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Key Topics
- Requirement
- Solution
- Introduction
- History of Vodafone
- Racal Telecom brand evaluation
- Vodafone group into Vodafone Airtouch plc.
- Factors affecting financial strategy
- Financial strategy analysis
- Seven Rappaport value drivers against performance
- Evaluation in context of corporate lifecycle
- Dividend policy & its impact
- Conclusion
- References
Requirement
Write a report to an investor considering investing in the company Vodafone.
Solution
Introduction
In this present paper, we will make a report on the evaluation of financial strategy of Vodafone Company. The paper discusses the history of a company over ten years and the key factors which affect the financial strategy of the company. The analysis of the financial strategy is analyzed from different aspects. The company’s performance is compared against the seven Rappaport value drivers. The critical evaluation is done in a context of corporate lifecycle, and the dividend policy of the company is evaluated with its impact on shareholders value.
The Vodafone is the largest company in the sector of telecom. It is based in the United Kingdom. The market value of a company is 75 billion until June 2008. The equity interest is widely available in 25 countries, and the partner network is available in approximately 42 countries. The name of the company is coming from the voice data phone, the aim of choosing the word is to reflect the provision of voice and data service which is provided by the mobile phones. The company agrees to acquire the interest of Hutchison Essar Limited 67% for worth US$11.1 billion. The company retains 4.4% stake in Airtel, and simultaneously the company agrees to sell back 5.6% Airtel back to the Mittal’s. The company is the world’s leading international mobile communication company in the world. The operations of the company are network partners of the company is approximately 30 available in 25 countries across five continents and with the consumers of 200 million across the world. The company tied up with the I-Phone. The company's profit has increased by 50% after the expansion of consumer base with an average of 1.5 million net additions monthly after an acquisition. The company launches in India after the tied up with iPhone 3G version then the rate of the phones goes down by 50%.
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The financial strategy of the company is to provide timely, efficiency in cost and the security of financial resources to the management and it also includes the management of capital structure with the target of A-grade credit rating. The company’s policy of borrowing includes issues of long term and short term capital market and to facilities of borrowing to meet the funding requirements of the company. The management of risk is the main element of financial policies. The managing of risk is derived from derivative instruments which help to manage the risk and interest rate and to mitigate the credit risk through collateral support agreements. The long term of debt facilities is financed through the commercial paper program.
History of Vodafone
The establishment of Vodafone was started in 1982 with the Rascal strategic radio ltd which is a Rascal electronics (Klauer, 2015). It is the largest maker of military radio technology in the United Kingdom. It is formulated in a joint venture with Millicom known as "Racal." And it is currently known as Vodafone.
Racal Telecom brand evaluation
The chairman of Racal Electronics named, Sir Ernest Harrison OBE is agreed on the deal with the General Electric Company’s owner Lord Weinstock, which includes the access of General Electric Company's tactical battlefield of radio technology. The head of Racal's was has explained the concept of commercial mobile radio through Generic When after that he w=visited to the mobile radio factory General Electric Companies to understand the use of military radio technology. The head of growing Swedish approached Rascals for jointly bidding in the UK’s second cellular radio license. Both of them has come up with the deal in which 60% of Racal’s giving for new company namely, Racal-Millicom ltd and the 40% is named Millicom. The policies were revised again in the December 1982. The Racal-Millicom was awarded as the United Kingdom's second mobile phone network license. In the last, the Racal has got 80% of the ownership, and Millicom holds 15% with the royalties and trust holdings of 5%. The Racal-Millicom ltd provides the best prospects around the nation by cellular radio.
The new name of Vodafone was given under Racal Vodafone ltd in the year 1985. The Racal Vodafone ltd the first office was based in the Courtyard in Newbury, Berkshire, and The Racal Strategic Radio was renamed Racal Telecommunications group limited. The company issued remaining shares of Minority shareholders with a worth of 110 million pounds. And after that, the Vodafone has become the fully owned brand of Racal. The Racal Telecom, which was majorly held by Racal Electronics, is published in London stock exchange in the year 1988 with 20% stock floated. The value of Racal stake in Racal Telecom was more values than the whole Racal Electronics due to the success floatation.
Vodafone group into Vodafone Airtouch plc.
The company was demerged from the Racal Electronics as a Vodafone Group, and the CEO was Gerry Whent. The company has acquired 75% of Falkland with the worth of 30.6 million pounds in the year 1996. The company has purchased Peoples Phone for worth 77 million pounds, and it was the defensive move, and the 181 chain of store consumers are happy with the Vodafone networks. The Aztec communication has owned 21 stores which are acquired by the company in the year 1996. The CEO of the company was retired in the year 1197, and the new CEO was Christopher Gent. The company has started speechmark logo, and it is comprised of the quotation mark in a circle with the O in the logo which represents the opening and closing of quotation marks and it suggests a conversation.
The company completes the purchases of Airtouch communication Inc., and the name replaces with Vodafone Airtouch plc. After the merger company starts trading on 30 June 1999. The company sold its 17.2% shares in E-plus Mobil funk so that the company can get the Antitrust approval for the merger (Nalwaya, 2014). After the acquisition, the company receives 35% of Mannesmann shares which is the owner of largest German mobile network. The company has made an unsolicited bid for Mannesmann, but that was rejected in the year 1999. With the interest in the Mannesmann the company purchases an Orange which is the largest mobile operator in the United Kingdom. The Mannesmann's move was in the UK has broken the gentleman agreement for not competing in each other's country. The hostile takeover has provoked the strong protest in the Germany and which reflects that the Mannesmann resists efforts of Vodafone. The offers have increased by Mannesmann by 112 million pounds and after that, it has become the largest corporate merger in the history.
The company reverted to its former name Vodafone group plc. In the year 2000. The Vodafone has acquired Eircell, which is the largest wireless communication company in Ireland. The company was rebranded as Vodafone Ireland. The company then acquire the Japan’s third largest mobile operator who is the first company to introduce camera phones in the Japan, J-Phone. The company enters into the sponsorship with McLaren formula one team which traded with the name “Vodafone McLaren Mercedes” till the end of sponsorship in the year 2013.
The Vodafone Essar shares were brought by the Vodafone Group plc. In the year 2011 with worth $5 billion. The company acquires Bluefish Communications ltd which is reading based ICCT Consultancy Company. The new unified communication was formed with the operations formed by acquisition. It focuses on the implementation of strategies and the solutions in cloud computing and it also strong the professional servings. The new announcement by the Vodafone is to acquire cable & wireless worldwide for worth 1.04 billion pounds. The acquisition gives the access of cable & worldwide wireless networks for the businesses, and it also helps to enable the unified communication solutions to the big organizations of United Kingdom. The also enables the expansion of networks in the emerging markets. The voting for Vodafone offers was done among the shareholders of cable & wireless worldwide than the votes were in the favor of Vodafone offerings. The next announcement of the company was to buy a German cable company in the year 2013. The company named was Kabel Deutschland and the value of takeover was 7.7 billion Euro, and it was recommended over the bid of rivalry Liberty Global. The company y makes the announcement regarding the selling of its 45%stake in Verizon Communication to vertical communications, and the amount of selling is worth $130 billion. It is the biggest deal among the history of corporates. The company starts its rollout of 4G to provincial New Zealand in the year 2013. It is launched around Coromandel. The company acquired the largest cable operator in Spain in the year 2014 with the amount of 7 billion Euro.
Factors affecting financial strategy
Financial strategy is affected by the number of factors which includes: external and internal factors. Following are the external factors which affect the financial strategy of the company.
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Political factors: The political factors which affect the financial strategy of the business include EU roaming regulations which are targeting to reduce the charges of mobile phone usage by 70% and the increment in the consumer rights in the Europe. The decisions are taken by the European Union Regulatory Framework for the Telecommunication Sector (Hansen, 2015). Any amendments to the legislation are considered as the political factor which affects the financial strategy.
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Economic factors: The Economic factors which affect the company's financial strategy include the growth of Gross domestic product and the rate of inflation. It also includes the financial crisis in the economy.
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Social factors: The social factors which affect the financial strategy include: changing the working patterns such as increasing in the flexible hour’s pattern of the employees. The factors also include issues such as going green and which affects the financial strategy directly or indirectly.
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Technological factor: The technological factors which affect the financial strategy include innovation in the technology which is the important factor that affects the financial strategy abruptly.
Debt funding The debentures are a loan which is provided to the company. The debentures have a fixed interest and a fixed repayment period, so it is different from other loans. It is secured on the goodwill of the company. There are two types of debenture: Registered and convertible. The convertible debentures become the stock at the end of the agreed period. The long-term projects are taken which is mostly wishes by the companies. The shares of the company are financed through both types of shares namely preferential as well as ordinary shares. The shareholders of both types of shares got the profit, but the preference is given to the preferential shareholders
Financial strategy analysis
The financial strategy analysis is done through the SWOT analysis. The SWOT analysis helps to analyze the financial strategy in-depth. The SWOT analysis make a clear and unbiased view of the company's strength, weakness, opportunities, and threats.
1. Strengths
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It is the world’s largest mobile service provider in the telecom industry. The consumer base is approximately 435 million (Daas, 2015). It is the market leader among the three service provider in the industry.
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The geographical diversification of the company is also acting as a strength. It helps to delineate the risk from one region to another.
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The strong brand recognition is an aggressive strategy which makes a decent consumer service with ecofriendly environmental policies.
2. Weaknesses
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The weakness of the company includes the sluggish economic condition in the Europe region due to which operator suffered weakly.
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The Company is using the same strategy among then developed and the emerging markets which have cut down the competition everywhere.
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Vodafone has a less presence in the USA due to which the profit earning from the US market is absent.
3. Opportunity
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The opportunity of retaining the profit in the business creates an opportunity to earn more profit margin.
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The emerging market in the India creates new opportunities for Vodafone Such as Africa, which is an untouched market till now, and it can become a good opportunity for the company.
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The new opportunity for the company includes fixed telecom and cable services which help in expanding the business in the market.
4. Threats
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The threat of the company includes market saturation in Europe because new market penetration is increasing in the telecommunication market and the profit is decreasing yearly which the threat become for the company.
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The uncertainties in the regulatory climate is another threat for the company which becomes the major issue in the Europe for falling in the mobile rates of termination.
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Increasing in the menace of over the top services is another threat for the company.
Seven Rappaport value drivers against performance
The breakdown of shareholders value is known as the drivers. Following are the seven drivers of shareholders value.
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Revenue: The revenue of the Vodafone gives 380,000 shareholders in the public. The performance of the company is at par till now.
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Operating margin: The operating margin of the company is according to the operating of the company, and it is in proportion to the shareholders value. The performance of the company's operating margin is high, but it is adequate in proportion to its share value,
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Cash tax rate: The tax rate of the company is contributed to the economy in the proportion, and the cash of tax rate is taken by considering the shareholders' value. The rate is fixed by the given, and it is appropriate till now.
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Incremental capital expenditure: The capital expenditure of the company is also considering the shareholders’ value and the performance of the increment in capital expenditure is appropriate.
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Investment in working capital: The working capital includes current assets over current liabilities, and the performance of working capital in the company is good.
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Cost of capital: The cost of capital include an opportunity of making an investment, and the Vodafone is investing correctly its performance is at par.
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Competitive advantage period: The competitive advantage of the company includes its presence in the countries and its availability of resources.
Evaluation in context of corporate lifecycle
The corporate lifecycle includes the stages which are started from the starting of a business i.e. courtship, and it ends with the death. The Vodafone lifecycle is evaluated through Vodafone telecommunication lifecycle assessments which help the company to manage internal processes, control costs through elimination of inefficiencies in the business, and it also helps to improve the internal operations (Andrae, 2012).
• Courtship
In this stage the company is focusing on the ideas and the possibilities in the future related to the product and services and Vodafone has succeeded in this stage through innovations and idea generation.
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Infancy: In this stage the focus is on the outcomes of the ideas it is related to the scrutiny of the process and the company has well scrutinized its ideas.
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Go-Go: It is the stage in which the company grows, and the objective is to increase the sales at its maximum, and the company is still running to increase its sales at the maximum
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Prime: The clarity of the vision is very necessary for the growth of the company and Vodafone is having the clear objective which helps to achieve their goals.
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Stability: The stability is required for making the brand image, and it includes less invention of ideas and technology. The Vodafone stability is impressive because they are taking another step after a certain period.
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Aristocracy: In this stage, a company acquires rather than making new companies, and Vodafone is subsequently making acquisitions around the world which help in the development of the company.
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Recrimination: In this stage, the company checks the flaws and faults of the company to fix the problems. The Vodafone is doing well in this stage by reviewing consumer feedback and overcome the problems.
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Bureaucracy: The regulations related to the environment is necessary to analyze so that the company becomes bureaucratic, and Vodafone is taking caring of this stage as well.
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Death: In this stage, the outflow of the company is converted into inflow through reinvestment and the Vodafone reinvest some proportion of their profit.
Dividend policy & its impact
The company is paying dividends to all the holders of ADRs, and the dividend is paid in cash in US dollars. The company pays interim dividends as well as a final dividend to its shareholders yearly. The dividend in the past ten years has increased by 406 percent, which is equal to 36.9 percent increases in the dividend annually (Medeiros, 2015).
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The dividend policy of paying the dividend presently is right because according to the Modigliani Millar theory the dividend paid by the company is irrelevant to the value of a firm.
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The dividend paid by the company also impacts the motivation level of the shareholders.
Conclusion
The financing strategies used by Vodafone in the company’s Balance sheet shows that there are some advantages from the strategies. The working capital is calculated once in two year which is also beneficial for the company because the company need not pay to make repayments and there is no cost attached to it because it is an internal source and it also stops the expenditure incurred externally. It also limits the debt and capital of the company which helps to preserve capital gearing ratio. The negative aspects involve an opportunity cost. The other strategy used for selling assets involves the advantages of no payment of interest, and the large amount can be raised from the sale of fixed assets. The involvement of risk includes that the business seizes to generate money for the company, and if the company wants to start the new business then huge initial capital is required. Thus the financial strategy used by the Vodafone is doing great, and it will sustain for a long time and the income of the company grows subsequently with the passage of time.
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Andrae, A. S., Dong, H., Shudong, L., Belfqih, M., & Gerber, E. (2012, September). Added value of life cycle assessment to a business case analysis of a photovoltaic/wind radio base site solution in South Africa. InIntelec 2012 (pp. 1-7). IEEE.
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Daas, B. M., & Sinha, S. (2015). KEYWORDS: Marketing Strategy, Market Share, Strategic Mix, Technology. STRATEGY VS. TECHNOLOGY-THE LINE OF ASSAULT DEFINES THE FATE, (55).
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Hansen, K. (2015). Strategic and Competitive Analysis of Vodafone Faroe Islands: which strategy would be most optimal for Vodafone Faroe Island, to achieve highest competitiveness, growth, and profitability?.
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Klauer, T. (2015). Valuation of Vodafone Group.
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Medeiros, M. C. F. D. (2015). NOS SGPS (Doctoral dissertation).
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Nalwaya, N., & Vyas, R. (2014). Merger and Acquisition in the Telecom Industry: An Analysis of Financial Performance of Vodafone Plc and Hutchison Essar. Journal of Marketing & Communication, 9(3), 67-73.
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Vodafone Dividend History - a Dividend Champion!. (2016). Early-retirement-investor.com.
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