Determinants Of Mergers And Acquisitions In Multinational Companies Of UK



1.1.Background of study:


Mergers and acquisitions are two aspects of corporate sector and management. It involves selling, buying, dividing and mixing of different companies so that they can spread at a wide range of the arena and grow rapidly. The history shows that mergers arose in 1708. It is the moment when the East India Company merged with its competitors.

Mergers and acquisitions do not include the formation of joint ventures and subsidiaries. It basically involves the reorganization of structures or companies for better growth and development. The word mergers actually stands for the reconstruction of a new organization through the union of two companies. Whereas acquisition is the process when one company take over the other and in turn creates a new organization. Acquisition is a complex procedure and success depends upon its outcome. Acquisition is the reverse of the mergers. When a small firm is taken over by a large company, acquisition occurs. It is proposed that how the information of such agreement is communicated to the members of the company. These members include shareholders, employees and board of directors. Hence acquisition is considered to be a confidential agreement. Corporate acquisition actually may be standing for any legal reason. It is discovered in 19th August (2013) by Moore Jim that in this case the seller sells the business to the buyer who is more interested in intellectual property. Buyer is not interested in liabilities and contractual relationships. McKenna Long & Aldridge LLP discovered on 19th August (2013) that these merged companies will never compete with each other in the same frame of the business area in the future. Due to the financial crisis many companies have used mergers and acquisitions (M&A) as a strategic tool to handle the difficulties the situation has caused. This has been reflected in the development of M&A activity within the multinational companies. The orange uk plc and Vodafone are two strong competitors.  Most of the major mobile telephone operations of Orange UK plc are neither merged nor acquired by the mobile telephone operations of Vodafone. Orange UK has had 17 million customers. It offers many service including DSL, GPRS, 2G, 3G, EDGE, etc. it use to offer two services pay as you go and monthly service plans.It has been discussed that whether these M&A brings any economical advantages in the future for the companies involved in it.


1.2.Aim and objectives:

The main aim of such study is to drive those factors that affect the process of merger and acquisition. The research is further proved by the selection of two multinational companies in competition with each other. These two includes orange UK and Vodafone companies. Orange UK is a multinational company that has undergone acquisition and in strong competition with Vodafone. The objective of this research based on the number of past mergers and acquisition is to highlight the determinants which affect its process and target. The objectives include determination of the factors of merger and acquisition in these respective companies. These also involve the evaluation of the impact of identified determinants of merger and acquisition on the company's future. It further consists of understanding of merger and acquisition between such companies. Its objective is to provide the knowledge of decision making of the merger and acquisition of such companies.


1.3.Problem statement:

During the year 2000 in February, M&A takes place between Orange UK plc and France telecom to form an Orange S.A. The original name of Orange UK has been retained as a result of it.When a merger takes place between Vodafone and Mannesmann for US $183 million they intend to divest from Orange PLC. The reason is that orange cannot hold two mobile licenses under EU regulation. In August 2000 as a result of which a merger and acquisition took place between France Telecom and Orange UK. There are a number of factors that lead to such merger and acquisition. The problem statement is that which drivers and determinants that resulted in such merger and acquisition in UK companies.


1.4.Research questions:

In order to resolve the problem statement there is need to investigate the answers of certain questions relevant to M&A.

These researches include a number of questions.

  • What are the factors that lead to merger and acquisition in Vodafone and Orange UK plc?
  • What is the process involved in merger and acquisition of these companies?
  • Whether other companies in the market are showing some signs financially or not?


1.5.Significance of study:

The study reveals the factors that affect the process of mergers and acquisitions in the financial area of UK companies. This helps to figure out the merger and acquisition needs ,targets and effects of financial services. It also form the basis to identify the strategic decision made by the executives in this regard. This type of study is preferred to find out the determinants and their impact on the process of merger and acquisition in organisation.

1.6.Structure of the Business Analysis Report:


The given study is only undertaken to examine the multinational companies listed on the stock exchange. The study is confined to the UK companies only. This section provides the details about the problem statements, research objectives, and the significance of study. The second section deals with the literature review of the study. The findings and point of views of previous researchers have shown in this section of report. The researcher mainly focuses on the latest studies. There are some old studies are also used to develop a literature review. A framework is also shown at the end of this section. The third section of the study outlines the methodology that is used for the completion of this study. Various parameters of the methodology is also elaborated in this section. The researcher is explaining that how the data is collected and analysed. A time frame has also been provided at the end of this section. The main findings of this study are provided in the fourth section of the report. The presentation of findings is done in form of tables. The fifth chapter concludes this report and summarize findings and give recommendations.












2.Chapter 2:                                     Literature review


Merger is a process where two companies either in a different or same market or sector merge with each other. When this merger of two companies takes place the resultant company comprise of the name of both of the respective companies. In this case all the stocks of both companies surrendered and new company stock issued. This is called the merger of equals. This occurred when Daimler-Benz and Chrysler ceased to operate further as individual companies. They exist as Daimlerchryler company. Mergers start its history from 1895 to 1905. The companies try to increase their market share during that merger movement. The great merger movements take place during this era by the companies named Dupont, General electric and US Steel. In 1893 a panic on merger movement arises that lead to a reduction in demand for homogeneous products. A model in 1893 named Naomi R. Lamoreaux was proposed for the demonstration of the acute fall in prices due to the the monopolies operated in the market.

Acquisition is different from the merger because purchasing companies do not require any exchange of stocks like mergers. In most of the acquisition it has been noticed that the true value of the company is not easily assessed. The value in some cases has been controversial. In (1996) Martin argued on the fact that there is ambiguity in the outcome of acquisition. So it is suggested to rely on the stock requirement in this regard. 

The process of acquisition takes place when one company buys another company. In practice, the merger of equals does not take place. In the purchase process, one company agrees to merge into another company. That is practically a purchase for the other company. That merger and acquisition takes place on mutual agreement of the CEOs.

In areas of mergers and acquisition the management researches reveal that the method in this literature is nomothetic surveys. In (2001) Michelle, Andred and Stafford presented the outcome of merger and acquisition for nomothetic surveys. Jensen and Ruback in (1983) also formulated certain case studies in this regard. The other category for case studies of merger and acquisition is conceptual publication such as by Jemison and Sitkin in (1986). There is a reason that why case studies are not frequently used in the literature of mergers and acquisitions. The difference in the norms in America and Europe is a major cause behind this Dilemma.

2.1.Classification of mergers and acquisition:

Merger is categories into three parts i.e. horizontal merger, vertical merger and conglomerate M&A. Horizontal merger is the merger when two companies related to the same sector merge with each other. For Example if a health sector merges with another health sector. This results in the increase in market share and the saving of excessive cost. Merger of this type between companies bring opportunities to market area  to enhance economy. Another is vertical merger which involves buying suppliers for the business. It can be explained by the example if health sector buys ambulance service from the suppliers. The aim behind this is the reduction in the cost of overheads. It also helps in achieving economies of scale.Williamson in (1975) explained that vertical mergers reduces the transaction cost. However, this reduction in cost cannot be justified unless it offsets the employment loss proportion. It is likely to reduce the employment losses by the reduction of prices and cost. It can also be justified if the procurement process is fast.

The process of merger have its drastic effects on the employment. It is difficult to find out the consequences of merger and acquisition on employment. However, it seems reasonable that merger activity is undergone for profit maximisation means. This is followed by cost saving and employment loss tactics. According to Jensen in (1986) it was examined that managers may urge to build or dissipate the cash flow. The actual outcome of an employment depends upon the current merger tactics and post merger position. Dutz in (1989) revealed that the losses to the employment are more severe in case of horizontal mergers than vertical or unrelated mergers. These are far more drastic when an industry gains economies of scale and surplus capacity.   

Conglomerate Merger and acquisition is actually an agreement in terms of merger or acquisition between irrelevant companies. The merger can be perfectly explained by an example that if health sector acquires a telecommunication company. The relation between both companies is null and irrelevant. The purpose behind this merger or acquisition is to diversify the capital investment to gain economies of scale. The example of conglomerate Merger is that take place between Walt Disney Company and American broadcasting company. Campbell et al (2005) proposed that conglomerate merger and acquisition takes place in order to extend the product range and corporate territories.

David and Henry (2002) said that like Robert .W McChesney, there is an increase interest of the entertainment industry in the media sector. The large interest in concentration of ownership of media sector is reported where wealthy individuals purchase such ventures. Apart from this there are some friendly and hostile mergers. In the friendly takeover, all the matters have approved from the management as a whole. The bidder fixes the bid after taking approval from the board of directors. The other form of takeover is the hostile takeover. In this case management is unwilling to enter into merger or takeover with other company. Healy, Palepu and Ruback et al (1997) argues  that the performance of previous takeovers depend upon the strategies adopted by management. If post takeovers have shown poor performances than any friendly takeover cannot remove that underperformance of companies.

Morck, Shleifer, and Vishny et al (1988) explained that hostile takeovers take place in countries with poor performances in the past.

2.2.Mergers and acquisition process:

Merger and acquisition is the most critical process. It needs to be handled with care when it comes to restructuring process. The reason behind a compact process is that a single mistake can bring unimaginable harm to company and economy as a whole. The company should follow those processes that lead the company to gain more benefit in the future.

Business valuation is the first step of merger and acquisition. This help in the evaluation and examination of the market value of the company that has been targeted. This involves research of whole history of organisation structures and market share. The past and the future forecast of the capital gains and strategies of the company.

The next step is of process and basically it is known as the proposal phase. In this phase proposal for merger and acquisition is then send by the company. This includes all the details of strategies and commitment.  After this, phase next is planning when company decides to sell its operations. In this case company take a strong decision whether to merge or acquire the company.  The company concentrates on the fact that merger or acquisition process should be organised and in profitable manner. In this process the management of the company evaluate the financial and business aspects of the company. It have a great influence on the issue that whether full or partial sale will be undertaken. Harari in (1997) give justification on mergers and acquisitions. These includes economies of scale, certain synergies and cost savings. The process of merger and acquisition also involve distribution channels and products. This further facilitate the availability of demanded products to customers to enhance their satisfaction. Gadiesh and Ormiston in (2002) presented the reasons of merger. These include poor strategic conditions and mismatch of cultures.  

The structuring business deal is the next phase after finalising the merger and the exit plan. The company that is going to takeover take new initiative to bring innovative ideas to the company. This strategy helps to enhance the credibility and business as a whole.

The next phase is the stage of integration. In this step both of the companies that are either tend to merge or undergone an acquisition process come with their own parameters. This section involves preparation of documents and signature at the agreement between both companies. It is further modified by negotiation of the deal. The parameters between both   companies explain the relationship of the entities in the future.

Acquisition  do not yield satisfactory financial returns most of the time. They suggest that due to the choice prospective, incomplete processes and outcomes are achieved.

After the signing of the agreement on mergers and acquisitions , both companies enter into a venture. The operation includes all the required expectations of all the companies. This merger and acquisition after the process constitute all the essential activities that are programmed to fulfil the requirement and desires of the respective companies. Acquisition focuses on the best strategies that fit to the business environment as a whole. Drucker,(1981) ;Searby, (1969) argues that involvement of managers, consumers, suppliers and operating managers helps to facilitate strategic choices. This commitment helps to improve the decision made for acquisition negotiations. Rappaport, (1979); Salter & Weinhold (1979) demonstrated that the involvement of industry, product and financial analysis helps in effective decision making regarding acquisition.


2.3.Determinants of Mergers & Acquisitions:


 Determinants of merger and acquisition are regulatory requirements, management inefficiency, financial structure inefficiency, credit operations and bank size. These determinants are discussed as follows.

2.3.1.Regulatory requirements:


Merger regulations provide a firm control over the merger and acquisition process.

Merger regulations are adopted in 1989. It is applied to cover the merger and regulation of control. It leads to the formation of a joint venture. Shaffer (1993) demonstrated that this competitive pressure on the unions have increased the demand of acquisition. Cebenoyan et al., (1993); Grabowski et al., (1993); Fried et al., (1996) suggested that there must be detailed examination of financial performance and their productivity in the respective company. In this case the evidence is available on the regulatory requirements and other financial determinants on mergers. These suggest that the motives for the merger vary slightly from company to company. 

Thompson (1997) argues that in dealing with Anglo-American, there was a threat of the hostile takeover. This threat leads the managers to violate their duty towards shareholders. In this type of corporate system, it is a disciplinary sanction for managers hold for their departure from shareholder wealth maximization. According to Thompson (1997) there is a suggestion that the structural change in the financial arena must be restricted to a friendly merger. This strategy must gain an acceptance from the regulatory authorities. Traditionally, it is also suggested that there should be maximised of services rather than profit earnings. Garden and Ralston (1999) demonstrate that higher deregulation among companies, high competition and new entrants in the market leads to focus on the commercial industry term.

According to Berger et al., (1999), government interventions affect mergers’ decision more directly. In addition to the above finding, Berger et al (1999) identified five factors which determine the increasing trend of mergers and acquisition in banking. These factors include changes, technology, financial downturn in the industry as well as markets, and deregulations. Berger et al., (1999) explained that there is clear evidence that deregulations accelerated M&A activity. The regulation is applied in case where restricted purchase, the takeover, merger and the reverse takeover take place. Regulations are imposed on the directors of the company and on those people who are involved in the consolidated acquisition. These are applied to the shareholders, authorized people, exchange participants and issuers.

2.4.Management efficiency:


Mergers and acquisition requirement tends to increase during the financial crises. There are a large number of characteristics in mergers and acquisition sector to enhance the financial performance of the company. According to Berger,Hunter, Timme in (1993) described the merger effect on the cost efficiency. The examinations proved that cost efficiency and effective resource utilization is enhanced due to merger. These motives include economies of scale, economies of scope, synergy and vertical integration. If the company tends to minimize the fixed cost, then a high profit margin is achieved due to maximum revenue. The efficiencies have been achieved by the increase and decrease in scope of marketing and distribution of products. Barney (2008) said that the resource distribution is uneven among the companies. Hence, companies can acquire resources by overcoming the information asymmetry.  It is the requirement and desire of stakeholders that both the organizations involved in merger and acquisition must emerge in an effective manner separately. The reason behind the assumption is that the organization undergone merger and acquisition, gain benefit from economies of scale and synergies. These can be achieved by a decrease in fixed cost and capital investment. It is explained that business area consists of evaluation of financial performance. This activity results in an increase in the productivity during the merger and acquisition. There is an indication of improvement in the post merger and acquisition operations. There is also indication that many companies have shown increase in turn over and decrease in capital expenditures. The performance of the company is measured by the profitability ratios to assess their efficiencies. It is explained that return on asset ROA and return on equity ROE are the ratios to be measured to assess the performance of respective company. The past review shows that highly developed companies acquire poorly performing firms. If the targeted company have higher ROA and ROE then there will be more chances that a company with a strong position acquire this company. These ratios ROA and ROE are used to measure the efficiency of the company. The highly performed company tends to acquire those firms or companies which are inefficient so that they can incorporate their organisational structure and technological tactics in this company. Such large multinational companies like Vodafone and orange UK take interest in the acquisition with those inefficiently performing companies to take the hold of their operations and to expand at a large scale. Lanine & Vennet, (2007) examined that due to the new entrants, cross boarder barriers do not fulfil the efficiency operation in  respective arena.


2.4.1.Asset Quality:

The quality of assets is an important determinant of merger and acquisition. If the asset quality factor in a company is not meet then it is unlikely that a merger or acquisition takes place. So, it can be considered that there is a positive relationship between the asset quality and ability to undergo merger and acquisition.  Nagle in (1991) stated that the issues and problems in asset quality relevant to the companies may become a global dilemma in future.

Merger and acquisition mainly focuses on the strengths and goals before taking any type of action. The managers and management accountant act as partners in this strategic process of merger and acquisition. They taken into account  that a compatibility factor exist between the companies or not. Yin in (1999) explained that the primary reason of downfall and financial crises were due to the deterioration of asset quality. It was due to the neglect credit method.


2.4.2.Size of company:

It is reviewed from the past examinations that small companies are good acquirers while large companies are not good at acquisitions. Size of companies has a drastic impact on mergers and acquisitions among them. There is a huge difference between the abnormal returns obtained from the small and large acquirers. If the acquisition of private companies is more profitable than public companies then this is due to the effect of size of the respective companies. Fuller et al in (2002) presented its research on a sample of five firms. According to his work it has been revealed that the return is abnormally high for the companies acquiring  private companies in comparison to public companies. The another factor is that small companies are likely to pay more amount to acquire any other company for cash. Chang (1998) and Fuller et al in (2002) described that the acquisition of private companies for equity do not have less return expected in comparison to the private companies acquired for cash. It has been reviewed that despite of the controls on the acquisition process and deals nothing can minimise the impact of the size of the company on it. The size of company effects on acquisition are more prevalent in large firms in comparison to small ones. The managers in small companies have their goals in line with shareholders. However, the managers of large companies are more socially involved in other operations and there is a little threat that they may depart from shareholder's wealth maximisation.



The theoretical framework maps the relationships between different concepts and the dependent variable (M&A Activity in our case). The variables under study are discussed below:

2.6.Variables of study:

The variables used for our study have been discussed along with their individual components and measurements. These variables include regulatory requirements, management efficiency, asset quality and the size of company.


2.6.1.Regulatory requirement:

In the UK some of the legislation are those which belong to EU regulations. The other authorities are financial conduct authority. There are certain compliance issues in large and small organisations. In UK corporate governance code is issued by the financial reporting council. The code of corporate governance introduces many standards in relationship to the remuneration, accountability, effectiveness and in relation with shareholders. These regulations set by the regulatory authority have an impact on the mergers and acquisitions of the company.

The regulations imposed on these companies are actually concerned with public interest. These are not linked with the rules for which merger and acquisition process is implemented. In Europe, a cross boarder concentration was approved. It was considered on the non-discriminatory basis rather than national basis as EEC. It is the European Economic Community and named as merger controls. The regulation was implemented smoothly. A self-executing regulation is in response to the merger and a directive applicable law.

2.6.2.Management efficiency:

Management efficiency is used to measure the profitability factor among the companies that have undergone merger or takeover. It is the determinant of merger and acquisition and can be easily measured by profitability ratios such as return on assets (ROA), return on equity (ROE) and operating profit margins. Belverd et al (2008) described that return on asset ROA is the profitability ratio used to measure the company's ability to utilise its assets to generate revenue. Return on equity ROE is used to measure the return obtained on shareholders’ equity. It measures the efficiency of the company to generate revenue from every unit of the equity of shareholders. Operating profit margin is a profitability ratio achieved by dividing operating income to net assets. It measures the management efficiency which demonstrates that how much income of the company is gained after making sales and paying for administrative expenses. It is a clear indicator that a company is profitable or not. Hence, operating profit margin is used as a tool to compare the profitability factor between different companies. The higher the ratios of profitability are than the financial position and performance of the company are much stronger. This leads to greater chances that investors are attracted towards the company and increase confidence on it. This helps to enhance the credibility of financial statements of the company.

2.6.3.Asset quality:

The quality of assets of company has a direct relationship with mergers and acquisition. According to Wheelock & Wilson, (2000); Focarelli & Pozzolo, (2005) if a company have lesser quality of assets than there will be lesser chances that this company is involved in merger and acquisition.

2.6.4.Size of the company:

Size of companies also has a strong impact on merger and acquisition selection. In this case there is need to maximise the wealth of shareholder by increasing the size, efficiency and diversifying the risk portfolio. The larger the size of the company, more investors will invest their capital. Travlos in (1987) said that public limited companies when acquire other companies for equity than the returns expected are low. It is also demonstrated and examined that the acquisition of private companies do not have low returns announcement. The company have lesser chances to be targeted by acquisition. Smaller the size of a company, more likely it would be considered as a target of acquisition by large companies.

2.7.Proposed hypotheses:

This study will test the following hypothesis:

H1: ROE has significant relationship with the probability of mergers and acquisitions.

H2: ROA has significant relationship with the probability of mergers and acquisitions.

H3: The Operating Profit Margin has significant relationship with the probability of mergers and acquisitions.

H4: ROCE has significant relationship with the probability of mergers and acquisition.

H5: The Asset quality of the company has a significant relationship with the probability of mergers and acquisitions.


Figure 1: Propose Framework



Independent Variables

  1. Asset Quality (Non-performing Loans)
  2. Regulatory Requirement
  3. Size of the company (Total Assets
  4. Management Efficiency (ROE, ROA, Opearting profit margin)


Dependent Variable

M&A Activity






3. Research Methodology


This section provides the details about the methodology that will be used for the completion of this study.

3.1.Type of study:

This is an analytical type of study as this study will identify various factors that play an important role in merger and acquisition. This study will attempt to evaluate the role of various identified factors in happening of merger and acquisition in companies. A thorough analysis of companies will help to identify those factors that play a significant role in merger and acquisition in an organization. The two companies have chosen for this purpose to demonstrate the process and target of merger and acquisition.

3.2.Research approach:

Saunders et al., (2009) said that a research may follow either a qualitative approach or a quantitative approach.Both of the approaches have own benefits and disadvantages. However, the present study will be using a quantitative approach. The approach has been selected because of the nature of the study and the variables taken in this study. The variables taken in the study are discrete and can be measured. Therefore, quantitative study is more suitable for this study. Moreover, this approach is likely to generate more reliable results as the use of the most reliable and agreed upon tools for analysis will be made in this study. 

3.3.Design of research:

Research design is based on the type of study. There are three widely used research designs, exploratory, explanatory and descriptive. The most appropriate research design for this study is explanatory research design. This research design is helpful in explaining the underlying factors about a certain phenomenon. The study will explain that how various factors affect taking place of mergers and acquisition in the multinational companies of UK. The study will provide further insight about the factors affecting mergers and acquisitions.

3.4.Population and sample:

The study will take companies listed on the stock exchange in UK as the population for the present study. The present study is focused only on multinational companies in UK. The data is extracted from the multinational companies, Orange UK and Vodafone for the year 2011-2013. The cases of mergers and acquisition taking place during this period will be investigated.

3.5.Data for the study:

The data used for the investigation of mergers and acquisition is basically secondary data, which is in a prior existence. The data are collected to point out past factors that lead to certain merger and acquisition phenomena. Financial data is extracted from the annual reports containing financial position, performance and equity statements of those respective companies. The data of the previous three years of Orange UK and Vodafone telecom are utilized to assess the profitability parameter between these competitive companies. The financial statements and notes to the financial statements will be thoroughly examined to extract the relevant data. The accounting ratios will be calculated by using certain specific formulas. These profitability ratios are calculated to present the fairness of the determinants that give rises to merger and acquisition.

3.6.Methods of analysis:

This research on data collected from the multinational companies is followed by a method. The companies involved in this analysis are Orange UK and Vodafone telecom. These are multinational companies and have undergone merger or acquisition phenomena in the past. The prediction of merger and acquisition requires a specific model with discrete outcomes. The model uses data to identify the factors that resulted in merger and acquisition process. There are various factors that are going to consider reaching to the depth of matter for determinants of acquisition and mergers.

These proposed hypotheses are tested by estimating post -acquisition and pre-acquisition ratio calculation of Vodafone telecom. The secondary data from a reliable resource is collected about these ratios to check the accuracy of this hypothesis being proposed. Meanwhile averages for selected units during the two years before and two years after acquisition are taken. Average pre-merger and post-merger financial performance ratios are compared to see if there is any statistically significant change in financial performance due to mergers, using the Student paired “t” distribution test. The average and standard deviation is calculated through following method.




Standard Deviation



3.7.Ethical consideration:


The researcher will try to maintain great care, morality and accuracy in the process of researching, collecting, recording and analyzing data. The entire data for this study will be in secondary form and quantitative values will be obtained from authentic resources such as the audited financial statements of multinational companies which are open for public access.   The data used for literature review will also be supported by appropriate references and the work of previous researchers will be properly acknowledged no attempt shall be to take any undue credit. The researcher will also adhere to the guidelines provided by the institution.



4.Findings and Analysis


The research is made on two companies in strong competition. One is Orange company and another is Vodafone telecommunication company. Both are in strong competition and indulge in provision of best mobile phone services and packages.

The data is collected from the peer groups of two companies in competition with each other.

Ratio Comparison for Fiscal Year 2013



Orange UK plc 2013

Vodafone telecom.                                  2013



Gross profit margin=

 gross profit/sales revenue 







Operating profit margin=

operating profit/sales revenue







Net profit margin=

Net income/sales revenue







Return on asset(ROA)=

net income/avg. of total assets          









Return on equity(ROE)=

Net income/avg shareholders equity                  








Return on capital employed(ROCE)   = EBIT/CE.                                   








         Ratio Comparison for Fiscal Year 2012                                       


Orange UK 2012.

Vodafone 2012.



Gross profit margin





Operating profit margin





Net profit margin.                          



















4.1.Analysis of Findings

In 2012, the increase in the gross profit margin in an orange UK company in comparison to Vodafone by 24.6% is due to certain changes. These involve higher mobile phone services in France, Poland, Spain and the rest of the world. The revenue formed of mobile services, sales of the mobile equipment, fixed services and other revenues from the respective countries. The major proportion of the revenue comprises of the services Orange UK has in France that is 10826, Spain 1988 and Poland 1694. The revenue is generated from incoming and outgoing calls, national and international roaming services. The services of machine to machine, broadband services and mobile virtual network operators also contributed for this revenue generation. The financial report shows that why gross profit margin is high both in year 2013 and 2012. The external expenses comprise of purchases, advertisement expenses, sponsoring costs, marketing costs, promotion and branding of commodities of Orange UK. External purchases in the year from France is 4,054, Spain 1326, Poland, 854, and the rest of the world 2132. The total external purchases in the year 2012 are higher in comparison to 2013. It is due to the fact that Orange UK broadband was re-branded as EE broadband on 30th October 2012. This results in the increase in brand, cost, promotion expenses and marketing of new broadband to gain higher market share. Vodafone telecom in year 2012 and 2013 come up with high administration and selling expenses. The increase is due to the reason that Vodafone accepted the agreement to acquire Cable and wireless worldwide for £1.04billion. So, the gross profit margin for the Orange UK is 25.3% higher than Vodafone. It is due to the fact that sales revenue is in inverse relationship with the gross profit margin. The operating profit margin ratios  of year 2013 on Vodafone reduces because of the  higher expense they incurred. They have undergone two largest acquisitions i.e. Cable & wireless worldwide for £1050m and the second one Telstra Clear limited for £440m cash. Some other acquisition expenses were £25m from the annual report of Vodafone telecom. The operating profit margin in Orange UK is 3.9% higher than Vodafone telecom for 2013. However, in 2012 operating profit margin was higher in Vodafone by 8.1%. The reason behind this less expenses than last year is no acquisition in case of year end 2012. The net profit margin has its own implications. The net profit margin of Vodafone is 11% higher than Orange UK in 2012. The annual reports of Orange UK show certain items like the cost of debt finance, gain on an asset contribution on debt finance, gain on foreign exchange and financial cost. The vast communication network of Orange UK results in foreign exchange cost. The financial cost is 697m Euros in 2012 and 869m Euros in 2013. It has been shown in the annual report that the variation in this cost is due to the financial parameters of the purchase price for ECMS shares. The reduction in net profit is due to the high amount of financial debt in 2012 of Orange UK. The high liabilities’ proportion comprises of bonds, bank overdraft. The year 2013 shows a high profit margin for Orange UK. In 2012 non operating expenses is 162 with finance cost 1932. This cost decreases the operating cost. Return on the asset ROA ratio reduces in Orange UK in comparison to Vodafone in both years. The non-current assets of Orange UK comprise of goodwill, property, plant and equipment, interest in associate and joint venture and other assets for sale and receivables. The amount of goodwill from the annual report is 25439 from countries like France, Spain, Poland and Rest of the world. In Belgium, the impairment is 385m Euros while 159m Euros from Romania contribute to the cash flow of the performance in medium and short term of Orange UK. The average of assets reduces the denominator of ROA and results in high ROA of Vodafone. The financial position of Vodafone telecom shows that the non-current assets contain intangible assets. These assets result in goodwill which is due to the acquisition of two larger companies Cable & Wireless Worldwide and Telstra clear limited. This good-will arises when a company acquires a new business and pay a higher amount than the fair value of the net assets of that business. The property, plant and equipment from the annual report show net book value. The net book value increases from 2012 to 2013 by 18655 to 20331. Return on equity ROE of Orange UK for the year 2012 is less than Vodafone while it is opposite in 2013 scenario.  The average value of shareholder’s equity is the main item of the balance sheet that affects the value of ROE. In the financial position of Orange UK for the year 2012 and 2013, there is a minor change in equity. The value of equity in 2012 is 26384 and in 2013 it is 26202.  Orange UK’s notes to the financial statement show that no new shares were issued during the first half of 2013. The amount of dividends in respect of earnings is 1528m Euros for September 2012 and 526m Euros for June 2013.The consolidated statement of changes in equity shows the movements in equity shareholders’ funds and non?controlling interests of Vodafone telecom. Equity shareholders' funds decreased by ?7. 1% to £71.5 billion as the profit for the year was more than offset by the purchase of its own shares under share buyback programs and equity dividends paid. The net income in year 2012 is higher than 2013 by an amount of 6294. Return on equity ratio value depends upon this equity value of shareholders, which include the called up share capital, additional paid in capital, treasury shares and retained losses. The retained losses of Vodafone telecom for year 2013 is higher that result in a reduction in the shareholder's equity. The treasury shares are in higher amount by 1188 than last year. This reacquired stock or repurchase of shares also reduced the net equity value. ROCE is a ratio having EBIT (earnings before interest and tax) in the nominator and CE (capital employed) in the denominator. As shown from the ratio of ROCE, Vodafone telecom for the year 2012 is higher  than 4.6%, while in 2013 this value is lower by 0.5%. Capital employed is the total asset - current liabilities. In a Vodafone plc financial statement, the trade payables shown the increase in 2012 of 198 from year 2013. The other payable also show an increase of 29 in the year 2012. The accruals and deferred income and derivatives of financial instruments form a part of the current liability. This respective increase in liability in comparison to EBIT reduces the denominator and increases the ROCE. The trade payables and other payables are the amount that they owe to their suppliers. The amount is either being accrued or invoiced. Due to the foreign currency fluctuation, derivatives of financial instrument are also incorporated in this current liability. The interest rate swaps and foreign currency swap have an amount of 800 and 89. In 2013 due to the acquisition and merger process, the interest rate swap value increases to 1016. On the other hand, the consolidated financial statement of Orange UK for the year 2013 shows that major portion non-current assets goodwill 15382 and property plant and equipment 11110 is obtained from France. While the current liabilities contain a major portion of trade payables 3051 and employee benefits 1028 are from France. The reason is the higher cross boarder relationship with France in comparison to Spain and the rest of the world. An Orange UK company having less assets, but the same profit as its competitors Vodafone has higher values of return on capital employed and thus higher profitability for the year 2012. But the situation is reversed in 2013 means that mobile phone innovations by Orange place proved to be the best of all for its customers. From the ratio calculation, it can be found that the result of the Orange UK company for the year 2013 is much better and satisfactory in comparison to the results of year 2012. The results of Vodafone telecom for the year 2012 shows that this organization was having the high profitability factor. All the ratios except gross profit margin were higher in Vodafone than Orange UK.  This organization is still suffering from this problem. Although Vodafone has been an attractive corporation for potential suitors in North America and Asia. Orange UK shows a huge increase in profitability factor in the year 2013. This increase is because of the fact that this organization gradually overtakes the business market. The monopoly has been created over the market against competitors by attracting customers through innovation. The services like DSL, GPRS, EDGE and 3G provide new lifestyle to the customers. On August 2011, Orange UK changed its price plans and revised it to provide a wide range of facilities to the customers globally. They offer mobile service customers £5 discount on the Orange broadband mobile plan.


Testing of proposed Hypothesis:

Significance of method of analysis:

The selected method is better than other methods of analysis being proposed. The fact it that the analysis through hypothesis explains the condition of performance of a company, before and after merger. The hypothesis test through estimation shows the ratio calculation to explore the pre-acquisition and post-acquisition phenomena's and their impact on financial performance of the company. The data are obtained from a reliable source like from the annual reports of Vodafone telecom. The comparison of certain ratios between Orange UK and Vodafone telecom gives the idea of financial performance. This assessment of financial performance of both companies is based on their financial information that is easily accessible to everyone. The selection of secondary data for estimation also enhances the durability and the significance of this method. The hypotheses are explained on the basis of past and present data of Vodafone Company to either reject or accept them. The data are accurately taken from the financial statement of Vodafone telecom who accepted the agreement of acquisition of Cable & Wireless World CWW. Hence, based on the fact of the report that merger and acquisition have a drastic impact on the financial performance of the company.







Asset quality= non-performing loans or asset/ total assets


= 18.7%


= 17%









2010 ratios pre-acquisition

2011 ratios  pre-acquisition

2012 ratios post-acquisition

2013 ratios post-acquisition
















Operating profit margin






Note: The ratios has been calculated on the basis of data obtained from the annual reports of Vodafone telecom for the last four year. The performance is assessed on the basis of two years before acquisition and two years after acquisition.                                                                             







Ho or  H1



















Operating profit margin













Where, Mean is 53.65 calculated by this formula:



Standard deviation is 80.36 calculated through this formula:



The above table shows that whether the probability of merger and acquisition in relation to the profitability ratios like ROA, ROE, ROCE and operating profit margin is significant or not. T – Test is based on the T – Distribution and is considered an appropriate test for judging the significance of a sample mean. It can also be used for judging, the significance of the coefficients of simple and partial correlations. This test is used to analyze the hypothesis H1, H2, H3 and H4 respectively.?The relevant test statistic, is calculated from the sample data and then compared with its problem value based on T – distribution at a specified level of significance for concern degrees of freedom for accepting or rejecting the Null Hypothesis.


The calculation of the mean and standard deviation of the ratios has been calculated by estimation of data obtained from Vodafone telecom for the year 2010 , 2011 pre acquisition ratios and 2012 and 2013 as post acquisition ratios. The significance of these mergers and acquisition is assessed through units called null hypothesis and alternative hypothesis;

Ho = μ1 = μ0

H1 = μ1 =? μ0.

Null factor shows that there is no significance change in financial performance before and after merger and acquisition. While alternate factor shows that there is a significant impact of the merger or acquisition of financial performance.

In the calculation, it is revealed that t-calculated in case of return on asset ROA and returns on the capital employed ROCE is lower than t-tabulated or specified. It shows that merger or acquisition in Vodafone case has no significant impact on these respective ratios ROA and ROCE. On the other hand t-calculated is higher than t-tabulated in case of the operating profit margin and return on asset ROA. It shows that an acquisition or merger took place in Vodafone telecom in 2012 have a significant impact on financial performance and profitability factor. This shows that the decision taken by Vodafone telecom to acquire CWW cable & wireless worldwide is valid and in the best interest of the company. So the hypothesis H2 and H4 is rejected while hypothesis H1 and H3 is accepted. It means that there is an improvement in performance in H1 and H3 after merger and acquisition while no improvement in case of H2 and H4.

According to H5 hypothesis, the asset quality of a company has a significant relationship with the probability of merger and acquisition. Asset quality is a significant alternative to assess the performance of the company. In order to measure the asset quality of the company, there is need to determine the percentage of non- performing assets to the amount of total assets.

The lower the ratio of non-performing asset or loan to total assets, higher will be the performance of the company. The non-performing loans from the annual report of Vodafone are 28297 for the year 2011. While this value is 24594 for the year 2013. The loan is falling due after more than one year. The table shows that after acquisition the ratio of asset quality is higher in comparison to before acquisition. Hence, it shows that asset quality has significant impact due to merger and acquisition. So, the hypothesis H5 is accepted, knowing the fact that asset quality plays a significant role in the probability of merger and acquisition.






This report has provided a systematic analysis on the effect of merger and acquisition on the multinational companies of the United Kingdom using a database collected from two such companies. It has also distinguished between related mergers, acquisition, and friendly takeover and restricted take over. This report also finds the merger activity substantially worse for employment. The process and classification of merger and acquisition presented in this report also elaborate past studies and researches. The size of the company is also a major determinant of merger and acquisition phenomena. In order to gain a sustainable factor in the market, companies put their investment in merger and acquisition. This is helpful to enhance the technology to a global arena. The determinants of merger and acquisition explained in this report enable a company like Orange UK to expand the program, package and product to the customers. The retention and reliability of customers is another major factor to boost the revenue of the company and at the same time to gain public confidence.

A business can be successful if an organization maintains the ability of competition. The overview of the results shows that Orange UK is more successful and gaining the customer's confidence.  It can be concluded that mergers and acquisition is a part of business industry. This process drives competition between companies in the same industry and across the boarder. In UK there are certain companies relevant to the telecommunication process. The process of merger and acquisition among this telecommunication industry is to spread the innovative technology throughout the global arena. It is a tool to diversify the risks related to the technology, price, cost, commodity, legislation and regulations. In order to spread it to the customers globally, the companies like Orange UK and Vodafone have developed certain new technologies to ease them. The provision of android facility is one of the main requirements of users. These companies through mergers and acquisition try to reach to that boom period and to create a monopoly over the industry. The requirement and demands of the users are their top-most priority. It can be concluded from the above discussion that acquisition in the telecommunication industry is a major factor to develop the entity and to spread it through multiple franchises. In the United Kingdom, the profitability factor among the companies is above all. The Orange UK company has shown more strength in this regard. In 2013, the team work brings new expertise, innovations and large revenue to the company. While in competition the Vodafone telecom shows unsatisfactory profitability results in the year 2013. Although it had been showing better results in 2012 in comparison to the Orange UK.  Despite of the fact that merger and acquisition among organizations bring some drastic impact on employment, it is essential for the expansion of innovations and technologies in a wider range.  Another prospect that came into light is the size of a company.  It has been elaborated in the report that acquisition in the small company is far better than that in the large company. The reason is the abnormal returns that may arise in case of large firms in comparison to the small firms. There are certain cases when the shareholder's wealth suffers from the acquisition announcement. The problem is that the method to finance the acquisition is not known.  The report clarifies the effect of such phenomenon as well as the determinants related to it. It has been justified the merger and acquisition facts through a current example of Orange UK and Vodafone telecommunication companies. The above results have been obtained after a thorough review of the consolidated financial statement of Orange UK and Vodafone telecom.



After a thorough analysis based on the determinants of mergers  and acquisition, it is recommended that a smooth functioning of an organization is reliant on a competition. In the UK, the multinational companies in related industries urge to be a part of competition to enhance the efficiency of a company. Despite of certain limitations, it is recommended that without merger or acquisition, the expansion of customers' services to the global arena will no longer be possible. The two companies undertaken includes Orange UK and Vodafone telecom. The history of both companies shows that the process of merger and acquisition enhanced efficiency and effectiveness.   

The companies acquire and merge in order to gain competitive advantage and to support their strategic goal. It is recommended for the companies to merge and acquire to have a stable position in society and to gain financial strength. The implementation strategy within an organization must be strong enough to tackle the issues arising during merger and acquisition. The reason is that a poor implementation of such strategies leads to failure of merger and acquisition. Therefore, it is recommended that companies should be more aggressive in financial product marketing to enhance and improve the financial efficiency. This will further result in improved financial position. It is also suggested that the management of the company must embrace diversification on the product strategy. They must incorporate a program of financial innovation within this business. This is the only way to enhance the income of a company. The companies must use merger and acquisition as a strategic tool that should be continuously applied and implemented. A man power training must be an integral part of an organization. The retraining of all the staff to ensure excellence in each division and sector of a company is also essential. There must be a continuous investment in information technology acquisition to ensure it is taking place at a smooth pace. Moreover, investment in training and retraining facilities to motivate the workers must be above all. This may lead to their commitment to the company and generate more revenue. The staff turnover rate can be reduced by this step. It is recommended that the merger and acquisition strategies must be appropriate and in line with the goals of those shareholders of the company. The information on the merger and acquisition process undertaken by companies like Orange and Vodafone of the United Kingdom must be properly and completely recorded and shown in their financial statement. The results of both companies must be reliable. It is also recommended that programs to enhance the performance of the management must be incorporated in the strategic system of a company.




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