Deutsche Telekom acquisition of VoiceStream Wireless Fall Joseph Alioto Steve Rowley Alan Ting Luis Felipe Troncoso Shing Wong Jiabin Wang

Transcription

1 Deutsche Telekom acquisition of VoiceStream Wireless Fall 2000 Joseph Alioto Steve Rowley Alan Ting Luis Felipe Troncoso Shing Wong Jiabin Wang

2 Identification of the Problem Deutsche Telekom (DT) announced it will acquire VoiceStream (VS) wireless, an American provider of digital wireless services. Agreement: Conflict VoiceStream shareholders will receive 3.2 shares of DT plus $30 per each share of VS. DT assumes $5.0 billions in net debt. New management measures and changes in VS. Federal Communication Commission (FCC), the American regulator body questioned the deal and would prohibit the merge. Company profiles Deutsche Telekom VoiceStream Market Capitalization $96.9b $24.7b Annual Sales $35.7b $475.5m Total Assets $95.3b $2.2b # of subscriber for mobile services 22.6 m 2.6m

3 Industry Overview Competing Technologies Focus: CDMA vs. GSM CDMA (Code Division Multiple Access): Uses the 800-megahertz frequency; Divides voice and data into codes, enabling caller to speak using several cells simultaneously; Results in efficient bandwidth usage allowing for more traffic volume; Worldwide, digital CDMA wireless services reaches 66 million customers as of June 2000 GSM (Global System for Mobile communications): Divides voice and data into time slots using a combination of Time and Frequency Division Multiple Access (TDMA/FDMA) techniques; The mobile unit does not allow simultaneous receipt and transmission Results in a dedicated but less efficient bandwidth compared to CDMA. Worldwide, digital GSM wireless services has 300 million customers across five continents of the world. The GSM system accounts for approximately 55 percent of the world's wireless market, and 65 percent of the total digital wireless market as of June Choices of Europe and USA Europe: The European community wanted to design a unified standard with the goal of achieving equipment uniformity, economies of scale, and savings. In 1982, the Conference of European Posts and Telegraphs (CEPT) formed a study group called Groupe Special Mobile (GSM) to develop a pan-european public land mobile system. In 1989, GSM responsibility was transferred to the European Transmission Standards Institute (ETSI). In mid-1991, commercial service was initiated. GSM continues to be guided by the directives of the European Union US: The US government has always maintained the decision to let free markets determine the best technology for digital wireless communications. As a result, Americans currently can choose from TDMA (e.g. AT&T), CDMA (e.g. SprintPCS), GSM (e.g. VoiceStream), and iden(e.g. Nextel). However, result is incompatible standards with duplicative capital investments and spotty coverage across the country.

4 US WIRELESS MARKET AND PLAYERS Market Share of US Coverage by Technology: TDMA: 85% - AT&T, Price, Centennial, Rural, Western, Rogers, US Cellular GSM: 58% - VoiceStream, Powertel, Microcel, SBC CDMA: 75% - SprintPCS, Verizon, US West, US Cellular, BCE, Clearnet iden: 66% - Nextel, Clearnet EUROPEAN/GLOBAL MARKET AND PLAYERS Market Dynamics Market Share by Geography and Technology: GSM: Worldwide million subs, Europe million subs, North America 7.1 million subs CDMA: Worldwide 65.9 million subs, Europe 680 thousand subs, North America 23.1 million subs Worldwide subscribers: 2000E: 410 million subs, 2005E: 730 million subs WHAT ARE THE STAKES FOR VOICESTREAM AND DEUTCHE TELEKOM AG? Projected Total US Subscribers and Revenues YE 2000: 107 million 38.8% penetration, YE 2005: 215 million 75.1% Value of Voice and Data Europe: YE 2000: Voice - $75,667m, Data - $3,755m; YE 2005: Voice - $70,753m, Data - $51,247m US: YE 2000: Data - $960m; YE 2005: Data - $14,846m; YE 2010: Data - $59,949m Forecasted Value of Goods and Services Purchased for Cellular Phones Europe: $145B US: $125B

5 Legal Issues Controlling Law Communications Act of 1934 (47 USC 310 (b)(4)) No Broadcast license can be granted to any corporation that: 1. Is controlled by another corporation of which more than 25% is owned by a foreign government, 2. IF the FCC finds that the public interest will be served by the refusal or revocation of such license. Conflicting Law? World Trade Organization Treaty 1998 (Basic Telecommunications Agreement) US and 68 WTO Member Countries Has opened global markets to U.S. and Foreigners 1997: 17% of top 20 global markets open to US firms 1998: Over 95% US Rationale: BTA would lead to privatization of government-owned telecommunications companies. UNFORTUNATELY: Japanese government: 53% of NTT German government 58% of Deutsche Telekom French government 54% of France Telecom

6 Legal Review Process?? Department of Justice Section 2, Sherman Act Legal Issues Federal Communications Commission will allow merger IF it serves the public interest: Will the transaction pose a very high risk to competition in the US? Are there other public interest issues, such as problems with National Security or Law Enforcement? Committee on Foreign Investment in the US (1980) Made up of almost all Executive Branch Agencies Can recommend to President to prohibit merger on grounds of National Security (seeks advise from DOJ, FBI, & DOD) Presidential Approval

7 Legal Issues Merger Opposition: Senator Holling Bill (S. 2793) Would prevent foreign-government-owned companies from acquiring US targets; removing FCC discretion. Strong Bipartisan Support: 33 Other Senators, Maj. Leader Lott, Min. Leader Daschle Arguments B I L L 1. US Law trumps WTO Treaty 2. Access to government capital provides for unfair competitive advantage F A I L E D 3. Receive certain government protections other competitors don t have 4. Dangerous precedent will follow

8 Business Strategy Arguments for VoiceStream Merger Builds GSM installed base in US Offer greater value to customers Global roaming Unified billing Single platform for value-added services Lower acquisition costs Bigger discounts on capital equipment Acquires spectrum licenses Leverages economies of scale when margin pressure looms Puts price pressure on rivals Obstacles Institutional opposition Government national security concerns Larger picture: the EU "Shot across the bow" Competitive risks Worldcom also needs a wireless capability, giving them an incentive to block the acquisition in hopes of buying VoiceStream themselves Relaxation of US legal obstacles would likely lead to calls for less strict oversight of foreign entry into EU markets

9 Business Strategy Alternatives Purchase Sprint (already have 10% stake) Benefits Big wireless customer base Broadband capability Disadvantages Regulatory obstacles persist, perhaps larger given US perception of EU regulator bias in the WorldCom debacle Incompatible wireless platforms (Sprint PCS uses CDMA) Build own wireless capability Benefits Avoids legal issues Technology 100% compatible Disadvantages Don't have spectrum licenses Prohibitively expensive and time-consuming Regulators can still make trouble

10 Recommendations No choice but to go ahead with the merger Other U.S acquisition opportunities are much less attractive Building their own network would be incredibly costly, even if the firm could get nationwide operating licenses, which still suffer some of the regulatory challenges as an acquisition All things being equal, take steps to address U.S. concerns by reducing government's stake in DT Regulatory block is the obvious risk Reduces pressure to level the playing field in EU markets