An Investment Analysis of Vodafone Group PLC Contents

An Investment Analysis of Vodafone Group PLC19

AnInvestment Analysis of Vodafone Group PLC

Contents

CHAPTER FOUR: LITERATURE REVIEW ON MERGERS AND ACQUISITIONS 2

Introduction 2

Empirical Studies of Mergers and Acquisitions 2

of Literature Review 8

CHAPTER FIVE: COMPANY ANALYSIS 9

Introduction 9

Cash Flow Analysis 9

Ratio Analysis 11

SWOT Analysis 13

Summary 14

CHAPTER SIX: FORECAST AND VALUATION 15

Introduction 15

Assumptions 15

Discounted Abnormal Earning Model 15

Discounted Cash Flow Model 16

The Discounted Dividend Model 17

Sensitivity Analysis 18

Conclusion 20

References 21

Appendix 1 23

Appendix 2: VOD Net Operating Cash Flows 26

Appendix 3: VOD Net investing Cash Flows 27

Appendix 4: VOD Net Financing Cash Flows 28

Appendix 5: Additional VOD Operational Information 29

Appendix 6: Obtaining VOD Inventory Turnover 30

Appendix 7: Assumptions 31

CHAPTERFOUR: LITERATURE REVIEW ON MERGERS AND ACQUISITIONSIntroduction

Mergersand Acquisition (M&ampA) have come to play a vital role as bothaspects of strategic management and corporate finance. This strategyhas been employed by companies in varying extents and involvesbuying, selling and dividing of different entities with an overridingaim of growing an enterprise rapidly in its line of operation withoutnecessarily creating a subsidiary (Weber&amp Yedidia, 2012, p. 296).Forthe past many years, Vodafone has employed this strategy to advanceits growth and expansion in the telecommunication industry. Thischapter provides a review on mergers and acquisition with a goal ofunderstanding the strategy as employed by Vodafone.

EmpiricalStudies of Mergers and Acquisitions

Mostempirical studies in this discipline have focused on the drive tomergers and acquisitions as well as the consequences of mergers andacquisitions. A typical study in this category would consider theevolution of profits of a merged firm relative to a specific industrybenchmark. Yook (2004) investigated the impacts of M&ampA on theacquiring firm’s financial performance. To achieve this, he relatedthe pre and post-acquisition economic value added (EVA) of thespecific entities to the projected industry economic value added(Industry EVA average). The study was based on 75 of the biggestmergers and acquisitions in the United States between 1989 and 1994.The transaction characteristics of the studied firms included: themethods of payment, the acquisition types and the businesssimilarity. The outcomes of the rigorous procedure revealed thatimmediately after acquisitions, the acquiring firms manifesteddeteriorating outcomes (p.83). However, the outcomes of this studyare subject to certain controls as the calculation of inter-industryEVA reveals no discernible difference between the entitiesperformance and the industry average. However, the typology generatedin performance appraisals before and after the acquisition processesprovide useful insights that could facilitate a robust analysis ofVodafone’s M&ampA.

Gurgler,Mueller, Yurtoglu and Zulehner (2003) conducted a study based oninformation from 2704 cases of merger collected a few years after thecompletion of the respective merger processes. The researcherscompared actual business profits for the first five years for theseentities to the projected profits and sales for the particularindustries. The study outcomes revealed that a decrease in salesafter a merger implied a decline in operational efficiency of theentities while increased profits implied increased market strength(p. 649).The findings herein concerned about 57.6% of all the mergedentities, a pointer to the fact that 42.4% were even made worse offby the merger. The essence of this study to the endeavor of thecurrent study is that in terms of profit, the merger picture hassignificant dark spots. In a similar study to Gurgler et al (2003),Moeller, Schliemann and Stutz (2004) investigated the relationshipbetween firm size and gains resulting from acquisitions. Using asample of 12,023 acquisitions, they demonstrated that small firmsusually benefit more from mergers and acquisitions as compared to thelarge firms (p. 224). Moreover, they demonstrated that large firmsusually experience substantial shareholder wealth losses particularlywhen they announce the acquisitions of public entities irrespectiveof the financing (p. 226. This study is significant for the fact thatit presents robust outcomes encompassing previous research findingsbut goes over and above that to investigate the effect of firm sizeon the consequences of mergers.

Thevarious developments concerning the management of mergers andacquisitions as well as the barriers to such acquisitions have alsobeen studied. Huang, Christine and Cleaner (2004) undertook a casestudy to investigate the strategic decisions made by managers priorto and after mergers and acquisition of entities. It has beenestablished that there is need for careful planning before mergersand acquisition if firms are to benefit from the process (p. 61).Thestudy established that cultural differences between entities engagingin mergers need to be harmonized because having a common ground incultural differences leads to a strong corporate foundation on whichthe firms can leverage their long term growth (p. 60). Further, itwas concluded that cultural differences are the major impediments tomergers and acquisition (p. 62). These conclusions are similar tothose of Moraine&ampSteger, (2004).

Studieson the effect of merger announcements by firms to their returns haveshown mixed results. Yue and Ng (2005) sought to establish theeffects of announcements of merger on abnormal returns by firms inCanada. In order to achieve this objective, they collectedinformation for 1361 entities that had acquired smaller entitiesbetween 1994 and 2000. It was found that abnormal results were usednot only by the acquiring entities but also by the targeted entitiesso as to advance their interests in the merger and acquisitionprocess (p. 122). The outcomes of Yue and Ng (2005) are contrary toother studies such as Andre et al (2004) which espoused negativeabnormal returns for acquiring firms and positive returns for thetargeted entities. The study also concluded that for privateentities, there were substantial abnormal returns relative to publicentities (acquirers) and that there were additional risks in theacquisition of private entities than public entities. Just like moststudies already reviewed, the results of Yue and Ng (2005) aresubject to certain limitations. The study examined the performance ofthe 1361 entities for a period of six weeks which is not adequate toassess the performance of a firm. For this reason, thegeneralizability of the outcomes is constrained as six weeks is notan adequate period to examine the performance of a company given thatthe period of study cannot enable adjustments for trend inperformance. Additionally, the period of the study might have beencharacterized by a particularly peculiar condition which might havemade the company performance to deviate from the actual trend but thestudy did not control for such a factor therefore making it difficultto generalize the outcomes. Nevertheless, Yue and Ng (2005) isphenomenal for its investigation of the effect of announcement ofabnormal returns by merging firms which is a key game theory in thisrealm (M&ampA). They also made the all-important distinction betweenprivate and public entities.

Thegeneral effects of mergers on the economies of different countrieshave also been examined especially in economies where M&ampArevolutionized enterprises. The exact mechanisms through whichmergers influence different economies especially for multinationalslike Vodafone have also been investigated. Kling (2006) conducted astudy to examine the effect of mergers on the German economy and theextent to which mergers were successful in the economy. This studywas informed by the fact that there are certain macroeconomic factorsthat can drive mergers such as economic growth and crises, inflationrates and economies of scale (p.668). The study used a sample of 35leading companies that had experienced mergers between 1870 and 1914.He used a vector regression model to establish the relationshipbetween merger waves and economic growth and prosperity. The modelresults did not identify whether mergers had been successful duringthe period covered by the study which necessitated the use of rollingmodels. The results showed that mergers positively impacted on thereturns in all industries covered except banking (p. 685).Theapplicability of these outcomes are however limited by the longperiod covered by the study. The study is also based at themacro-level making it less useful for firm level studies.

Integrationplays a key role in mergers and acquisition and the literature inthis field is replete with the various mechanisms through which itinfluences mergers and acquisition. While investigating theintegration-merger-acquisition nexus, DePamphilis(2009) noted that an entity’s approach to integration will varybased on two vital dimensions of integration: the newfoundrelationship with the acquiring firm and the organizational autonomy(p. 72).On the relationship between the entities involved, he notedthat this essentially is the working atmosphere that needs to existin order to facilitate the transfer of strategic capability i.e. the“strategic interdependence need”. As for the second dimension, itwas found that after the acquisition process, the acquired entityneeded to retain some core strategic capabilities (p. 74). Thevarious dimensions of acquisition necessitates a give absorptionthreshold to integration as far as mergers and acquisitions areconcerned (DePamphilis, 2009, p. 74). These findings are similar tothose of Homburg &amp Bucerius (2006) and Palmatier et al (2007).The significance of DePamphilis (2009) in relation to the mergers andacquisition processes of Vodafone is that it enables theinvestigation of the dimensions of integration that might haveinformed some major Vodafone acquisitions.

Whatmotivates companies like Vodafone to participate in mergers andacquisitions? Existing body of literature have attempted to provideresponses for this question from various perspectives. One of themost decorated studies in recent literature is Duksaite &ampTamosiuniene (2011) which is as extensive it is intensive. The studyinvestigated among others, three mergers considered to be thegreatest M&ampA of all times due to the large sums involved in thetransactions including Vodafone and Mannesmann in 1999 (Transactioncost $ 172.2 billion), America Online and Time Warner in 2000 (Worth$112.1 billion) and PKN’s acquisition of Mazeikiu in 2006 for 5800Litas (p. 21).This piece of literature is particularly significant tothe current study that seeks to comprehend the strategic policies ofVodafone with respect to M&ampA in this section. The study analyzedthe various reasons (motives) that drive companies to merger andconcluded that the motives can be classified into two broadcategories: primary and secondary drivers (p. 25). Essentially,companies engage in mergers and acquisition primarily as a long termgrowth strategy (Duksaite &amp Tamosiuniene, 2011, p. 25). Thesecondary motives are diverse and vary across industries. Thesesecondary motives may include need for diversification, synergy,access to intangible assets and integration (p. 25). Moreover, thestudy established that a majority of the M&ampA drivers basicallyserve as strategic instruments for reshaping competitive advantage within the respective industries and maintaining corporatecredibility in the face of radical changes in business operations. Inthe applicability of these outcomes, it is important to note thatsome of the motives as identified in Duksaite &amp Tamosiuniene(2011) are more intense in some industries relative to others.

Thekind of relationship that exists between the acquirer and thetargeted firm have also been highlighted by empirical literature asinfluential in determining the performance of mergers andacquisition. In a more recent study, Ishii &amp Xuan (2014)investigated the impact of social ties between acquirers and targetson the performance of mergers. Using data on educational backgroundand employment history, the study constructed a measure of the degreeof social connection between the management teams of the acquirer andthe target. The outcomes showed that social ties between entities areinversely related to the abnormal returns to the acquirer andultimately the merger. Additionally, the social ties between theacquirer firm and the targeted firm were found to increase theprobability that the top management of the target firm are absorbedin the resulting entity after the merger complete with huge perks (p.359). The clearest result of the study with much more significance tothe current study is the finding that the occurrence of social tiesbetween the acquirer entity and the targeted entity usually result inpoorer-decision making and lower creation of value especially forshareholders (p.361).

Theissues that impinge on mergers and acquisition are as contemporary asthey are traditional. Literatures have addressed the problems of M&ampA,the impacts of M&ampA on performance of entities and the motives forengaging in mergers and acquisition. One of the most recent study,Ofili (2015) undertook a review of literature with an objective ofassessing the risks involved in mergers and acquisition. The paperestablished that mergers and acquisitions are often replete withrisks especially on overpayment and strategic incompatibility (p.8).He further noted that if not treated with utmost caution, M&ampAcould result in adverse implications that can disrupt the entirebusiness operations (p. 9).

of Literature Review

Thesystematic review of literatures in this chapter has cut across theissues pertinent to mergers and acquisition as they evolve over time.M&ampA, as pursued by different entities, has over time gone beyonda mere growth platform to become a key strategy to counter stiffintra industry competition. There is a consensus that M&ampA impactson business performance but whether this is true for all partiesinvolved is not immediately available. The motives behind firmsengaging in mergers and acquisition also vary depending on the growthstrategies of the firms as well as the industries in which theyoperate. The game theories that characterize the mergers andacquisition processes also come in as crucial intervening factors inassessing the performance of M&ampA. Therefore, the extensive M&ampAby Vodafone (See Appendix 1) can be comprehended in the context ofthese outcomes.

Asto whether mergers and acquisitions usually add value to anorganization, the extensive review of literature undertaken in thischapter has revealed that mergers and acquisition can either improveor worsen the performance of certain organizations. A majority of theliteratures reveal that in the case of a merger, the bigger companiesoften emerge as the greater beneficiaries with the smaller partiesbeing made worse off. Nevertheless, the review has revealed some ofthe underlying factors that determine whether mergers andacquisitions will improve or worsen the performance of a company.These include the performance of a company are the type of gametheory involved in the transactions (e.g. announcement of abnormalreturns), the relationships between the merging firms, the culturalsimilarities (or differences) between the firms, the motives thatdrove the firms to merger and acquisition as well as the industry ofthe firms.

CHAPTERFIVE: COMPANY ANALYSIS

Introduction

Thischapter undertakes to assess the operations management, investmentactivities, financial position and cash flows of Vodafone using cashflow and ratio analyses. A Vodafone SWOT analysis is also presentedin this section to assist investors to grasp the snapshot of thecompany.

CashFlow Analysis

Thissection is significant since it expresses the effectiveness of in thegeneration and use of cash flows by Vodafone to create opportunitiesfor growth and profitability. The cash flow analysis undertaken herecovers the period 2011 to 2015. Over the five years covered by thisreport, Vodafone maintained an impressive cash flow resulting mainlyfrom netinvesting cash flows (SeeAppendices 2, 3 and 4). The investing activities of the multinationalshowed an increasing trend in which the net investing cash rosesteadily from £5.05 billion in 2011 to 25.25 billion in 2014. Thisrepresents a 500% increase in net investing cash flows in four years,which is quite impressive. Moreover, this growth is bound to soureven hire given that the first quarter entries for 2015 amountto11.16 billion (Appendix 3). However, despite this impressivegrowth, the year 2012 recorded a dismal £505 million in netinvesting cash flows and Vodafone could attribute this to the lack ofa substantial M&ampA in that material year.

M&ampAactivities are often used by some businesses strategically to checktheir rates of depreciation and capital outflow (DePamphilis,2009, p. 113).This strategy could account for the trend in Vodafone’sdepreciation, depletion and amortization netoperating cash flowsbetween 2011 and 2015. The company had recorded a decrease indepreciation, depletion and amortization cash flows from £7.88billion in 2011 to £6.66 billion in 2013 but the trend reversed inbetween 2014 and 2015 increasing the depreciation, depletion andamortization cash flows from £7.56 billion to £9.578 billionrespectively (Appendix 2).

Additionally,the netfinancing cash flowsof the group have not recorded a clear trend in the past five years.The company recorded £6.68 billion, £13.74 billion, £1.22 billion,£32.35 billion and £842 million for 2011, 2012, 2013, 2014 and 2015respectively (see appendix 4). The fluctuating trend is illustratedin figure 5.1 below.

Figure5.1:Vodafone financing cash flows between 2011 and 2015

Source:Author’s graph with data from&lthttp://www.vodafone.com/content/index/investors/investor information/ annual_report.html&gt

Thefluctuation in Vodafone’s net financing cash flows in between 2011and 2015 could be attributed to a multiplicity of factors. Key amongthem is the groups change in M&ampA strategies (see appendix 1). Allthe same, the reliability and the soundness of the integratedstrategies adopted by the company in the last five years is manifestthe reduced free cash flows from £10.71 billion in 2012 to £2.41billion in 2015 (Appendix 5). Drawing from the cash flow analysis,the company’s prospects are much more positive given the globaleconomic environment and trends in M&ampA.

RatioAnalysis

Thissection undertakes a financial analysis of Vodafone financialstatements by obtaining and subsequently interpreting the relevantratios of specific Vodafone balance sheet items. Theprofitability ratios arevery crucial to this endeavor as they will show Vodafone’s abilityto generate profits in light of its very own expenses. The figurebelow shows Vodafone’s profitability ratios for the last ten years.It is important to have a wide range for this period because otherthan espousing the ability of a company to generate margins above itsexpenses, the essence of profit ratios is facilitation of comparisonsto preceding periods so as to enable ascertainment of businessprogress (Hoskin, 2014, p. 183).

Thefigure above shows Vodafone’s profitability ratios for the last tenfinancial years. Our focus, however, is the period between 2011 and2015. From the table, it is clear that there is no general trend inthe profitability across the three main ratios that will be analyzedin detail in this section of the report: Return on Assets (ROA),Return on Equity (ROE) and Return on Invested Capital (ROI). There isa slight margin between the three ratios in 2011 and the ratios in2015 as displayed in the table above. The ROA was 5.15 in 2011 and4.71 in 2011 while ROE was 8.96 in 2011 and 8.41 in 2015. MeanwhileROI increased from 6.44 in 2011 to 7.08 in 2015. 2013 wasparticularly notorious for recording the lowest profitability ratiosand a large percentage of the drop in profitability can be attributedto the M&ampA strategies adopted by Vodafone in the preceding yearas already discussed in the previous chapter. However, it isimportant at this point to note the attractiveness of Vodafone owingto the large positive ratios observed across board. Given that thisreport is intended for shareholders, the ROE is particularly a pointof focus. The ROE for 2015, for instance, is 7.08 that from ashareholder perspective imply 708% profitability!

TheVodafoneInventory Turnoverhas also been promising in the past few years. In the first quarterfor 2015, the company recorded £23,028 million in cost of goods soldand had an average inventory of £7.85 million (VOD,http://www.vodafone.com/content/annualreport/annual_report11/performance/financial-position-and-resources.html,accessed on 6 August 2015). This implies that the company had aninventory turnover of about 29.29.34 (see appendix 6). The tablebelow shows the Vodafone inventory turnover between 2011 and 2015.

Table5.2 Vodafone Inventory Turnover

Year

2011

2012

2013

2014

2015

Inventory Turnover

28.92

23.93

28.43

30.85

29.34

Source:Author’s computation using data from&lthttp://www.vodafone.com/content/annualreport/annual_report11/performance/financial-position-and-resources.html&gt

Froman investor perspective, the Vodafone inventory turnover trend servesto indicate the rate at which the company turns over its inventoryannually and the VOD Inventory Turnover figures are impressive at alllevels of investments. It is important to observe the rate at whichVodafone Group PLC has been turning over its stock if the realperformance of the company is to be comprehended. In 2011, thecompany had an inventory turnover of 28.92 which means that in thefinancial year ending March 2011, Vodafone had managed to ‘turnover’ its inventory at the rate of 28.92 times a single unit. In2012, the inventory turnover reduced to 23.93. The poor performancerecorded by Vodafone in this year is not unique to this performancemetric, the net financial cash flows, net operating cash flows andthe net investing cash flows analyzed in the preceding section allpointed towards a poor performance in 2012. Partly, this drop inperformance which seemed to have had a spiral effect on theperformance of the following financial year as revealed in figure5.1. However, the inventory turnover for the year 2013 paints a morepromising picture having risen by 4.5 units to 28.43 (See table 5.2).In 2014, the impressive trend continued with the year recording aninventory turnover of 30.85 which is its highest within the periodcovered by this analysis. This peak in performance as far asinventory is concerned can be attributed to Vodafone’s renewedmerger and acquisition strategies in the preceding year (2013) and atthe beginning of 2014 (see appendix 1). 2015 recorded a slight dropto 29.34 but taken as a whole, the period covering the three years(2013, 2014 and 2015) show a sustained productivity which could forma firm foundation for future growth and performance.

Tosupplement this information, the multinational’s days inventory forthe six months ended March 2015 was 6.22 the company’s days salesinventory was 4.46 with an inventory to revenue ratio of 0.02(Gurufocus, http://www.gurufocus.com/term/InventoryTurnover/VOD/Inventory%2BTurnover/Vodafone%2BGroup%2BPLC,accessed on 6thAugust 2015).

SWOTAnalysis

ASWOT analysis is an important investment consideration as it helpsinvestors to comprehend from a snapshot the issues impinging on acompany’s operational efficiency (Wall, 2014, p. 7). The tablebelow provides a summary of the Vodafone Group PLC SWOT analysis.

Table5.4:Vodafone Group PLC SWOT analysis

Strengths

-M&ampA Growth Strategies

-Strong partnerships

-Brand Strength

-Financial Resources and Infrastructure

-Supply Chain Management Practices

-Global presence

Weaknesses

-Lack of control interests in certain ventures

-Managerial challenges resulting from economies of scale

Opportunities

-Emerging markets in Asia

-Recovery of global economy

-Trend towards Mergers and Acquisitions M&ampA

Threats

-Fierce competition from new market entrants

-Regulatory frameworks in external markets

-Macroeconomic dynamism

Summary

Theanalyses conducted in this chapter have revealed that there is nopredictability in the trend of Vodafone’s profitability andintrinsic worth owing to the fact that a discernible trend could notbe established. This is partly due to the relatively poor financialperformance of the company in 2013 which this chapter has clearlyexposed. Nevertheless, what comes out clearly is that from whoeverdirection one investigates the company, the profit margins areimpressive and reflect more positive future prospects for thebusiness.

CHAPTERSIX: FORECAST AND VALUATIONIntroduction

Thepreceding chapter has evaluated Vodafone’s performance and itsfuture prospects based on the global industry and the projectedmacroeconomic conditions. This chapter seeks to forecast and valuethe intrinsic worth of Vodafone. In order to achieve this objective,three models will be employed in forecasting and valuation: TheDiscounted Dividend Model (DDM), the Discounted Abnormal Earnings(DAE) and Discounted Cash Flows Model (DCF).

Assumptions

Inthis section, certain assumptions are made to facilitate valuationand forecasting. To this end, the analysis henceforth will assume atax rate of 32%, the cost of credit before and after tax will beassumed to be 6.23% and 4.62% respectively. The cost of equity aftertax will be assumed 7.99% and the weights attached to cost of creditand cost of equity are 33.54% and 696.46% respectively. Additionally,a deliberate and customized criteria is adopted for obtaining theweighted average cost of capital (see appendix 7 for more details andassumptions).

DiscountedAbnormal Earning Model

Inthis framework, the value of equity is obtained based on the bookvalue of equity and the abnormal earnings created by the firm.Abnormal earnings are particularly relevant as instruments of M&ampAgame theory. The cost of equity (assumed 8.21%) is used as a discountfactor in the formula below to obtain the equity value.

Dueto competitive equilibrium assumption (see appendix 7), the abnormalearnings theoretically vanish beyond terminal year. However, this iscould be exceptional for Vodafone especially given the assumptionthat the telecommunication industry keeps growing exponentially(appendix 7). Considering this, the model result is £3.61, which iswell beyond the foregoing market prices.

Figure6.1:Discounted Abnormal Earning Model

DiscountedCash Flow Model

Thismodel uses the discount factor of the weighted average cost ofcapital (WACC). In this technique, the equity value (similar to thatobtained in DAE model) is adjusted for debt as illustrated in theformula below.

Adjustingfor the assumption that a 1.71% terminal growth rate withcharacterize the free cash flow from Vodafone, this model yields£3.95 as shown below.

Table6.2: The Discounted Cash Flow Model

TheDiscounted Dividend Model

Thisframework proposes that the value of the company’s equity equalsthe total present value of projected dividends to be received forevery share. Given the assumption that the projected equity valueequals the expected dividend per share, the equity value in thismodel is obtained via the formula below.

Thismodel yields £3.32 as shown in the diagram below

Figure6.3:The Discounted Dividend Model

Allthe three models used here i.e. the Discounted Dividend Model(£3.32), Discounted Abnormal Earnings (£3.61) and Discounted CashFlows Model (£3.95) yield share prices above the market price of£2.41 further endearing the company to stakeholders.

SensitivityAnalysis

Owingto the fact that all this models are anchored on certain fundamentalassumptions which may not always hold, there is need to conduct asensitivity analysis so as to ascertain how the model mechanismswould adjust to variations in input parameters. The variationsconsidered here encompass risk premium, beta and free rate so as totest for the stability of the discount factors selected and the rateof growth for future cash flows.

Figure6.4:Sensitivity Analysis for the DDM

Figure6.5: Sensitivity Analysis for the DAE

Figure6.6: Sensitivity Analysis for the DCF

Fromthe figures above, the three models manifest the same ranges ofvariation in which discounted abnormal earnings (DAE) models comesacross as the least sensitive. The other two models exhibit muchhigher outcomes as compared to the foregoing market outcomes. Theresults of the sensitivity analyses for the models reinforce theoutcomes that Vodafone shares are as attractive today as they will inthe next five years and beyond.

Conclusion

Allthe three models used here i.e. the Discounted Dividend Model(£2.49), Discounted Abnormal Earnings (£2.92) and Discounted CashFlows Model (£2.79) yield share prices above the market price (£2.41– VOD LSE current share price). Further, sensitivity analyses ofthe models manifest the same (little) ranges of variation furtherendearing the company to stakeholders. Any rational consumer can onlycome to one conclusion: the earlier and the more Vodafone shares arebought, the better.

ReferencesList

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Duksaitė,E., &amp Tamošiūnienė, R. (2011). Why companies decide toparticipate in mergers and acquisition transactions. Science–Futureof Lithuania/Mokslas–Lietuvos Ateitis,1(3),21-25.

Galpin,T. J. (2014). Thecomplete guide to mergers and acquisitions: Process tools to supportM&ampA integration at every level.John Wiley &amp Sons.

Gugler,K., Mueller, D. C., Yurtoglu, B. B., &amp Zulehner, C. (2003). Theeffects of mergers: an international comparison. Internationaljournal of industrial organization,21(5),625-653.

Homburg,C., &amp Bucerius, M. (2006). Is speed of integration really asuccess factor of mergers and acquisitions? An analysis of the roleof internal and external relatedness. Strategicmanagement journal,27(4),347-367.

Hoskin,R. E., Fizzell, M. R., &amp Cherry, D. C. (2014). Financialaccounting: a user perspective.Wiley Global Education.

Huang,C. T., &ampCleaner, B. H. (2004). New developments concerningmanaging mergers and acquisitions. ManagementResearch News,27(4/5),54-62.

Ishii,J., &amp Xuan, Y. (2014). Acquirer-target social ties and mergeroutcomes. Journalof Financial Economics,112(3),344-363.

Journalof Business &amp Economics, Summer, pp. 67- 84.

Moeller,S. B., Schliemann, F. P., &ampStutz, R. M. (2004). Firm size and thegains from acquisitions. Journalof Financial Economics,73(2),201-228.

Moraine,P., &amp Steger, U. (2004). Managing Complex Mergers–Real WorldLessons in Implementing Successful Cross-Cultural. Mergersand Acquisition.

OFILI,O. U. (2015). REVIEW OF RISK MANAGEMENT TECHNIQUES IN MERGERS &ampACQUISITION. Ethics,3(10).

Palmatier,R. W., Miao, C. F., &amp Fang, E. (2007). Sales channel integrationafter mergers and acquisitions: A methodological approach foravoiding common pitfalls. IndustrialMarketing Management,36(5),589-603.

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Yue,A. and A. Ng. 2005. &quotEffects of Private and Public CanadianMergers&quot

Appendix1

VODAFONEMERGER AND ACQUISITION: Dates, Continent &amp Transaction amounts

Vodafonein UK

-07/1996: Vodafone acquired the two thirds of Talkland that it did notown for £30.6million.

-11/1996: Vodafone purchased Peoples Phone for £77 million with astore of 181stores and acquired the 80% of Astec Communication thatit did not own with 21 stores.

Vodafonein Europe

-29/06/1999: Vodafone purchased AirTouch Communications Inc, whichalso gave

Vodafonea 35% share of Mannesmann, owner of the largest German mobilenetwork.

-21/09/1999: Vodafone emerged its US wireless assets with those ofBell Atlantic

Corp,to form Verizon Wireless

-11/1999: Vodafone made an unsolicited (hostile) bid for Mannesmann,which was rejected. During 1999, Mannesman had purchased the UKmobile operator Orange and both Vodafone and Mannesman were nowoperating in the same markets. The hostile takeover provoked strongprotest in Germany and there insued a board struggle which saw

Mannesmannresist Vodafone`s efforts. However on 3 February 2000 the Mannesmannboard agreed to an increased offer of £112bn, then the largestcorporate merger ever. The

EUapproved the merger in April 2000.

-28/07/2000: The Company reverted to its former name, Vodafone GroupPlc.

-2001: Vodafone took over Eircell (part of eircom) in Ireland,rebranding the company Vodafone Ireland.

-17/12/2001: Vodafone signed TDC Mobil of Denmark to introduce“Partner

Networks”.This new concept means the Vodafone’s involve in local marketwithout the need of investment by Vodafone.

-2002: Vodafone acquired Japan`s third-largest mobile operatorJ-Phone, which was the first operator to introduce camera phones inJapan.

-2002: Vodafone rebranded Japan`s J-sky mobile internet as Vodafonelive!™ which presaged the global rollout of both the brand and theservice.

-02/02/2002: Radiolinja of Finland was signed as a Partner Network.(Radiolinjalater becomes Elisa.)

119Consolidated from published data

Investmentanalysis of Vodafone 2010

58

-03/12/2002: The brand was introduced into the Estonian market withthe signing of a Partner Network Agreement with Radiolinja (Eesti).

-07/01/2003: Vodafone signed a group-wide Partner agreement withMobilkom

Austria.This brings Austria, Croatia, and Slovenia into the Vodafonecommunity.

-16/04/2003: Og Vodafone was introduced in the Icelandic market.

-13/05/2003: Omnitel was rebranded Vodafone Italy.

-21/07/2003: Lithuania was added to the community, with the signing ofa Partner

Networkagreement with Bité.

-16/02/2004: Vodafone signed a Partner Network Agreement withLuxembourg`s

LuxGSM.

-20/02/2004: Vodafone signed a Partner Network Agreement with Cyta ofCyprus.

Cytaagreed to rename its mobile phone operations to Cytamobile-Vodafone.

-04/2004: Vodafone purchased Singlepoint airtime provider from JohnCaudwell

(CaudwellGroup) and added 1.5million customers onto its consumer base.

-06/2005: Vodafone increased its participation in Romania`s Connex to99% and bought Czech mobile operator Oskar and rebranded Oskar intoOskar-Vodafone on

01/07/2005.

-28/10/2005: Connex in Romania was rebranded as Connex-Vodafone.

-31/10/2005: Vodafone reached an agreement to sell Vodafone Sweden toTelenor for approximately € 1 billion. After the sale, VodafoneSweden becomes a Partner

Network.

-13/12/2005: Vodafone won an auction to buy Turkey`s second-largestmobile phone company, Telsim, for $4.5 billion.

-22/02/2006: Vodafone announced that it was extending its footprint toBulgaria with the signing of Partner Network Agreement with Mobiltel,which was part of

MobilkomAustria group.

-11/04/2006: Vodafone announced that it has signed an extension to itsPartner

NetworkAgreement with BITE Group, enabling its Latvian subsidiary &quotBITELatvija&quot to become the latest member of Vodafone`s globalpartner community.

-01/05/2007: Vodafone added Jersey and Guernsey to the community, asAirtel was signed as Partner Network in both crown dependencies.

-18/12/2008: Vodafone increased stake in Polkomtel S.A. by 4.8% to24.4% for netcash consideration of €186 million (£171 million) inPoland.

Investmentanalysis of Vodafone 2010

Vodafonein Asia – Pacific

-07/1993: BellSouth, the first mobile service in New Zealand went liveand

VodafoneAustralia went live right in the same year.

-07/1994: Vodafone’s Fiji network went alive.

-11/1998: Vodafone purchased BellSouth New Zealand which later wasrebranded as Vodafone New Zealand,

-01/10/2003: J-Phone, which was purchased in 2002, became Vodafone andits mobile internet service J-Sky became Vodafone Live!

-12/2004: Vodafone signed with SmarTone of Hong Kong as partner whichbecame

SmarTone– Vodafone in 04/2005.

-28/10/2005: Vodafone announced the acquisition of a 10% of India’sBharti

Televentures,the India’s largest mobile phone network, under the brand nameAirTel.

-25/01/2006: Vodafone announced to sign partner network in Indonesia,Malaysiaand Sri Lanka.

-06/02/2007: Samoa was added as a partner market of Vodafone.

-09/05/2007: A Bharti group company irrevocably agreed to purchaseVodafone’s

5.60%direct shareholding in Bharti Airtel Limited.

-09/06/2009: Vodafone Australia merged with Hutchison 3G Australia toform a

50:50joint venture, Vodafone Hutchison Australia Pty Limited

Vodafonein the Middle East and Africa

-10/1998: Vodafone Egypt went live under the name ClickGSM

-18/09/2002: Vodafone signed a partner agreement with the MTC group ofKuwait which was rebranded to MTC-Vodafone.

-03/11/2004: Vodacom, Vodafone’s South African affiliate, introducedVodafone’s international services and partner agreements to thelocal market.

-03/12/2005: By buying out the 15% stake held by VenFin, Vodafoneowned a 50%stake in Vodacom

-08/11/2006: to have further co-operation in Egyptian market, Vodafoneannounced a deal with Telecom Egypt in which Vodafone Egypt was owned55% by the group and the remaining was owned by Telecom Egypt.

-17/08/2008: Vodafone acquired 70.0% of Ghana Telecommunications forcash consideration of £486 million in Ghana

Investmentanalysis of Vodafone 2010

60

-20/04/2009 – South Africa: Vodafone acquired an additional 15.0%stake in

Vodacomfor cash consideration of ZAR 20.6 billion (£1.6 billion). On 18 May2009

Vodacombecame a subsidiary following the listing of its shares on theJohannesburg

StockExchange and concurrent termination of the shareholder agreement withTelkom SA

Limited,the seller and previous joint venture partner.

-10/05/2009: Vodafone Qatar completed a public offering of 40.0% ofits authorized share capital raising QAR 3.4 billion (£0.6 billion).The shares were listed on the Qatar

Exchangeon 22 July 2009. Qatar launched full services on its network on 7July 2009.

Vodafonein the USA

-06/1999: Vodafone merged with AirTouch Communication and changed itsname to Vodafone AirTouch Plc.

-09/1999: Vodafone AirTouch announced a $70-billion joint venture withBell

AtlanticCorp. The first wireless business with a national footprint in theU.S., Verizon

Wirelesswas composed of Bell Atlantic`s and Vodafone Air Touch’s U.S.wireless assets and began operations on April 4, 2000. However,Verizon Communications—the company formed when Bell Atlantic andGTE merged on June 30, 2000—owns a majority of

VerizonWireless and Vodafone`s branding is not used, nor is the CDMA networkcompatible with GSM phones.

-04/04/2000: The merger of Vodafone and Verizon Wireless was completed

-9/01/2009: Verizon Wireless completed its acquisition of Alltel Corp.for approximately US$5.9 billion (£3.9 billion).

Vodafonein the Americas

-15/11/2005: Vodafone announced co-operation including internationalservices and roaming with América Móvil of Mexico. Included in theagreement were the 13 networks owned and controlled by América Móvil(except Tracfone in the US), and various operating companies ofVodafone and its Partner Networks.

Appendix2: VOD Net Operating Cash FlowsAppendix3:VOD Net investingCash FlowsAppendix4:VOD Net FinancingCash FlowsAppendix5:AdditionalVOD Operational InformationAppendix6: Obtaining VOD Inventory TurnoverAppendix7: Assumptions

Costof Credit (cc)

Thecredit costs are taken to be the arithmetic average of yearlyinterest between 2011 and 2015.

Vodafone’saverage interest rates are based on the financing costs paid over thetotal borrowings, which were 56.5%, 8.24%, 8.62%, 4.78% and 4.5% in2011, 2012, 2013, 2014 and 2015 respectively.

Thecredit cost is therefore projected at 7.2% per annum.

Costof Equity (ce)

Thecost of equity will be obtained as in the formula below

ce= rf + β[E(rm) – rf]

Whererf is risk free interest rate – a decade long government bond whichhappens to be Vodafone’s main source of financing. The averageyield of the US and ECB10 year Treasury bond is projected at 5.43%which will serve as the rf.

Thesystematic risk β of Vodafone, which reflects the sensitivity of thefirm’s value to market movement, is 0.654. Adopted from&lthttp://markets.ft.com/research/Markets/Tearsheets/Summary?s=VOD:LSE&gt

Toobtain the market risk premium, the risk free rate will be subtractedfrom marginal rate i.e. (rm-rf) and this basically is thecompensation that investors are subjected to for holding riskyequities.

Theexpected risk premium for the United Kingdom in 2013 and 2014 is6.1%. However, due to the economic slump in 2013 as reflected in theanalyses, this report assumes a market premium risk of 5.9%, a figureslightly lower than the projected premium.

WeightedAverage Cost of Capital (WACC)

TheWACC will be obtained as in the formula below.

An Investment Analysis of Vodafone Group PLC Contents

An Investment Analysis of Vodafone Group PLC19

AnInvestment Analysis of Vodafone Group PLC

Contents

CHAPTER FOUR: LITERATURE REVIEW ON MERGERS AND ACQUISITIONS 2

Introduction 2

Empirical Studies of Mergers and Acquisitions 2

of Literature Review 8

CHAPTER FIVE: COMPANY ANALYSIS 9

Introduction 9

Cash Flow Analysis 9

Ratio Analysis 11

SWOT Analysis 13

Summary 14

CHAPTER SIX: FORECAST AND VALUATION 15

Introduction 15

Assumptions 15

Discounted Abnormal Earning Model 15

Discounted Cash Flow Model 16

The Discounted Dividend Model 17

Sensitivity Analysis 18

Conclusion 20

References 21

Appendix 1 23

Appendix 2: VOD Net Operating Cash Flows 26

Appendix 3: VOD Net investing Cash Flows 27

Appendix 4: VOD Net Financing Cash Flows 28

Appendix 5: Additional VOD Operational Information 29

Appendix 6: Obtaining VOD Inventory Turnover 30

Appendix 7: Assumptions 31

CHAPTER FOUR: LITERATURE REVIEW ON MERGERS AND ACQUISITIONSIntroduction

Mergersand Acquisition (M&ampA) have come to play a vital role as bothaspects of strategic management and corporate finance. This strategyhas been employed by companies in varying extents and involvesbuying, selling and dividing of different entities with an overridingaim of growing an enterprise rapidly in its line of operation withoutnecessarily creating a subsidiary (Weber&amp Yedidia, 2012, p. 296).Forthe past many years, Vodafone has employed this strategy to advanceits growth and expansion in the telecommunication industry. Thischapter provides a review on mergers and acquisition with a goal ofunderstanding the strategy as employed by Vodafone.

Empirical Studies of Mergers and Acquisitions

Mostempirical studies in this discipline have focused on the drive tomergers and acquisitions as well as the consequences of mergers andacquisitions. A typical study in this category would consider theevolution of profits of a merged firm relative to a specific industrybenchmark. Yook (2004) investigated the impacts of M&ampA on theacquiring firm’s financial performance. To achieve this, he relatedthe pre and post-acquisition economic value added (EVA) of thespecific entities to the projected industry economic value added(Industry EVA average). The study was based on 75 of the biggestmergers and acquisitions in the United States between 1989 and 1994.The transaction characteristics of the studied firms included: themethods of payment, the acquisition types and the businesssimilarity. The outcomes of the rigorous procedure revealed thatimmediately after acquisitions, the acquiring firms manifesteddeteriorating outcomes (p.83). However, the outcomes of this studyare subject to certain controls as the calculation of inter-industryEVA reveals no discernible difference between the entitiesperformance and the industry average. However, the typology generatedin performance appraisals before and after the acquisition processesprovide useful insights that could facilitate a robust analysis ofVodafone’s M&ampA.

Gurgler,Mueller, Yurtoglu and Zulehner (2003) conducted a study based oninformation from 2704 cases of merger collected a few years after thecompletion of the respective merger processes. The researcherscompared actual business profits for the first five years for theseentities to the projected profits and sales for the particularindustries. The study outcomes revealed that a decrease in salesafter a merger implied a decline in operational efficiency of theentities while increased profits implied increased market strength(p. 649).The findings herein concerned about 57.6% of all the mergedentities, a pointer to the fact that 42.4% were even made worse offby the merger. The essence of this study to the endeavor of thecurrent study is that in terms of profit, the merger picture hassignificant dark spots. In a similar study to Gurgler et al (2003),Moeller, Schliemann and Stutz (2004) investigated the relationshipbetween firm size and gains resulting from acquisitions. Using asample of 12,023 acquisitions, they demonstrated that small firmsusually benefit more from mergers and acquisitions as compared to thelarge firms (p. 224). Moreover, they demonstrated that large firmsusually experience substantial shareholder wealth losses particularlywhen they announce the acquisitions of public entities irrespectiveof the financing (p. 226. This study is significant for the fact thatit presents robust outcomes encompassing previous research findingsbut goes over and above that to investigate the effect of firm sizeon the consequences of mergers.

Thevarious developments concerning the management of mergers andacquisitions as well as the barriers to such acquisitions have alsobeen studied. Huang, Christine and Cleaner (2004) undertook a casestudy to investigate the strategic decisions made by managers priorto and after mergers and acquisition of entities. It has beenestablished that there is need for careful planning before mergersand acquisition if firms are to benefit from the process (p. 61).Thestudy established that cultural differences between entities engagingin mergers need to be harmonized because having a common ground incultural differences leads to a strong corporate foundation on whichthe firms can leverage their long term growth (p. 60). Further, itwas concluded that cultural differences are the major impediments tomergers and acquisition (p. 62). These conclusions are similar tothose of Moraine&ampSteger, (2004).

Studieson the effect of merger announcements by firms to their returns haveshown mixed results. Yue and Ng (2005) sought to establish theeffects of announcements of merger on abnormal returns by firms inCanada. In order to achieve this objective, they collectedinformation for 1361 entities that had acquired smaller entitiesbetween 1994 and 2000. It was found that abnormal results were usednot only by the acquiring entities but also by the targeted entitiesso as to advance their interests in the merger and acquisitionprocess (p. 122). The outcomes of Yue and Ng (2005) are contrary toother studies such as Andre et al (2004) which espoused negativeabnormal returns for acquiring firms and positive returns for thetargeted entities. The study also concluded that for privateentities, there were substantial abnormal returns relative to publicentities (acquirers) and that there were additional risks in theacquisition of private entities than public entities. Just like moststudies already reviewed, the results of Yue and Ng (2005) aresubject to certain limitations. The study examined the performance ofthe 1361 entities for a period of six weeks which is not adequate toassess the performance of a firm. For this reason, thegeneralizability of the outcomes is constrained as six weeks is notan adequate period to examine the performance of a company given thatthe period of study cannot enable adjustments for trend inperformance. Additionally, the period of the study might have beencharacterized by a particularly peculiar condition which might havemade the company performance to deviate from the actual trend but thestudy did not control for such a factor therefore making it difficultto generalize the outcomes. Nevertheless, Yue and Ng (2005) isphenomenal for its investigation of the effect of announcement ofabnormal returns by merging firms which is a key game theory in thisrealm (M&ampA). They also made the all-important distinction betweenprivate and public entities.

Thegeneral effects of mergers on the economies of different countrieshave also been examined especially in economies where M&ampArevolutionized enterprises. The exact mechanisms through whichmergers influence different economies especially for multinationalslike Vodafone have also been investigated. Kling (2006) conducted astudy to examine the effect of mergers on the German economy and theextent to which mergers were successful in the economy. This studywas informed by the fact that there are certain macroeconomic factorsthat can drive mergers such as economic growth and crises, inflationrates and economies of scale (p.668). The study used a sample of 35leading companies that had experienced mergers between 1870 and 1914.He used a vector regression model to establish the relationshipbetween merger waves and economic growth and prosperity. The modelresults did not identify whether mergers had been successful duringthe period covered by the study which necessitated the use of rollingmodels. The results showed that mergers positively impacted on thereturns in all industries covered except banking (p. 685).Theapplicability of these outcomes are however limited by the longperiod covered by the study. The study is also based at themacro-level making it less useful for firm level studies.

Integrationplays a key role in mergers and acquisition and the literature inthis field is replete with the various mechanisms through which itinfluences mergers and acquisition. While investigating theintegration-merger-acquisition nexus, DePamphilis(2009) noted that an entity’s approach to integration will varybased on two vital dimensions of integration: the newfoundrelationship with the acquiring firm and the organizational autonomy(p. 72).On the relationship between the entities involved, he notedthat this essentially is the working atmosphere that needs to existin order to facilitate the transfer of strategic capability i.e. the“strategic interdependence need”. As for the second dimension, itwas found that after the acquisition process, the acquired entityneeded to retain some core strategic capabilities (p. 74). Thevarious dimensions of acquisition necessitates a give absorptionthreshold to integration as far as mergers and acquisitions areconcerned (DePamphilis, 2009, p. 74). These findings are similar tothose of Homburg &amp Bucerius (2006) and Palmatier et al (2007).The significance of DePamphilis (2009) in relation to the mergers andacquisition processes of Vodafone is that it enables theinvestigation of the dimensions of integration that might haveinformed some major Vodafone acquisitions.

Whatmotivates companies like Vodafone to participate in mergers andacquisitions? Existing body of literature have attempted to provideresponses for this question from various perspectives. One of themost decorated studies in recent literature is Duksaite &ampTamosiuniene (2011) which is as extensive it is intensive. The studyinvestigated among others, three mergers considered to be thegreatest M&ampA of all times due to the large sums involved in thetransactions including Vodafone and Mannesmann in 1999 (Transactioncost $ 172.2 billion), America Online and Time Warner in 2000 (Worth$112.1 billion) and PKN’s acquisition of Mazeikiu in 2006 for 5800Litas (p. 21).This piece of literature is particularly significant tothe current study that seeks to comprehend the strategic policies ofVodafone with respect to M&ampA in this section. The study analyzedthe various reasons (motives) that drive companies to merger andconcluded that the motives can be classified into two broadcategories: primary and secondary drivers (p. 25). Essentially,companies engage in mergers and acquisition primarily as a long termgrowth strategy (Duksaite &amp Tamosiuniene, 2011, p. 25). Thesecondary motives are diverse and vary across industries. Thesesecondary motives may include need for diversification, synergy,access to intangible assets and integration (p. 25). Moreover, thestudy established that a majority of the M&ampA drivers basicallyserve as strategic instruments for reshaping competitive advantage within the respective industries and maintaining corporatecredibility in the face of radical changes in business operations. Inthe applicability of these outcomes, it is important to note thatsome of the motives as identified in Duksaite &amp Tamosiuniene(2011) are more intense in some industries relative to others.

Thekind of relationship that exists between the acquirer and thetargeted firm have also been highlighted by empirical literature asinfluential in determining the performance of mergers andacquisition. In a more recent study, Ishii &amp Xuan (2014)investigated the impact of social ties between acquirers and targetson the performance of mergers. Using data on educational backgroundand employment history, the study constructed a measure of the degreeof social connection between the management teams of the acquirer andthe target. The outcomes showed that social ties between entities areinversely related to the abnormal returns to the acquirer andultimately the merger. Additionally, the social ties between theacquirer firm and the targeted firm were found to increase theprobability that the top management of the target firm are absorbedin the resulting entity after the merger complete with huge perks (p.359). The clearest result of the study with much more significance tothe current study is the finding that the occurrence of social tiesbetween the acquirer entity and the targeted entity usually result inpoorer-decision making and lower creation of value especially forshareholders (p.361).

Theissues that impinge on mergers and acquisition are as contemporary asthey are traditional. Literatures have addressed the problems of M&ampA,the impacts of M&ampA on performance of entities and the motives forengaging in mergers and acquisition. One of the most recent study,Ofili (2015) undertook a review of literature with an objective ofassessing the risks involved in mergers and acquisition. The paperestablished that mergers and acquisitions are often replete withrisks especially on overpayment and strategic incompatibility (p.8).He further noted that if not treated with utmost caution, M&ampAcould result in adverse implications that can disrupt the entirebusiness operations (p. 9).

Summary of Literature Review

Thesystematic review of literatures in this chapter has cut across theissues pertinent to mergers and acquisition as they evolve over time.M&ampA, as pursued by different entities, has over time gone beyonda mere growth platform to become a key strategy to counter stiffintra industry competition. There is a consensus that M&ampA impactson business performance but whether this is true for all partiesinvolved is not immediately available. The motives behind firmsengaging in mergers and acquisition also vary depending on the growthstrategies of the firms as well as the industries in which theyoperate. The game theories that characterize the mergers andacquisition processes also come in as crucial intervening factors inassessing the performance of M&ampA. Therefore, the extensive M&ampAby Vodafone (See Appendix 1) can be comprehended in the context ofthese outcomes.

Asto whether mergers and acquisitions usually add value to anorganization, the extensive review of literature undertaken in thischapter has revealed that mergers and acquisition can either improveor worsen the performance of certain organizations. A majority of theliteratures reveal that in the case of a merger, the bigger companiesoften emerge as the greater beneficiaries with the smaller partiesbeing made worse off. Nevertheless, the review has revealed some ofthe underlying factors that determine whether mergers andacquisitions will improve or worsen the performance of a company.These include the performance of a company are the type of gametheory involved in the transactions (e.g. announcement of abnormalreturns), the relationships between the merging firms, the culturalsimilarities (or differences) between the firms, the motives thatdrove the firms to merger and acquisition as well as the industry ofthe firms.

CHAPTERFIVE: COMPANY ANALYSIS

Introduction

Thischapter undertakes to assess the operations management, investmentactivities, financial position and cash flows of Vodafone using cashflow and ratio analyses. A Vodafone SWOT analysis is also presentedin this section to assist investors to grasp the snapshot of thecompany.

CashFlow Analysis

Thissection is significant since it expresses the effectiveness of in thegeneration and use of cash flows by Vodafone to create opportunitiesfor growth and profitability. The cash flow analysis undertaken herecovers the period 2011 to 2015. Over the five years covered by thisreport, Vodafone maintained an impressive cash flow resulting mainlyfrom netinvesting cash flows (SeeAppendices 2, 3 and 4). The investing activities of the multinationalshowed an increasing trend in which the net investing cash rosesteadily from £5.05 billion in 2011 to 25.25 billion in 2014. Thisrepresents a 500% increase in net investing cash flows in four years,which is quite impressive. Moreover, this growth is bound to soureven hire given that the first quarter entries for 2015 amountto11.16 billion (Appendix 3). However, despite this impressivegrowth, the year 2012 recorded a dismal £505 million in netinvesting cash flows and Vodafone could attribute this to the lack ofa substantial M&ampA in that material year.

M&ampAactivities are often used by some businesses strategically to checktheir rates of depreciation and capital outflow (DePamphilis,2009, p. 113).This strategy could account for the trend in Vodafone’sdepreciation, depletion and amortization netoperating cash flowsbetween 2011 and 2015. The company had recorded a decrease indepreciation, depletion and amortization cash flows from £7.88billion in 2011 to £6.66 billion in 2013 but the trend reversed inbetween 2014 and 2015 increasing the depreciation, depletion andamortization cash flows from £7.56 billion to £9.578 billionrespectively (Appendix 2).

Additionally,the netfinancing cash flowsof the group have not recorded a clear trend in the past five years.The company recorded £6.68 billion, £13.74 billion, £1.22 billion,£32.35 billion and £842 million for 2011, 2012, 2013, 2014 and 2015respectively (see appendix 4). The fluctuating trend is illustratedin figure 5.1 below.

Figure5.1:Vodafone financing cash flows between 2011 and 2015

Source:Author’s graph with data from&lthttp://www.vodafone.com/content/index/investors/investor information/ annual_report.html&gt

Thefluctuation in Vodafone’s net financing cash flows in between 2011and 2015 could be attributed to a multiplicity of factors. Key amongthem is the groups change in M&ampA strategies (see appendix 1). Allthe same, the reliability and the soundness of the integratedstrategies adopted by the company in the last five years is manifestthe reduced free cash flows from £10.71 billion in 2012 to £2.41billion in 2015 (Appendix 5). Drawing from the cash flow analysis,the company’s prospects are much more positive given the globaleconomic environment and trends in M&ampA.

RatioAnalysis

Thissection undertakes a financial analysis of Vodafone financialstatements by obtaining and subsequently interpreting the relevantratios of specific Vodafone balance sheet items. Theprofitability ratios arevery crucial to this endeavor as they will show Vodafone’s abilityto generate profits in light of its very own expenses. The figurebelow shows Vodafone’s profitability ratios for the last ten years.It is important to have a wide range for this period because otherthan espousing the ability of a company to generate margins above itsexpenses, the essence of profit ratios is facilitation of comparisonsto preceding periods so as to enable ascertainment of businessprogress (Hoskin, 2014, p. 183).

Thefigure above shows Vodafone’s profitability ratios for the last tenfinancial years. Our focus, however, is the period between 2011 and2015. From the table, it is clear that there is no general trend inthe profitability across the three main ratios that will be analyzedin detail in this section of the report: Return on Assets (ROA),Return on Equity (ROE) and Return on Invested Capital (ROI). There isa slight margin between the three ratios in 2011 and the ratios in2015 as displayed in the table above. The ROA was 5.15 in 2011 and4.71 in 2011 while ROE was 8.96 in 2011 and 8.41 in 2015. MeanwhileROI increased from 6.44 in 2011 to 7.08 in 2015. 2013 wasparticularly notorious for recording the lowest profitability ratiosand a large percentage of the drop in profitability can be attributedto the M&ampA strategies adopted by Vodafone in the preceding yearas already discussed in the previous chapter. However, it isimportant at this point to note the attractiveness of Vodafone owingto the large positive ratios observed across board. Given that thisreport is intended for shareholders, the ROE is particularly a pointof focus. The ROE for 2015, for instance, is 7.08 that from ashareholder perspective imply 708% profitability!

TheVodafoneInventory Turnoverhas also been promising in the past few years. In the first quarterfor 2015, the company recorded £23,028 million in cost of goods soldand had an average inventory of £7.85 million (VOD, 2015). Thisimplies that the company had an inventory turnover of about 29.29.34(see appendix 6). The table below shows the Vodafone inventoryturnover between 2011 and 2015.

Table5.2 Vodafone Inventory Turnover

Year

2011

2012

2013

2014

2015

Inventory Turnover

28.92

23.93

28.43

30.85

29.34

Source:Author’s computation using data from&lthttp://www.vodafone.com/content/annualreport/annual_report11/performance/financial-position-and-resources.html&gt

Froman investor perspective, the Vodafone inventory turnover trend servesto indicate the rate at which the company turns over its inventoryannually and the VOD Inventory Turnover figures are impressive at alllevels of investments. It is important to observe the rate at whichVodafone Group PLC has been turning over its stock if the realperformance of the company is to be comprehended. In 2011, thecompany had an inventory turnover of 28.92 which means that in thefinancial year ending March 2011, Vodafone had managed to ‘turnover’ its inventory at the rate of 28.92 times a single unit. In2012, the inventory turnover reduced to 23.93. The poor performancerecorded by Vodafone in this year is not unique to this performancemetric, the net financial cash flows, net operating cash flows andthe net investing cash flows analyzed in the preceding section allpointed towards a poor performance in 2012. Partly, this drop inperformance which seemed to have had a spiral effect on theperformance of the following financial year as revealed in figure5.1. However, the inventory turnover for the year 2013 paints a morepromising picture having risen by 4.5 units to 28.43 (See table 5.2).In 2014, the impressive trend continued with the year recording aninventory turnover of 30.85 which is its highest within the periodcovered by this analysis. This peak in performance as far asinventory is concerned can be attributed to Vodafone’s renewedmerger and acquisition strategies in the preceding year (2013) and atthe beginning of 2014 (see appendix 1). 2015 recorded a slight dropto 29.34 but taken as a whole, the period covering the three years(2013, 2014 and 2015) show a sustained productivity which could forma firm foundation for future growth and performance.

Tosupplement this information, the multinational’s days inventory forthe six months ended March 2015 was 6.22 the company’s days salesinventory was 4.46 with an inventory to revenue ratio of 0.02(Gurufocus, 2015).

SWOTAnalysis

ASWOT analysis is an important investment consideration as it helpsinvestors to comprehend from a snapshot the issues impinging on acompany’s operational efficiency (Wall, 2014, p. 7). The tablebelow provides a summary of the Vodafone Group PLC SWOT analysis.

Table5.4:Vodafone Group PLC SWOT analysis

Strengths

-M&ampA Growth Strategies

-Strong partnerships

-Brand Strength

-Financial Resources and Infrastructure

-Supply Chain Management Practices

-Global presence

Weaknesses

-Lack of control interests in certain ventures

-Managerial challenges resulting from economies of scale

Opportunities

-Emerging markets in Asia

-Recovery of global economy

-Trend towards Mergers and Acquisitions M&ampA

Threats

-Fierce competition from new market entrants

-Regulatory frameworks in external markets

-Macroeconomic dynamism

Summary

Theanalyses conducted in this chapter have revealed that there is nopredictability in the trend of Vodafone’s profitability andintrinsic worth owing to the fact that a discernible trend could notbe established. This is partly due to the relatively poor financialperformance of the company in 2013 which this chapter has clearlyexposed. Nevertheless, what comes out clearly is that from whoeverdirection one investigates the company, the profit margins areimpressive and reflect more positive future prospects for thebusiness.

CHAPTERSIX: FORECAST AND VALUATIONIntroduction

Thepreceding chapter has evaluated Vodafone’s performance and itsfuture prospects based on the global industry and the projectedmacroeconomic conditions. This chapter seeks to forecast and valuethe intrinsic worth of Vodafone. In order to achieve this objective,three models will be employed in forecasting and valuation: TheDiscounted Dividend Model (DDM), the Discounted Abnormal Earnings(DAE) and Discounted Cash Flows Model (DCF).

Assumptions

Inthis section, certain assumptions are made to facilitate valuationand forecasting. To this end, the analysis henceforth will assume atax rate of 26%, the cost of credit before and after tax will beassumed to be 5% and 3.7% respectively. The cost of equity after taxwill be assumed 8.21% and the weights attached to cost of credit andcost of equity are 30.47 and 69.53 respectively. Additionally, adeliberate and customized criteria is adopted for obtaining theweighted average cost of capital (see appendix 7 for more details andassumptions).

DiscountedAbnormal Earning Model

Inthis framework, the value of equity is obtained based on the bookvalue of equity and the abnormal earnings created by the firm.Abnormal earnings are particularly relevant as instruments of M&ampAgame theory. The cost of equity (assumed 8.21%) is used as a discountfactor in the formula below to obtain the equity value.

Dueto competitive equilibrium assumption (see appendix 7), the abnormalearnings theoretically vanish beyond terminal year. However, this iscould be exceptional for Vodafone especially given the assumptionthat the telecommunication industry keeps growing exponentially(appendix 7). Considering this, the model result is £3.61, which iswell beyond the foregoing market prices.

Figure6.1:Discounted Abnormal Earning Model

DiscountedCash Flow Model

Thismodel uses the discount factor of the weighted average cost ofcapital (WACC). In this technique, the equity value (similar to thatobtained in DAE model) is adjusted for debt as illustrated in theformula below.

Adjustingfor the assumption that a 1.71% terminal growth rate withcharacterize the free cash flow from Vodafone, this model yields£3.95 as shown below.

Table6.2: The Discounted Cash Flow Model

TheDiscounted Dividend Model

Thisframework proposes that the value of the company’s equity equalsthe total present value of projected dividends to be received forevery share. Given the assumption that the projected equity valueequals the expected dividend per share, the equity value in thismodel is obtained via the formula below.

Thismodel yields £3.32 as shown in the diagram below

Figure6.3:The Discounted Dividend Model

Allthe three models used here i.e. the Discounted Dividend Model(£3.32), Discounted Abnormal Earnings (£3.61) and Discounted CashFlows Model (£3.95) yield share prices above the market price of£2.41 further endearing the company to stakeholders.

SensitivityAnalysis

Owingto the fact that all this models are anchored on certain fundamentalassumptions which may not always hold, there is need to conduct asensitivity analysis so as to ascertain how the model mechanismswould adjust to variations in input parameters. The variationsconsidered here encompass risk premium, beta and free rate so as totest for the stability of the discount factors selected and the rateof growth for future cash flows.

Figure6.4:Sensitivity Analysis for the DDM

Figure6.5: Sensitivity Analysis for the DAE

Figure6.6: Sensitivity Analysis for the DCF

Fromthe figures above, the three models manifest the same ranges ofvariation in which discounted abnormal earnings (DAE) models comesacross as the least sensitive. The other two models exhibit muchhigher outcomes as compared to the foregoing market outcomes. Theresults of the sensitivity analyses for the models reinforce theoutcomes that Vodafone shares are as attractive today as they will inthe next five years and beyond.

Conclusion

Allthe three models used here i.e. the Discounted Dividend Model(£2.49), Discounted Abnormal Earnings (£2.92) and Discounted CashFlows Model (£2.79) yield share prices above the market price (£2.41– VOD LSE current share price). Further, sensitivity analyses ofthe models manifest the same (little) ranges of variation furtherendearing the company to stakeholders. Any rational consumer can onlycome to one conclusion: the earlier and the more Vodafone shares arebought, the better.

ReferencesList

DePamphilis,D. (2009). Mergers,acquisitions, and other restructuring activities: An integratedapproach to process, tools, cases, and solutions.Academic Press.

Duksaitė,E., &amp Tamošiūnienė, R. (2011). Why companies decide toparticipate in mergers and acquisition transactions. Science–Futureof Lithuania/Mokslas–Lietuvos Ateitis,1(3),21-25.

Galpin,T. J. (2014). Thecomplete guide to mergers and acquisitions: Process tools to supportM&ampA integration at every level.John Wiley &amp Sons.

Gugler,K., Mueller, D. C., Yurtoglu, B. B., &amp Zulehner, C. (2003). Theeffects of mergers: an international comparison. Internationaljournal of industrial organization,21(5),625-653.

Homburg,C., &amp Bucerius, M. (2006). Is speed of integration really asuccess factor of mergers and acquisitions? An analysis of the roleof internal and external relatedness. Strategicmanagement journal,27(4),347-367.

Hoskin,R. E., Fizzell, M. R., &amp Cherry, D. C. (2014). Financialaccounting: a user perspective.Wiley Global Education.

Huang,C. T., &ampCleaner, B. H. (2004). New developments concerningmanaging mergers and acquisitions. ManagementResearch News,27(4/5),54-62.

Ishii,J., &amp Xuan, Y. (2014). Acquirer-target social ties and mergeroutcomes. Journalof Financial Economics,112(3),344-363.

Journalof Business &amp Economics, Summer, pp. 67- 84.

Moeller,S. B., Schliemann, F. P., &ampStutz, R. M. (2004). Firm size and thegains from acquisitions. Journalof Financial Economics,73(2),201-228.

Moraine,P., &amp Steger, U. (2004). Managing Complex Mergers–Real WorldLessons in Implementing Successful Cross-Cultural. Mergersand Acquisition.

OFILI,O. U. (2015). REVIEW OF RISK MANAGEMENT TECHNIQUES IN MERGERS &ampACQUISITION. Ethics,3(10).

Palmatier,R. W., Miao, C. F., &amp Fang, E. (2007). Sales channel integrationafter mergers and acquisitions: A methodological approach foravoiding common pitfalls. IndustrialMarketing Management,36(5),589-603.

Wall,L. (2014). Business plan: It`s business time!.

Weber,Y., &amp Yedidia Tarba, S. (2012). Mergers and acquisitions process:The use of corporate culture analysis. CrossCultural Management: An International Journal,19(3),288-303.

Yook,K.C. 2004. “The Measurement of Post-Acquisition Performance UsingEVA&quot, Quarterly

Yue,A. and A. Ng., 2005. &quotEffects of Private and Public CanadianMergers&quot

Appendix 1

VODAFONEMERGER AND ACQUISITION: Dates, Continent &amp Transaction amounts

Vodafonein UK

-07/1996: Vodafone acquired the two thirds of Talkland that it did notown for £30.6million.

-11/1996: Vodafone purchased Peoples Phone for £77 million with astore of 181stores and acquired the 80% of Astec Communication thatit did not own with 21 stores.

Vodafonein Europe

-29/06/1999: Vodafone purchased AirTouch Communications Inc, whichalso gave

Vodafonea 35% share of Mannesmann, owner of the largest German mobilenetwork.

-21/09/1999: Vodafone emerged its US wireless assets with those ofBell Atlantic

Corp,to form Verizon Wireless

-11/1999: Vodafone made an unsolicited (hostile) bid for Mannesmann,which wasrejected. During 1999, Mannesman had purchased the UK mobileoperator Orange andboth Vodafone and Mannesman were now operating inthe same markets. The hostiletakeover provoked strong protest inGermany and there insued a board struggle which saw

Mannesmannresist Vodafone`s efforts. However on 3 February 2000 theMannesmannboard agreed to an increased offer of £112bn, then thelargest corporate merger ever. The

EUapproved the merger in April 2000.

-28/07/2000: The Company reverted to its former name, Vodafone GroupPlc.

-2001: Vodafone took over Eircell (part of eircom) in Ireland,rebranding thecompany Vodafon Ireland.

-17/12/2001: Vodafone signed TDC Mobil of Denmark to introduce“Partner

Networks”.This new concept means the Vodafone’s involve in local marketwithout theneed of investment by Vodafone.

-2002: Vodafone acquired Japan`s third-largest mobile operatorJ-Phone, which wasthe first operator to introduce camera phones inJapan.

-2002: Vodafone rebranded Japan`s J-sky mobile internet as Vodafonelive!™ whichpresaged the global rollout of both the brand and theservice.

-02/02/2002: Radiolinja of Finland was signed as a Partner Network.(Radiolinjalater becomes Elisa.)

119Consolidated from published data

Investmentanalysis of Vodafone 2010

58

-03/12/2002: The brand was introduced into the Estonian market withthe signing ofa Partner Network Agreement with Radiolinja (Eesti).

-07/01/2003: Vodafone signed a group-wide Partner agreement withMobilkom

Austria.This brings Austria, Croatia, and Slovenia into the Vodafonecommunity.

-16/04/2003: Og Vodafone was introduced in the Icelandic market.

-13/05/2003: Omnitel was rebranded Vodafone Italy.

-21/07/2003: Lithuania was added to the community, with the signing ofa Partner

Networkagreement with Bité.

-16/02/2004: Vodafone signed a Partner Network Agreement withLuxembourg`s

LuxGSM.

-20/02/2004: Vodafone signed a Partner Network Agreement with Cyta ofCyprus.

Cytaagreed to rename its mobile phone operations to Cytamobile-Vodafone.

-04/2004: Vodafone purchased Singlepoint airtime provider from JohnCaudwell

(CaudwellGroup) and added 1.5million customers onto its consumer base.

-06/2005: Vodafone increased its participation in Romania`s Connex to99% andbought Czech mobile operator Oskar and rebranded Oskar intoOskar-Vodafone on

01/07/2005.

-28/10/2005: Connex in Romania was rebranded as Connex-Vodafone.

-31/10/2005: Vodafone reached an agreement to sell Vodafone Sweden toTelenorfor approximately € 1 billion. After the sale, VodafoneSweden becomes a Partner

Network.

-13/12/2005: Vodafone won an auction to buy Turkey`s second-largestmobilephone company, Telsim, for $4.5 billion.

-22/02/2006: Vodafone announced that it was extending its footprint toBulgariawith the signing of Partner Network Agreement with Mobiltel,which was part of

MobilkomAustria group.

-11/04/2006: Vodafone announced that it has signed an extension to itsPartner

NetworkAgreement with BITE Group, enabling its Latvian subsidiary &quotBITELatvija&quot tobecome the latest member of Vodafone`s global partnercommunity.

-01/05/2007: Vodafone added Jersey and Guernsey to the community, asAirtel wassigned as Partner Network in both crown dependencies.

-18/12/2008: Vodadfone increased stake in Polkomtel S.A. by 4.8% to24.4% for netcash consideration of €186 million (£171 million) inPoland.

Investmentanalysis of Vodafone 2010

Vodafonein Asia – Pacific

-07/1993: BellSouth, the first mobile service in New Zealand went liveand

VodafoneAustralia went live right in the same year.

-07/1994: Vodafone’s Fiji network went alive.

-11/1998: Vodafone purchased BellSouth New Zealand which later wasrebrandedas Vodafone New Zealand,

-01/10/2003: J-Phone, which was purchased in 2002, became Vodafone anditsmobile internet service J-Sky became Vodafone Live!

-12/2004: Vodafone signed with SmarTone of Hong Kong as partner whichbecame

SmarTone– Vodafone in 04/2005.

-28/10/2005: Vodafone announced the acquisition of a 10% of India’sBharti

Televentures,the India’s largest mobile phone network, under the brand nameAirTel.

-25/01/2006: Vodafone announced to sign partner network in Indonesia,Malaysiaand Sri Lanka.

-06/02/2007: Samoa was added as a partner market of Vodafone.

-09/05/2007: A Bharti group company irrevocably agreed to purchaseVodafone’s

5.60%direct shareholding in Bharti Airtel Limited.

-09/06/2009: Vodafone Australia merged with Hutchison 3G Australia toform a

50:50joint venture, Vodafone Hutchison Australia Pty Limited

Vodafonein the Middle East and Africa

-10/1998: Vodafone Egypt went live under the name ClickGSM

-18/09/2002: Vodafone signed a partner agreement with the MTC group ofKuwaitwhich was rebranded to MTC-Vodafone.

-03/11/2004: Vodacom, Vodafone’s South African affiliate, introducedVodafone’sinternational services and partner agreements to thelocal market.

-03/12/2005: By buying out the 15% stake held by VenFin, Vodafoneowned a 50%stake in Vodacom

-08/11/2006: to have further co-operation in Egyptian market, Vodafoneannounceda deal with Telecom Egypt in which Vodafone Egypt was owned55% by the group and theremaining was owned by Telecom Egypt.

-17/08/2008: Vodafone acquired 70.0% of Ghana Telecommunications forcashconsideration of £486 million in Ghana

Investmentanalysis of Vodafone 2010

60

-20/04/2009 – South Africa: Vodafone acquired an additional 15.0%stake in

Vodacomfor cash consideration of ZAR 20.6 billion (£1.6 billion). On 18 May2009

Vodacombecame a subsidiary following the listing of its shares on theJohannesburg

StockExchange and concurrent termination of the shareholder agreement withTelkom SA

Limited,the seller and previous joint venture partner.

-10/05/2009: Vodafone Qatar completed a public offering of 40.0% ofits authorized share capital raising QAR 3.4 billion (£0.6 billion).The shares were listed on the Qatar

Exchangeon 22 July 2009. Qatar launched full services on its network on 7July 2009.

Vodafonein the USA

-06/1999: Vodafone merged with AirTouch Communication and changed itsnameto Vodafone AirTouch Plc.

-09/1999: Vodafone AirTouch announced a $70-billion joint venture withBell

AtlanticCorp. The first wireless business with a national footprint in theU.S., Verizon

Wirelesswas composed of Bell Atlantic`s and Vodafone AirTouch`s U.S. wirelessassetsand began operations on April 4, 2000. However, VerizonCommunications—the companyformed when Bell Atlantic and GTE mergedon June 30, 2000—owns a majority of

VerizonWireless and Vodafone`s branding is not used, nor is the CDMAnetworkcompatible with GSM phones.

-04/04/2000: The merger of Vodafone and Verizon Wireless was completed

-9/01/2009: Verizon Wireless completed its acquisition of Alltel Corp.forapproximately US$5.9 billion (£3.9 billion).

Vodafonein the Americas

-15/11/2005: Vodafone announced co-operation including internationalservices androaming with América Móvil of Mexico. Included in theagreement were the 13 networksowned and controlled by América Móvil(except Tracfone in the US), and variousoperating companies ofVodafone and its Partner Networks.

Appendix2: VOD Net Operating Cash FlowsAppendix3:VOD Net investingCash FlowsAppendix4:VOD Net FinancingCash FlowsAppendix5:AdditionalVOD Operational InformationAppendix6: Obtaining VOD Inventory TurnoverAppendix7: Assumptions

Costof Credit (cc)

Thecredit costs are taken to be the arithmetic average of yearlyinterest between 2011 and 2015.

Vodafone’saverage interest rates are based on the financing costs paid over thetotal borrowings, which were 56.5%, 8.24%, 8.62%, 4.78% and 4.5% in2011, 2012, 2013, 2014 and 2015 respectively.

Thecredit cost is therefore projected at 7.2% per annum.

Costof Equity (ce)

Thecost of equity will be obtained as in the formula below

ce= rf + β[E(rm) – rf]

Whererf is risk free interest rate- a decade long government bond whichhappens to be Vodafone’s main source of financing. The averageyield of the US and ECB 10 year Treasury

Thesystematic risk β of Vodafone, which reflects the sensitivity of thefirm’s value tomarket movement, is 0.798.

WeightedAverage Cost of Capital (WACC)

TheWACC will be obtained as in the formula below.

An Investment Analysis of Vodafone Group PLC Contents

An Investment Analysis of Vodafone Group PLC 19

AnInvestment Analysis of Vodafone Group PLC

Contents

CHAPTER FOUR: LITERATURE REVIEW ON MERGERS AND ACQUISITIONS 2

Introduction 2

Empirical Studies of Mergers and Acquisitions 2

of Literature Review 8

CHAPTER FIVE: COMPANY ANALYSIS 9

Introduction 9

Cash Flow Analysis 9

Ratio Analysis 11

SWOT Analysis 13

Summary 14

CHAPTER SIX: FORECAST AND VALUATION 15

Introduction 15

Assumptions 15

Discounted Abnormal Earning Model 15

Discounted Cash Flow Model 16

The Discounted Dividend Model 17

Sensitivity Analysis 18

Conclusion 20

References 21

Appendix 1 23

Appendix 2: VOD Net Operating Cash Flows 26

Appendix 3: VOD Net investing Cash Flows 27

Appendix 4: VOD Net Financing Cash Flows 28

Appendix 5: Additional VOD Operational Information 29

Appendix 6: Obtaining VOD Inventory Turnover 30

Appendix 7: Assumptions 31

CHAPTERFOUR: LITERATURE REVIEW ON MERGERS AND ACQUISITIONSIntroduction

Mergersand Acquisition (M&ampA) have come to play a vital role in bothaspects of strategic management and corporate finance. This strategyhas been employed by companies in varying extents and involvesbuying, selling and dividing of different entities with an overridingaim of growing an enterprise rapidly in its line of operation withoutnecessarily creating a subsidiary (Weber&amp Yedidia, 2012, p. 296).For the past many years, Vodafone has employed this strategy toadvance its growth and expansion in the telecommunication industry.This chapter provides a review of the mergers and acquisition with agoal of understanding the strategy as employed by Vodafone.

EmpiricalStudies of Mergers and Acquisitions

Mostempirical studies in this discipline have focused on the drive tomergers and acquisitions as well as the consequences of mergers andacquisitions. A typical study in this category would consider theevolution of the profits of a merged firm relative to a specificindustry benchmark. Yook (2004) investigated the impacts of M&ampAon the acquiring firm’s financial performance. To achieve this, herelated the pre and post-acquisition economic value added (EVA) ofthe specific entities to the projected industry economic value added(Industry EVA average). The study was based on 75 of the biggestmergers and acquisitions in the United States between 1989 and 1994.The transaction characteristics of the studied firms included: themethods of payment, the acquisition types and the businesssimilarity. The outcomes of the rigorous procedure revealed thatimmediately after acquisitions, the acquiring firms manifesteddeteriorating outcomes (p.83). However, the outcomes of this studyare subject to certain controls as the calculation of inter-industryEVA reveals no discernible difference between the entity’sperformance and the industry average. However, the typology generatedin performance appraisals before and after the acquisition processesprovide useful insights that could facilitate a robust analysis ofVodafone’s M&ampA.

Gurgler,Mueller, Yurtoglu and Zulehner (2003) conducted a study based oninformation from 2704 cases of merger collected a few years after thecompletion of the respective merger processes. The researcherscompared actual business profits for the first five years for theseentities to the projected profits and sales for the particularindustries. The study outcomes revealed that a decrease in salesafter a merger implied a decline in operational efficiency of theentities while increased profits implied increased market strength(p. 649). The findings herein, concerned about 57.6% of all themerged entities, a pointer to the fact that 42.4% were even madeworse off by the merger. The essence of this study to the endeavor ofthe current study is that in terms of profit, the merger picture hassignificant dark spots. In a similar study to Gurgler et al. (2003),Moeller, Schliemann and Stutz (2004) investigated the relationshipbetween firm size and gains resulting from acquisitions. Using asample of 12,023 acquisitions, they demonstrated that small firmsusually benefit more from mergers and acquisitions as compared to thelarge firms (p. 224). Moreover, they demonstrated that large firmsusually experience substantial shareholder wealth losses,particularly when they announce the acquisitions of public entitiesirrespective of the financing (p. 226). This study is significant forthe fact that it presents robust outcomes encompassing previousresearch findings, but goes over and above that to investigate theeffect of firm size on the consequences of mergers.

Thevarious developments concerning the management of mergers andacquisitions as well as the barriers to such acquisitions have alsobeen studied. Huang, Christine and Cleaner (2004) undertook a casestudy to investigate the strategic decisions made by managers priorto and after mergers and acquisition of entities. It has beenestablished that there is the need for careful planning beforemergers and acquisition if firms are to benefit from the process (p.61). The study established that cultural differences between entitiesengaging in mergers need to be harmonized because having a commonground in cultural differences leads to a strong corporate foundationon which the firms can leverage their long-term growth (p. 60).Further, it was concluded that cultural differences are the majorimpediments to mergers and acquisition (p. 62). These conclusions aresimilar to those of Moraine&ampSteger, (2004).

Studieson the effect of merger announcements by firms to their returns haveshown mixed results. Yue and Ng (2005) sought to establish theeffects of announcements of a merger on the abnormal returns by firmsin Canada. In order to achieve this objective, they collectedinformation for 1361 entities that had acquired smaller entitiesbetween 1994 and 2000. It was found that abnormal results were usednot only by the acquiring entities, but also by the targeted entitiesso as to advance their interests in the merger and acquisitionprocess (p. 122). The outcomes of Yue and Ng (2005) are contrary toother studies such as Andre et al. (2004), which espoused negativeabnormal returns for acquiring firms and positive returns for thetargeted entities. The study also concluded that for privateentities, there were substantial abnormal returns relative to publicentities (acquirers) and that there were additional risks in theacquisition of private entities than public entities. Just like moststudies already reviewed, the results of Yue and Ng (2005) aresubject to certain limitations. The study examined the performance ofthe 1361 entities for a period of six weeks which is not adequate toassess the performance of a firm. For this reason, thegeneralizability of the outcomes is constrained as six weeks is notan adequate period to examine the performance of a company given thatthe period of study cannot enable adjustments for trend inperformance. Additionally, the period of the study might have beencharacterized by a particularly peculiar condition, which might havemade the company performance to deviate from the actual trend, butthe study did not control for such a factor therefore making itdifficult to generalize the outcomes. Nevertheless, Yue and Ng (2005)is phenomenal for its investigation of the effect of the announcementof abnormal returns by merging firms which is a key game theory inthis realm (M&ampA). They also made the all-important distinctionbetween private and public entities.

Thegeneral effects of mergers on the economies of different countrieshave also been examined, especially in economies where M&ampArevolutionized enterprises. The exact mechanisms through whichmergers influence different economies, especially for multinationalslike Vodafone have also been investigated. Kling (2006) conducted astudy to examine the effect of mergers on the German economy and theextent to which mergers were successful in the economy. This studywas informed by the fact that there are certain macroeconomic factorsthat can drive mergers such as economic growth and crises, inflationrates and economies of scale (p.668). The study used a sample of 35leading companies that had experienced mergers between 1870 and 1914.He used a vector regression model to establish the relationshipbetween merger waves and economic growth and prosperity. The modelresults did not identify whether mergers had been successful duringthe period covered by the study, which necessitated the use ofrolling models. The results showed that mergers positively impactedon the returns in all industries covered except banking (p. 685). Theapplicability of these outcomes is however limited by the long periodcovered by the study. The study is also based on the macro-level,making it less useful for the firm level studies.

Integrationplays a key role in mergers and acquisition and the literature inthis field is replete with the various mechanisms through which itinfluences mergers and acquisition. While investigating theintegration-merger-acquisition nexus, DePamphilis(2009) noted that an entity’s approach to integration will varybased on two vital dimensions of integration, which include thenewfound relationship between the acquiring firm and theorganizational autonomy (p. 72). On the relationship between theentities involved, he noted that this essentially is the workingatmosphere that needs to exist in order to facilitate the transfer ofstrategic capability, that is, the “strategic interdependenceneed”. As for the second dimension, it was found that after theacquisition process, the acquired entity needed to retain some corestrategic capabilities (p. 74). The various dimensions of acquisitionnecessitate a give absorption threshold to integration as far asmergers and acquisitions are concerned (DePamphilis, 2009, p. 74).These findings are similar to those of Homburg &amp Bucerius (2006)and Palmatier et al., (2007). The significance of DePamphilis (2009)in relation to the mergers and acquisition processes of Vodafone isthat it enables the investigation of the dimensions of integrationthat might have informed some major Vodafone acquisitions.

Whatmotivates companies like Vodafone to participate in mergers andacquisitions? The existing body of literature has attempted toprovide responses to this question from various perspectives. One ofthe most decorated studies in recent literature is Duksaite &ampTamosiuniene (2011) which is as extensive it is intensive. The studyinvestigated among others, three mergers considered to be thegreatest M&ampA of all times due to the large sums involved in thetransactions, including Vodafone and Mannesmann in 1999 (Transactioncost $ 172.2 billion), America Online and Time Warner in 2000 (Worth$112.1 billion) and PKN’s acquisition of Mazeikiu in 2006 for 5800Litas (p. 21). This piece of literature is particularly significantto the current study that seeks to comprehend the strategic policiesof Vodafone with respect to M&ampA in this section. The studyanalyzed the various reasons (motives) that drive companies to mergeand concluded that the motives can be classified into two broadcategories: primary and secondary drivers (p. 25). Essentially,companies engage in mergers and acquisition primarily as a long-termgrowth strategy (Duksaite &amp Tamosiuniene, 2011, p. 25). Thesecondary motives are diverse and vary across industries. Thesesecondary motives may include the need for diversification, synergy,access to intangible assets and integration (p. 25). Moreover, thestudy established that a majority of the M&ampA drivers basicallyserves as strategic instruments for reshaping competitive advantagewithin the respective industries and maintaining corporatecredibility in the face of radical changes in business operations. Onthe applicability of these outcomes, it is important to note thatsome of the motives as identified in Duksaite &amp Tamosiuniene(2011) are more intense in some industries relative to others.

Thekind of relationship that exists between the acquirer and thetargeted firm have also been highlighted by empirical literature asinfluential in determining the performance of mergers andacquisition. In a more recent study, Ishii &amp Xuan (2014)investigated the impact of social ties between acquirers and targetson the performance of mergers. Using data on educational backgroundand employment history, the study constructed a measure of the degreeof social connection between the management teams of the acquirer andthe target. The outcomes showed that social ties between entities areinversely related to the abnormal returns to the acquirer andultimately the merger. Additionally, the social ties between theacquiring firm and the targeted firm were found to increase theprobability that the top management of the target firm is absorbedinto the resulting entity after the merger complete with huge perks(p. 359). The clear result of the study with more significance to thecurrent study is the finding that the occurrence of social tiesbetween the acquiring entity and the targeted entity, usually resultsin poorer decision-making and the lower creation of value especiallyfor shareholders (p.361).

Theissues that impinge on mergers and acquisition are as contemporary asthey are traditional. Literature has addressed the problems of M&ampA,the impacts of M&ampA on the performance of entities and the motivesfor engaging in mergers and acquisition. One of the most recentstudy, Ofili (2015) undertook a review of literature with anobjective of assessing the risks involved in mergers and acquisition.The paper established that mergers and acquisitions are often repletewith risks, especially on overpayment and strategic incompatibility(p. 8). He further noted that if not treated with utmost caution, M&ampAcould result in adverse implications that can disrupt the entirebusiness operations (p. 9).

of Literature Review

Thesystematic review of literature in this chapter has cut across theissues pertinent to mergers and acquisition as they evolve over time.M&ampA, as pursued by different entities, has over time, gone beyonda mere growth platform to become a key strategy to counter stiffintra-industry competition. There is a consensus that M&ampA impactson business performance, but whether this is true for all partiesinvolved is not immediately available. The motives behind firmsengaging in mergers and acquisition also vary depending on the growthstrategies of the firms as well as the industries in which theyoperate. The game theories that characterize the mergers andacquisition processes also come in as crucial intervening factors inassessing the performance of M&ampA. Therefore, the extensive M&ampAby Vodafone (See Appendix 1) can be comprehended in the context ofthese outcomes.

Asto whether mergers and acquisitions usually add value to anorganization, the extensive review of literature undertaken in thischapter has revealed that mergers and acquisition can either improveor worsen the performance of certain organizations. A majority of theliterature reveals that in the case of a merger, the bigger companiesoften emerge as the greatest beneficiaries with the smaller partiesbeing made worse off. Nevertheless, the review has revealed some ofthe underlying factors that determine whether mergers andacquisitions will improve or worsen the performance of a company.These include the performance of a company are the type of gametheory involved in the transactions, for example, the announcement ofabnormal returns, the relationships between the merging firms, thecultural similarities (or differences) between the firms, the motivesthat drove the firms to merger and acquisition as well as theindustry of the firms.

CHAPTERFIVE: COMPANY ANALYSIS

Introduction

Thischapter undertakes to assess the operations management, investmentactivities, financial position and cash flows of Vodafone using cashflow and ratio analyses. A Vodafone SWOT analysis is also presentedin this section to assist investors to grasp the snapshot of thecompany.

CashFlow Analysis

Thissection is significant since it expresses the effectiveness of in thegeneration and use of cash flows by Vodafone to create opportunitiesfor growth and profitability. The cash flow analysis undertook herecovers the period 2011 to 2015. Over the five years covered by thisreport, Vodafone maintained an impressive cash flow resulting mainlyfrom netinvesting cash flows (SeeAppendices 2, 3 and 4). The investing activities of the multinationalshowed an increasing trend in which the net investing cash rosesteadily from £5.05 billion in 2011 to 25.25 billion in 2014. Thisrepresents a 500% increase in net investing cash flows in four years,which is quite impressive. Moreover, this growth is bound to soareven higher given that the first quarter entries for 2015 amountto11.16 billion (Appendix 3). However, despite this impressivegrowth, the year 2012 recorded a dismal £505 million in netinvesting cash flows and Vodafone could attribute this to the lack ofa substantial M&ampA in that material year.

M&ampAactivities are often used by some businesses strategically to checktheir rates of depreciation and capital outflow (DePamphilis,2009, p. 113).This strategy could account for the trend in Vodafone’sdepreciation, depletion and amortization netoperating cash flowsbetween 2011 and 2015. The company had recorded a decrease indepreciation, depletion and amortization cash flows from £7.88billion in 2011 to £6.66 billion in 2013 but the trend reversed inbetween 2014 and 2015 increasing the depreciation, depletion andamortization cash flows from £7.56 billion to £9.578 billionrespectively (Appendix 2).

Additionally,the netfinancing cash flowsof the group have not recorded a clear trend in the past five years.The company recorded £6.68 billion, £13.74 billion, £1.22 billion,£32.35 billion and £842 million for 2011, 2012, 2013, 2014 and 2015respectively (see Appendix 4). The fluctuating trend is illustratedin figure 5.1 below.

Figure5.1:Vodafone financing cash flows between 2011 and 2015

Source:Author’s graph with data from&lthttp://www.vodafone.com/content/index/investors/investor information/ annual_report.html&gt

Thefluctuation in Vodafone’s net financing cash flows in between 2011and 2015 could be attributed to a multiplicity of factors. Key amongthem is the groups change in M&ampA strategies (see Appendix 1). Allthe same, the reliability and the soundness of the integratedstrategies adopted by the company in the last five years is manifestthe reduced free cash flows from £10.71 billion in 2012 to £2.41billion in 2015 (Appendix 5). Drawing from the cash flow analysis,the company’s prospects are much more positive given the globaleconomic environment and trends in M&ampA.

RatioAnalysis

Thissection undertakes a financial analysis of Vodafone financialstatements by obtaining and subsequently interpreting the relevantratios of specific Vodafone balance sheet items. Theprofitability ratios arevery crucial to this endeavor as they will show Vodafone’s abilityto generate profits in light of its very own expenses. The figurebelow shows Vodafone’s profitability ratios for the last ten years.It is important to have a wide range for this period because otherthan espousing the ability of a company to generate margins above itsexpenses, the essence of profit ratios is the facilitation ofcomparisons to preceding periods so as to enable ascertainment ofbusiness progress (Hoskin, 2014, p. 183).

Figure1.52:VOD Profitability Ratios

Thefigure above shows Vodafone’s profitability ratios for the last tenfinancial years. Our focus, however, is the period between 2011 and2015. From the table, it is clear that there is no general trend inthe profitability across the three main ratios that will be analyzedin detail in this section of the report: Return on Assets (ROA),Return on Equity (ROE) and Return on Invested Capital (ROI). There isa slight margin between the three ratios in 2011 and the ratios in2015 as displayed in the table above. The ROA was 5.15 in 2011 and4.71 in 2015 while ROE was 8.96 in 2011 and 8.41 in 2015. Meanwhile,ROI increased from 6.44 in 2011 to 7.08 in 2015. 2013 wasparticularly notorious for recording the lowest profitability ratiosand a large percentage of the drop in profitability can be attributedto the M&ampA strategies adopted by Vodafone in the preceding yearas already discussed in the previous chapter. However, it isimportant at this point to note the attractiveness of Vodafone owingto the large positive ratios observed across the board. Given thatthis report is intended for shareholders, the ROE is particularly apoint of focus. For instance, the ROE for 2015 is 7.08 from ashareholder’s perspective, this implies 708% profitability!

TheVodafoneInventory Turnoverhas also been promising in the past few years. In the first quarterof 2015, the company recorded £23,028 million in cost of goods soldand had an average inventory of £7.85 million (VOD, 2015). Thisimplies that the company had an inventory turnover of about 29.29.34(see Appendix 6). The table below shows the Vodafone inventoryturnover between 2011 and 2015.

Table5.2 Vodafone Inventory Turnover

Year

2011

2012

2013

2014

2015

Inventory Turnover

28.92

23.93

28.43

30.85

29.34

Source:Author’s computation using data from&lthttp://www.vodafone.com/content/annualreport/annual_report11/performance/financial-position-and-resources.html&gt

Froman investor perspective, the Vodafone inventory turnover trend servesto indicate the rate at which the company turns over its inventoryannually and the VOD Inventory Turnover figures are impressive at alllevels of investments. It is important to observe the rate at whichVodafone Group PLC has been turning over its stock if the realperformance of the company is to be comprehended. In 2011, thecompany had an inventory turnover of 28.92 which means that in thefinancial year ending March 2011, Vodafone had managed to ‘turnover’ its inventory at the rate of 28.92 times a single unit. In2012, the inventory turnover reduced to 23.93. The poor performancerecorded by Vodafone in this year is not unique to this performancemetric, the net financial cash flows, net operating cash flows andthe net investing cash flows analyzed in the preceding section allpointed towards a poor performance in 2012. Partly, this drop inperformance, which seemed to have had a spiral effect on theperformance of the following financial year as revealed in figure5.1. However, the inventory turnover for the year 2013 brings out amore promising picture having risen by 4.5 units to 28.43 (See Table5.2). In 2014, the impressive trend continued with the year recordingan inventory turnover of 30.85 which is its highest within the periodcovered by this analysis. This peak in performance as far asinventory is concerned can be attributed to Vodafone’s renewedmerger and acquisition strategies in the preceding year (2013) and atthe beginning of 2014 (see Appendix 1). 2015 recorded a slight dropto 29.34 but taken as a whole, the period covering the three years(2013, 2014 and 2015) show a sustained productivity which could forma firm foundation for future growth and performance.

Tosupplement this information, the multinational’s day’s inventoryfor the six months ended March 2015 was 6.22 the company’s dayssales inventory was 4.46 with an inventory to revenue ratio of 0.02(Gurufocus, http://www.gurufocus.com/term/InventoryTurnover/VOD/Inventory%2BTurnover/Vodafone%2BGroup%2BPLC,accessed on 6thAugust 2015).

SWOTAnalysis

ASWOT analysis is an important investment consideration as it helpsinvestors to comprehend from a snapshot the issues impinging on acompany’s operational efficiency (Wall, 2014, p. 7). The tablebelow provides a summary of the Vodafone Group PLC SWOT analysis.

Table5.4:Vodafone Group PLC SWOT Analysis

Strengths

-M&ampA Growth Strategies

-Strong partnerships

-Brand Strength

-Financial Resources and Infrastructure

-Supply Chain Management Practices

-Global presence

Weaknesses

-Lack of control interests in certain ventures

-Managerial challenges resulting from economies of scale

Opportunities

-Emerging markets in Asia

-Recovery of global economy

-Trend towards Mergers and Acquisitions M&ampA

Threats

-Fierce competition from new market entrants

-Regulatory frameworks in the external markets

-Macroeconomic dynamism

Summary

Theanalyses conducted in this chapter have revealed that there is nopredictability in the trend of Vodafone’s profitability andintrinsic worth owing to the fact that a discernible trend could notbe established. This is partly due to the relatively poor financialperformance of the company in 2013 which this chapter has clearlyexposed. Nevertheless, what comes out clearly is that from whoeverdirection one investigates the company, the profit margins areimpressive and reflect more positive future prospects for thebusiness.

CHAPTERSIX: FORECAST AND VALUATIONIntroduction

Thepreceding chapter has evaluated the Vodafone’s performance and itsfuture prospects based on the global industry and the projectedmacroeconomic conditions. This chapter seeks to forecast and valuethe intrinsic worth of Vodafone. To achieve this objective, threemodels will be employed in forecasting and valuation: The DiscountedDividend Model (DDM), the Discounted Abnormal Earnings (DAE) andDiscounted Cash Flows Model (DCF).

Assumptions

Inthis section, certain assumptions are made to facilitate valuationand forecasting. To this end, the analysis henceforth will assume atax rate of 32%, the cost of credit before and after tax will beassumed to be 6.23% and 4.62% respectively. The cost of equity aftertax will be assumed 5.7% and the weights attached to the cost ofcredit and cost of equity are 33.54% and 66.46% respectively.Additionally, a deliberate and customized criterion is adopted forobtaining the weighted average cost of capital (see Appendix 7 formore details and assumptions).

DiscountedAbnormal Earning Model

Inthis framework, the value of equity is obtained based on the bookvalue of equity and the abnormal earnings created by the firm.Abnormal earnings are particularly relevant as instruments of M&ampAgame theory. The cost of equity (assumed 8.21%) is used as a discountfactor in the formula below to obtain the equity value.

Dueto the competitive equilibrium assumption (see Appendix 7), theabnormal earnings theoretically vanish beyond a terminal year.However, this is could be exceptional for Vodafone especially giventhe assumption that the telecommunication industry keeps growingexponentially (Appendix 7). Considering this, the model result is£3.52, which is well beyond the foregoing market prices.

Figure6.1:Discounted Abnormal Earning Model

DiscountedCash Flow Model

Thismodel uses the discount factor of the weighted average cost ofcapital (WACC). In this technique, the equity value (similar to thatobtained in DAE model) is adjusted for debt as illustrated in theformula below.

Adjustingfor the assumption that a 1.71% terminal growth rate, whichcharacterize the free cash flow from Vodafone, this model yields£3.81 as shown in the figure below.

Table6.2:The Discounted Cash Flow Model

TheDiscounted Dividend Model

Thisframework proposes that the value of the company’s equity equalsthe total present value of projected dividends to be received forevery share. Given the assumption that the projected equity valueequals the expected dividend per share, the equity value in thismodel is obtained via the formula below.

Thismodel yields £3.45 as shown in the diagram below

Figure6.3:The Discounted Dividend Model

Allthe three models used here, that is, the Discounted Dividend Model(£3.45), Discounted Abnormal Earnings (£3.52) and Discounted CashFlows Model (£3.74) yield share prices above the market price of£2.41 further endearing the company to stakeholders.

SensitivityAnalysis

Owingto the fact that all these models are anchored on certain fundamentalassumptions, which may not always hold, there is need to conduct asensitivity analysis so as to ascertain how the model mechanismswould adjust to variations in input parameters. The variationsconsidered here encompass risk premium, beta and free rate so as totest for the stability of the discount factors selected and the rateof growth for future cash flows.

Figure6.4:Sensitivity Analysis for the DDM

Figure6.5: Sensitivity Analysis for the DAE

Figure6.6: Sensitivity Analysis for the DCF

Fromthe figures above, the three models manifest the same ranges ofvariation in which discounted abnormal earnings (DAE) models comeacross as the least sensitive. The other two models exhibit muchhigher outcomes as compared to the foregoing market outcomes. Theresults of the sensitivity analysis for the models reinforce theoutcomes that Vodafone shares are as attractive today as they will inthe next five years and beyond.

Conclusion

Allthe three models used here, that is, the Discounted Dividend Model(£3.45), Discounted Abnormal Earnings (£3.52) and Discounted CashFlows Model (£3.81) yield share prices above the market price (£2.41– VOD LSE current share price). Further, sensitivity analysis ofthe models manifest the same (little) ranges of variation furtherendearing the company to stakeholders. Any rational consumer can onlycome to one conclusion: the earlier and the more Vodafone shares arebought, the better.

ReferencesList

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Duksaitė,E., &amp Tamošiūnienė, R. (2011). Why companies decide toparticipate in mergers and acquisition transactions. Science–Futureof Lithuania/Mokslas–Lietuvos Ateitis,1(3),21-25.

Galpin,T. J. (2014). Thecomplete guide to mergers and acquisitions: Process tools to supportM&ampA integration at every level.John Wiley &amp Sons.

Gugler,K., Mueller, D. C., Yurtoglu, B. B., &amp Zulehner, C. (2003). Theeffects of mergers: an international comparison. Internationaljournal of industrial organization,21(5),625-653.

Homburg,C., &amp Bucerius, M. (2006). Is speed of integration really asuccess factor of mergers and acquisitions? An analysis of the roleof internal and external relatedness. Strategicmanagement journal,27(4),347-367.

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Appendix1

VODAFONEMERGER AND ACQUISITION: Dates, Continent &amp Transaction amounts

Vodafonein UK

-07/1996: Vodafone acquired the two thirds of Talkland that it did notown for £30.6million.

-11/1996: Vodafone purchased Peoples Phone for £77 million with astore of 181stores and acquired the 80% of Astec Communication thatit did not own with 21 stores.

Vodafonein Europe

-29/06/1999: Vodafone purchased AirTouch Communications Inc, whichalso gave

Vodafonea 35% share of Mannesmann, owner of the largest German mobilenetwork.

-21/09/1999: Vodafone emerged its US wireless assets with those ofBell Atlantic

Corp,to form Verizon Wireless

-11/1999: Vodafone made an unsolicited (hostile) bid for Mannesmann,which was rejected. During 1999, Mannesman had purchased the UKmobile operator Orange and both Vodafone and Mannesman were nowoperating in the same markets. The hostile takeover provoked strongprotest in Germany and there insued a board struggle which sawMannesmann resist Vodafone`s efforts. However, on 3 February 2000 theMannesmann board agreed to an increased offer of £112bn, then thelargest corporate merger ever. The EU approved the merger in April2000.

-28/07/2000: The Company reverted to its former name, Vodafone GroupPlc.

-2001: Vodafone took over Eircell (part of eircom) in Ireland,rebranding the company Vodafone Ireland.

-17/12/2001: Vodafone signed TDC Mobil of Denmark to introduce“Partner

Networks.”This new concept means the Vodafone’s involve in local marketwithout the need of investment by Vodafone.

-2002: Vodafone acquired Japan`s third-largest mobile operatorJ-Phone, which was the first operator to introduce camera phones inJapan.

-2002: Vodafone rebranded Japan`s J-sky mobile internet as Vodafonelive!™ which presaged the global rollout of both the brand and theservice.

-02/02/2002: Radiolinja of Finland was signed as a Partner Network.(Radiolinjalater becomes Elisa.)

119Consolidated from published data

Investmentanalysis of Vodafone 2010

58

-03/12/2002: The brand was introduced into the Estonian market withthe signing of a Partner Network Agreement with Radiolinja (Eesti).

-07/01/2003: Vodafone signed a group-wide Partner agreement withMobilkom

Austria.This brings Austria, Croatia, and Slovenia into the Vodafonecommunity.

-16/04/2003: Og Vodafone was introduced in the Icelandic market.

-13/05/2003: Omnitel was rebranded Vodafone Italy.

-21/07/2003: Lithuania was added to the community, with the signing ofa Partner

Networkagreement with Bité.

-16/02/2004: Vodafone signed a Partner Network Agreement withLuxembourg`s

LuxGSM.

-20/02/2004: Vodafone signed a Partner Network Agreement with Cyta ofCyprus.

Cytaagreed to rename its mobile phone operations to Cytamobile-Vodafone.

-04/2004: Vodafone purchased Singlepoint airtime provider from JohnCaudwell

(CaudwellGroup) and added 1.5million customers onto its consumer base.

-06/2005: Vodafone increased its participation in Romania`s Connex to99% and bought Czech mobile operator Oskar and rebranded Oskar intoOskar-Vodafone on

01/07/2005.

-28/10/2005: Connex in Romania was rebranded as Connex-Vodafone.

-31/10/2005: Vodafone reached an agreement to sell Vodafone Sweden toTelenor for approximately € 1 billion. After the sale, VodafoneSweden becomes a Partner

Network.

-13/12/2005: Vodafone won an auction to buy Turkey`s second-largestmobile phone company, Telsim, for $4.5 billion.

-22/02/2006: Vodafone announced that it was extending its footprint toBulgaria with the signing of Partner Network Agreement with Mobiltel,which was part of

MobilkomAustria group.

-11/04/2006: Vodafone announced that it has signed an extension to itsPartner

NetworkAgreement with BITE Group, enabling its Latvian subsidiary &quotBITELatvija&quot to become the latest member of Vodafone`s globalpartner community.

-01/05/2007: Vodafone added Jersey and Guernsey to the community, asAirtel was signed as Partner Network in both crown dependencies.

-18/12/2008: Vodafone increased stake in Polkomtel S.A. by 4.8% to24.4% for netcash consideration of €186 million (£171 million) inPoland.

Investmentanalysis of Vodafone 2010

Vodafonein Asia – Pacific

-07/1993: BellSouth, the first mobile service in New Zealand went liveand

VodafoneAustralia went live right in the same year.

-07/1994: Vodafone’s Fiji network went alive.

-11/1998: Vodafone purchased BellSouth New Zealand which later wasrebranded as Vodafone New Zealand,

-01/10/2003: J-Phone, which was purchased in 2002, became Vodafone andits mobile internet service J-Sky became Vodafone Live!

-12/2004: Vodafone signed with SmarTone of Hong Kong as partner whichbecame

SmarTone– Vodafone in 04/2005.

-28/10/2005: Vodafone announced the acquisition of a 10% of India’sBharti

Televentures,the India’s largest mobile phone network, under the brand nameAirTel.

-25/01/2006: Vodafone announced to sign partner network in Indonesia,Malaysia and Sri Lanka.

-06/02/2007: Samoa was added as a partner market of Vodafone.

-09/05/2007: A Bharti group company irrevocably agreed to purchaseVodafone’s

5.60%direct shareholding in Bharti Airtel Limited.

-09/06/2009: Vodafone Australia merged with Hutchison 3G Australia toform a

50:50joint venture, Vodafone Hutchison Australia Pty Limited

Vodafonein the Middle East and Africa

-10/1998: Vodafone Egypt went live under the name ClickGSM

-18/09/2002: Vodafone signed a partner agreement with the MTC group ofKuwait which was rebranded to MTC-Vodafone.

-03/11/2004: Vodacom, Vodafone’s South African affiliate, introducedVodafone’s international services and partner agreements to thelocal market.

-03/12/2005: By buying out the 15% stake held by VenFin, Vodafoneowned a 50%stake in Vodacom

-08/11/2006: to have further co-operation in Egyptian market, Vodafoneannounced a deal with Telecom Egypt in which Vodafone Egypt was owned55% by the group and the remaining was owned by Telecom Egypt.

-17/08/2008: Vodafone acquired 70.0% of Ghana Telecommunications forcash consideration of £486 million in Ghana

Investmentanalysis of Vodafone 2010

60

-20/04/2009 – South Africa: Vodafone acquired an additional 15.0%stake in

Vodacomfor cash consideration of ZAR 20.6 billion (£1.6 billion). On 18 May2009

Vodacombecame a subsidiary following the listing of its shares on theJohannesburg

StockExchange and concurrent termination of the shareholder agreement withTelkom SA

Limited,the seller and previous joint venture partner.

-10/05/2009: Vodafone Qatar completed a public offering of 40.0% ofits authorized share capital raising QAR 3.4 billion (£0.6 billion).The shares were listed on the Qatar

Exchangeon 22 July 2009. Qatar launched full services on its network on 7July 2009.

Vodafonein the USA

-06/1999: Vodafone merged with AirTouch Communication and changed itsname to Vodafone AirTouch Plc.

-09/1999: Vodafone AirTouch announced a $70-billion joint venture withBell

AtlanticCorp. The first wireless business with a national footprint in theU.S., Verizon

Wirelesswas composed of Bell Atlantic`s and Vodafone Air Touch’s U.S.wireless assets and began operations on April 4, 2000. However,Verizon Communications—the company formed when Bell Atlantic andGTE merged on June 30, 2000—owns a majority of

VerizonWireless and Vodafone`s branding is not used, nor is the CDMA networkcompatible with GSM phones.

-04/04/2000: The merger of Vodafone and Verizon Wireless was completed

-9/01/2009: Verizon Wireless completed its acquisition of Alltel Corp.for approximately US$5.9 billion (£3.9 billion).

Vodafonein the Americas

-15/11/2005: Vodafone announced co-operation including internationalservices and roaming with América Móvil of Mexico. Included in theagreement were the 13 networks owned and controlled by América Móvil(except Tracfone in the US), and various operating companies ofVodafone and its Partner Networks.

Appendix2: VOD Net Operating Cash FlowsAppendix3:VOD Net investingCash FlowsAppendix4:VOD Net FinancingCash FlowsAppendix5:AdditionalVOD Operational InformationAppendix6: Obtaining VOD Inventory TurnoverAppendix7: Assumptions

Costof Credit (cc)

Thecredit costs are taken to be the arithmetic average of yearlyinterest between 2011 and 2015.

Vodafone’saverage interest rates are based on the financing costs paid over thetotal borrowings, which were 6.5%, 8.24%, 8.62%, 4.78% and 4.5% in2011, 2012, 2013, 2014 and 2015 respectively.

Thecredit cost is therefore projected at 7.2% per annum.

Costof Equity (ce)

Thecost of equity will be obtained as in the formula below

ce= rf + β[E(rm) – rf]

Whererf is risk free interest rate- a decade long government bond whichhappens to be Vodafone’s main source of financing. The averageyield of the US and ECB10 year Treasury bond is projected at2.3%whichwill serve as the rf. Adoptedfrom&lthttp://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx&gt

Thesystematic risk βof Vodafone, which reflects the sensitivity of the firm’s value tomarket movement, is 0.654.Adopted from&lthttp://markets.ft.com/research/Markets/Tearsheets/Summary?s=VOD:LSE&gt

Toobtain the market risk premium, the risk free rate will be subtractedfrom marginal rate i.e. (rm-rf) and this basically is thecompensation that investors are subjected to for holding riskyequities.

Theexpected risk premium for the United Kingdom is taken as 5.2%.&lthttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2598104&gt

Thedividend payments as used in the DDM are increasing by about £200million from 2016 to 2019 which is projected based on the company’sinventory turnover (equity).

Capitalexpenditure is projected based on the Vodafone ROC between 2011 and2015. See figure 1.52 – VOD Profitability Ratios &ltMorning StarFinancials, http://financials.morningstar.com/ratios/r.html?t=VOD&gt

VODWorkingCapitalbetween 2016 and 2019 is projected based on the VOD inventoryturnover (IT) that averaged 29.294 between 2011 and 2015.

SinceCost of Sales is a component of Inventory turnover and is positivelyrelated to IT, Costof Salesis projected on a similar plane to Working Capital with the ITaverage of 29.294.

SalesGrowth is anchored on the VOD investing activities between 2011 and2015 in which sale of fixed assets and business averaged £340million but the figure will be discounted since it is inflated bysales of £1.26 billion in 2012. Information obtained from VODInvesting Net Cash Flows (See Appendix 3)

WeightedAverage Cost of Capital (WACC)

TheWACC will be obtained as in the formula below.