Would a ‘megamerger’ between Vodafone and Verizon be a good thing?

It has been widely reported this week that two of the largest communication firms in the world, Vodafone and Verizon, are in talks regarding a merger. Some reports have touted this as a ‘megamerger’ worth figures in the region of $250 billion which would result in one of the largest mergers in history, creating a communications giant. Such deal would be considered a horizontal merger whereby two companies in similar lines of activities combine (Arnold, 2008), which could result in great benefits to a number of parties. With Vodafone shares jumping 7% this week on the back of such rumours, this blog aims to analyse the potential benefits of such a deal.

Whilst there are a wide range of reasons to merge two companies, a key reason for a horizontal merger is the benefits achieved through economies of scale. Economies of scale are essentially the cost advantages a firm achieves through its size. Whilst Vodafone and Verizon are likely to experience economies of scale currently due to their large respective sizes, such merger could enhance this further as size would increase. Another key reason for such merger could be the increase in market power achieved by the newly created firm who would essentially become, as mentioned, a communications giant within the industry. Market power is also enhanced as competition is reduced, as these two firms who previously may have seen each other as competition are now working in synergy. There could be an element of risk diversification in this deal, as although the companies operate in the same industry, Verizon focuses predominately on broadband communications and Vodafone focuses predominately on telecommunications operations. This factor could also open up a wide range of opportunities for the firm as sharing knowledge between these two areas could allow the firm to excel in all areas of the industry along with the sheer size and scope of the organisation potentially allowed the new firm to consider entering new markets. There could also be a wide range of other benefits to the new firm resulting from the merger in terms of physical resources, human resources and financial resources as the firm would have access to a wider range of assets, a wider range of staff and therefore knowledge pool, along with generating greater sums of cash and in turn greater profits.

The above paragraph suggested some benefits I believe Verizon and Vodafone would experience from merging the two firms, however I feel it is also important to consider the potential benefits on other stakeholder groups. Firstly would consumers benefits from the new global giant? Well in theory if the firm achieved greater economies of scale and increased efficiency, thus reducing costs, they would be in a position to reduce prices. However this may not actually be the case, as instead the firm may be in such a dominant position over consumers and other firms due to increased market power that they instead raise prices and reap the rewards through greater profits. However, the new global giant created is likely to have access to a greater research and development department which may benefit consumers through new products for example to meet ever changing demand. Another key stakeholder group is the employees of both firms involved. It is often the case after a merger that a number of staff roles become redundant as roles in the newly created firm are shared. However it depends on the strategy the firm wishes to follow, as increasing the size of the firm could alternatively result in jobs actually being created. There are also a wide range of other stakeholders who would be affected by the merger of Verizon and Vodafone, such as shareholders who in this case may gain through increased share price of the new global giant, advisors who are likely to gain through high fees resulting from the transaction, governments who will receive taxes from the organisation and local communities who may benefit from increased employment opportunities and improved infrastructure for example.

Whilst this blog has considered the benefits of a potential merger between Verizon and Vodafone, there is of course the flip side, as such merger is likely to result in a number of potential disadvantages. As mentioned there may be employment implications such as jobs becoming redundant due to overlapping job roles. There may also be other issues to consider such as the new company exploiting tax loopholes to avoid payment of tax in a number of ways. However along with these issues there are likely to be vast disadvantages resulting from what would become one of the largest companies in the world, not just the industry. Whilst the new firm would not be a monopoly, it would possess significant power in the communications industry which it could use in a number of ways. For example the firm would have more power over suppliers and more power over market prices which benefits the firm at the expense of suppliers and customers. Such a large firm may even experience diseconomies of scale, as production costs may instead increase due to the size of the organisation. Other typical disadvantages of mergers include ‘culture clashes’ whereby the two firms corporate cultures struggle to integrate, leading to friction within the new organisation or poor ‘consumer perception’, whereby consumers may not like the idea of such a large corporation in the industry and choose not to use it.

So, should they do it? Well obviously the whole process and decision is a little more complex than I have made it seem in this short blog however the concept is true. In this case, a global giant would be created, which based on the evidence suggested in news reports and rumours this week, is a realistic prospect. I feel it would be very interesting for such a large merger to occur. I personally feel the key benefits would be through aspects such as R&D as such a giant would be in a position to create new products which could potentially change the communications industry as a whole. I also feel that if power and dominance was not exploited, then the firm could achieve benefits in the form of economies of scale which could be reflected in areas such as prices, thus benefiting consumers. It is not really possible to tell the impact on areas such as employment, however the potential for job creation is present. I also feel that the shareholders would benefits from such a merger, arguably a view supported by the market based on the 7% increase this week simply on the back of ‘rumours.’ It will be interesting to see what happens regarding this merger in the near future, but in my often optimistic view, I would support it.

Reference in this blog

Arnold, G (2008) Corporate Financial Management. Fourth Edition. Harlow. Financial Times, Prentice Hall.