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The telecommunications sector

The telecommunications sector is experiencing a tremendous growth as a result of increased globalisation and demand for telecommunication services. Mergers and acquisitions have become a necessity and they are proving vital devices for global expansion in the telecommunications industry (EconomyWatch, 2009: 1). Mergers and acquisitions have been on the rise within the telecommunications industry as firms try to gain competitive advantage. Numerous international as well as domestic mergers have therefore been witnessed during the recent years (Warf, 2003: 321; Alfas, 2006: 36).

As is the trend with mergers and acquisitions, the outcomes of synergy effects are reduced operational costs, bigger market share and efficient market control (Trillas, 2002: 269-270: Park and Lee, 2000: 52). Perella and Bruner (2004: 327-330) make use of a framework for synergy analysis to show synergy effects of mergers. In this framework, seven types of synergies are suggested. These include financial synergies; revenue enhancement synergies; cost reduction synergies; asset reduction synergies; tax reduction synergies; growth synergies and real option synergies.

Numerous telecommunication companies all over the world are now seeking to merge or acquire other companies so as to gain from the above synergies. This exorbitant growth in the number of mergers and acquisitions however could not have been possible without certain growth catalysts that are solely responsible for these developments (DePamphilis, 2003: 113-154). Globalization and free trade has resulted in deregulation which has spurred interaction between companies in different countries to interact and form alliances more easily (Shaw, 2001: 543-544; Victoria, 2002: 2).

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The US Telecommunications Act of 1996 saw a complete turn of events in the telecommunications industry (Kang, 2001). Similarly, the European Union integration in 1998 and the WTO agreement signed in 1997 sparked the same wave as trade became more liberalized (Coakley and Thomas, 2004). Competition in the telecommunications industry was on the rise as investors rushed to take advantage of the reduction in entry barriers. This has seen the emergence of many firms in the telecommunications industry causing stiff competition (Pitofsky, 1999: 3).

Companies are now turning to M&A to help shield this competition as they gain from the synergies of large-scale operations. The increased demand in more superior and sophisticated technologies in telecommunications has put firms under pressure to invest highly in research and development (Jovanovic and Rousseau, 2001). To a certain extent, this is quite difficult for smaller firms to handle single handed such that they prefer to merge so as to pool resources. Synergy effects Market share and market control

M&A serve to reduce the effects of competition among firms such that client’s attention is now focused on the products of both companies as a single entity (Hopkins, 1999: 209). This way, a larger market share is acquired and the firms do not have to compete for customers (Fisher and Lande, 1983: 1589). Depending on the market share of each company, it is possible for the coalition to render competitors powerless as the new organisation takes control of the market (Bower, 2001: 98; Andrade and Stafford 2004: 98).

This is however well traced by governments to prevent companies from breaking anti-trust laws (Geradin, 2003: 18-24). Consolidation as in M&A can help firms to be in a better position to compete in the market. A bigger company is more likely to have a better market control than a smaller company (Fuller, 2002: 1969). As an example, WorldCom and MCI merged in 1996 so as to be able to effectively compete with AT&T following the Telecommunication Act (Keefe, 1998: 2). Together they were able to command a larger market share and consequently be at a better position to compete with AT&T.

Telefonica, a Spanish based telecommunications company which has acquired O2 is bound to benefit greatly from international market penetration. The company can now tap market in UK, Ireland and Latin America, where O2 has been operating. According to Mobile gazette (2009: 1), this move is expected to put Telefonica/O2 in a position near Vodafone, the largest mobile company in the world. While Vodafone gets €55 billion in revenues, Telefonica/O2 will get €40 billion which is quite comparable (Alderman, 2009: 2).

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