Investors couldn't ask for a better buying opportunity than this blue-chip behemoth with a stock-market value of $86 billion. The $28 billion acquisition of Alltel makes Verizon Wireless -- a joint venture with the UK's Vodafone -- the nation's largest wireless carrier, with million customers.
Gwendolyn et al (2010) states that an established firm can enter a new product market through acquisition or internal development. The study states that the choice of market entry mode depends on relatedness between the new product and the firm's existing products have repeatedly failed to gain empirical support. The study explore the ways to resolve ambiguity in prior work by developing dynamic measures of relatedness, and by making a distinction between entries inside vs. outside a firm's primary business domain. Using a fine-grained dataset on the telecommunications sector, the study find that inside a firm's primary business domain, acquisitions are used to fill persistent gaps near the firm's existing products, whereas outside that domain, acquisitions are used to extend the enterprise in new directions.NEED, OBJECTIVE, SCOPE & METHODOLOGY
NEED FOR THE STUDY
India has become a hotbed of telecom mergers and acquisitions in the last decade. Till now, no comprehensive study has been conducted on Mergers and Acquisitions in Indian Telecom Sector. The purpose of the study is to comprehensively explore the mergers and acquisitions in Indian telecom sector and analyse the conditions under which such M&AsOBJECTIVES OF STUDY
- To study the Mergers and Acquisitions in Indian telecommunication industry
- To identify the reasons of success and failures of mergers in Indian Telecom Industry
- To study the impact of M &A in Indian Telecom Industry on the wealth of shareholders.
- To suggest the directions for strategy formulation in the area of Mergers and Acquisitions in Indian Telecom Industry.
One of the objectives of the study is to analyse whether Mergers and Acquisitions activities in Indian Telecom Sector are leading to abnormal gains or not. This leads to the hypothesis:Null Hypothesis
Markets are Efficient and thus there is no positive effect on the share price of the companies due to Mergers and Acquisitions.Research Design
The research design used for this project is exploratory as well as causal research.Sampling technique:
Convenience sampling technique is chosen for this research work.Sample size
The sample would include all the mergers and acquisitions in Indian Telecom Sector, which have taken place from 1995 to 2009.
Data collection: The secondary data will be collected from various websites such as NSE, BSE, SEBI, books, journals, newspapers & magazines etc.
Tools for analysis: To fulfill the objectives of the study, the proposed tools are case Study, Event study, etc. Industry Analysis would also be conducted. Collected information will be quantified and tested to the extent possible.The Event-Study Approach
Capital markets views corporate events such as stock splits, earnings announcements and merger announcements as signals describing management's future expectations. This study includes all the Mergers & Acquisitions that has taken in Indian Telecom Sector till year 2010. Daily stock returns are used for the analysis. The Standard Risk Adjusted Event Study methodology has been used. The information has been retrieved from Finance.Yahoo.com, nseindia.com etc., such as the historical data for the company and the market (SENSEX). The announcement date of the merger has been used as Day zero.
- All of the information about the stock price and market price within the duration of -240 days to +40 days is attained. The time period from Day -40 to Day 40 is referred to as the event period.
- A regression analysis was performed comparing the actual daily return of each company to the Market daily return. The return on the firm is the dependent variable and the Sensex return is the independent variable. The regression covered the pre-event period (Day -240 to Day -40) to find the intercept alpha and the standardized coefficient beta.
- The Risk-Adjusted method was used to get the normal expected returns. The expected returns for each stock, for each day during the event period (Day -40 to day +40) was calculated using the following formula: E(R) = alpha + Beta (Rm), Rm is the return on the market.
- The Excess Return (ER) was calculated using: ER = the Actual Return (R) - Expected Return E(R)
- Average Excess Returns (AER) were calculated from days -40 to +40 by simply averaging all of the excess returns:
- AER= sum of the excess returns for day/number of firms (13)
- Graphs of the AER and the CAER from days -40 to +40 were then created.
Cumulative AER, or CAER, was found by adding the AERs from each day from -40 to +40.
In order to study the M & A deals in Indian Telecom Sector, Case Study Methodology has been used. Case Study method has been used to deeply analyse the deals and on the basis of those cases, several small cases has been developed which gives the overview of deals along with its reasons and benefits.INDUSTRY ANALYSIS
In order to do analysis of Indian Telecom Sector, Porter's Five Forces Model has been used which deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry's likely profitability is conducted in Porter's five forces modelScope of Study
This Study would explore the Mergers and Acquisitions in Indian Telecom Sector