Blog

Can a Little Fish Eat a Big Fish: The Acquisition Strategy of Vodafone

vodafone

A corporate strategy article by Thunderbird students Edyette Key, Kara Nguyen, Cole Augustine, Ilan Fehler, Giff Bloom and F. Trevor Rogers

Economies and industries go through periods of consolidation; from the bust of the .coms, recent restructuring of the banks and even the funneling of the beer industry. In some cases these consolidations aren’t because the biggest player in the market is gobbling up all the little ones, but rather the lean and agile end up with more capital and are able to buy into a controlling position of a much bigger and strapped for cash giant. One such example is the acquisition of miller brewing company by the South African Brewery that has propelled SAB to be one of the top three breweries in the world. The communications industry is no different and many companies seek to enter new markets through acquisition. This article dissects the motivations of Vodafone’s further acquisition of Verizon and its potential to weaken Vodafone’s current global growth momentum.

T-Bird Team 7

Can a Little Fish Eat a Big Fish:

The Acquisition Strategy of Vodafone

By Edyette Key, Kara Nguyen, Cole Augustine, Ilan Fehler, Giff Bloom, F. Trevor Rogers

Economies and industries go through periods of consolidation; from the bust of the .coms, recent restructuring of the banks and even the funneling of the beer industry. In some cases these consolidations aren’t because the biggest player in the market is gobbling up all the little ones, but rather the lean and agile end up with more capital and are able to buy into a controlling position of a much bigger and strapped for cash giant.  One such example is the acquisition of miller brewing company by the South African Brewery that has propelled SAB to be one of the top three breweries in the world1. The communications industry is no different and many companies seek to enter new markets through acquisition. This article dissects the motivations of Vodafone’s further acquisition of Verizon and its potential to weaken Vodafone’s current global growth momentum.

From its initial formation in 1985, Vodafone quickly captured market share and became a well-known brand in the United Kingdom. In 1993, Vodafone executed on its global implementation plans by creating Vodafone Group International. Using a global strategy of combinations of partnerships with local firms and licensing agreements, Vodafone has grown to become the second largest wireless company on the planet2. Vodafone has been very aggressive in its collaboration strategy, making over 40 “Partner Network Agreements” to gain access in as many markets as possible3. One of those partnerships included Verizon Wireless in the United States.

Verizon wireless, hereafter referred to as Verizon, is one of the top cellular network providers in the US and was a joint venture between Vodafone and Bell Atlantic, which is now known as Verizon Communications. At the time of the collaboration, Verizon Communications was the largest US wireless company, with access to 90 percent of the US population4. Vodafone has since held a 45 percent stake in Verizon and settled for dividends from Verizon in lieu of a closer relationship with the company, but believes that increasing their collaboration will strengthen their competitive advantage.

While it has definitely focused on developed markets, Vodafone has not been shy about entering into collaborations in emerging markets, such as India and South Africa. Vodacom, the African subsidiary of Vodafone, has captured 60% of revenue market share, which is the largest market share across all Vodafone companies in terms of percentage of revenue market share. In India, Vodafone has over 150 million subscribers and in Germany Vodafone has the greatest revenue. Vodafone’s global strategy of acquisitions in various countries has proved to be a success.

Problems with the acquisition strategy?

Vodafone’s plan for future growth, according to its most recent 20-F, is to increase its data services to meet customer demands, increase its presence in emerging markets, focus on enterprise solutions, and provide new services6. With a presence in 26 countries, Vodafone has also pushed a “One Vodafone” initiative in an effort to integrate its varied collaborators and achieve greater synergy5. Vodafone’s acquisition and collaboration strategy has curbed and although they have been quite successful entering the emerging markets by acquiring companies, does it still make sense for them to continue this practice in the US market?

Looking at another example in the industry, British Telecom has also struggled to enter the US market by acquisition. In the late 1990's British Telecom (BT) faced a similar situation to Vodafone and Verizon. In 1996, BT was a 20% owner of MCI and partner in a joint venture called Concert. Amidst significant speculation that BT would acquire MCI to form the world's largest telecom company, BT found itself surprised by the unexpected offers of WorldCom and GTE, two US companies that had recently completed successful acquisitions. What happened? BT failed to assess the competition in the US market and, after formalizing the Concert JV, the company began to prepare for an acquisition, basing its entire US strategy on the successful acquisition of MCI. WorldCom saw this coming and made a strategic decision to outbid BT. According to Johnson, in the article MCI and WorldCom -- How BT Fell Short at C, BT made three fundamental mistakes: 1) BT failed to anticipate the actions of its competitors, 2) BT failed to keep its strategic information from its competition, allowing WorldCom to jump in with an unexpected bid after BT stockholders negative reception to the lower than expected financial performance of MCI, and 3) BT failed to evaluate the recent acquisitions of US competitors WorldCom and GTE

7.

In addition to their acquisition strategies, both WorldCom and GTE were focusing heavily on their Internet services in the US, something that it appears BT may have been unprepared to address in the US. For Vodafone, this case should provide a warning, especially given the company's focus on wireless communications, as opposed to the bundled approach that is currently being taken by many US telecom providers. Just like BT, it appears that Vodafone may be unprepared for the structural differences in its core business model, compared to those of Verizon.

Comparing the strategies of both Vodafone and Verizon, it is apparent that Verizon is focusing on three core needs. The first area of focus is wireless services, devices and accessories for US consumers. The second is residential services including landlines, TV, and Internet for the home. The last strategy is business needs including a unique set of tools tailored for small business to enterprise customers. In comparison, Vodafone strategy seems to be primarily focused on growing their global mobile network and speeding up their cell tower data networks.

While both companies seem to be focused on growth, Vodafone seems to be targeting the emerging markets and creating a better customer experience for their existing customers. On the other hand, Verizon seems to be focused on growing share within the existing developed markets. This is apparent in their recent roll out of the FIOS network and Verizon’s attempt to capture a large share of the broadband business that many of their competitors have capitalized on.

Why are the conditions not ripe for another acquisition?

Looking at this from a strategy perspective, in order to measure if an acquisition will be successful we have to ask ourselves if both companies share a similar strategy or do they have complementing technologies. It is apparent in this example that while their technologies might complement each other, Vodafone and Verizon are attempting to achieve growth in opposite directions. If Vodafone increased its share of Verizon, this could potentially hurt Verizon’s long-term potential as its vision for future expansions vastly contrasts that of Vodafone.

At the time of the initial collaboration in 2003, significant potential for growth existed in the US mobile market, and Vodafone’s entry was consistent with its global strategy. However, demand conditions have evolved in the market, with the focus being on premium services and smart phones, and Verizon has entrenched itself as a leading provider of such capabilities. In the highly developed US market, intense competition has led to collusion among telecom companies, evidenced by successful legislative efforts to throttle data rates and create tiered access to 3G and other premium services. Verizon has emerged as one of the survivors and its strength has increased significantly since 2003.

Vodafone should not attempt to acquire Verizon

Vodafone's global strategy of expanding through merger and acquisition has hit a wall in the U.S. with Verizon, and although it is contrary to their wishes, our strategy readings have shown that it is for the best.  Vodafone's intentions towards Verizon are misguided and would result in reducing the competitive advantage of each company if they were realized.  Acquiring Verizon could have a drastic impact on the company’s existing culture and potentially impact it’s earnings. The acquisition itself, if successful from a legal perspective, can also force Verizon’s management to lose their strategic leadership role which is sometimes what happens to subsidiaries of a global company.

Verizon, as mentioned earlier, is one of the most successful service providers in the US. It has done this because it is acting as a strategic leader in its industry. As a major shareholder in Verizon, Vodafone will continue to achieve strong financial results through the company. It is not necessary, nor recommended for Vodafone to acquire Verizon.