Investments of Vodafone and British Telecom Companies - Essay Example

The telecommunications and mobile technologies industries are categorised by the existence of rising competition, difficult economic conditions related to financing business activities and maintaining positive investor relationships. All of these external business forces create significant risk for both Vodafone and British Telecom (BT), which both maintain international or multinational business presences. Despite the sheer size of both European companies, Vodafone and British Telecom must consider how to create positive short- and long-term business strategies in the midst of unpredictable or somewhat-uncontrollable economic situations. This report identifies the relevant industry-related and economic-related factors which drive today’s strategic decision-making in both companies.

Vodafone and BT
Both Vodafone and BT thrive within a very regulated environment. Depending on the nature of the product or services, various regulation exists which dictate pricing limitations and overall service provision. British Telecom recognizes this and routinely expresses the business’ awareness of regulatory issues and how they relate to the long-term stability of the business. The Chief Executive Officer of Vodafone describes regulation as a risk to “market share, competitive position and future profitability” (Verwaayen, 2007: 27). From a strategic standpoint, regulation is a routine part of business operations, however when various legislation is provided in different, multinational regions the business must consider whether the foreign environment is worth the investment or whether new market opportunities should be researched. Moving either Vodafone or British Telecom presence into different markets which maintain less regulatory activities (such as price controls) would allow the company to have autonomy regarding the provision of competitive pricing which best befits the business model and profit expectations. It is clear that both Vodafone and BT must consider regulatory compliance in many varieties of business decision-making.
The regulatory activity also comes in the form of litigation, where different foreign taxing powers regularly assess the value of company activities and demand capital gains taxes or other regional taxing expectations. Currently, Vodafone has appealed a case to the Supreme Court in which the business is being requested by the government in Bombay, India to pay approximately £2 billion in capital gains taxes (Leahy and Betts, 2008). In a situation where both Vodafone and British Telecom have leveraged the businesses and used debt to finance expansion and growth, there would not be a great deal of cash available. A sudden, unplanned expenditure to the Indian government in the amount of £2 billion could represent the demise of a previously-planned strategic initiative due to limited financing and cash availability. This illustrates the importance of understanding the specific regulatory framework in each operating environment (both foreign and domestic) to ensure integrity in matters of finance.
Current economic conditions are also creating difficulties for financing business activities in the midst of global economic instability for the telecommunications and mobile industry. Bullock, Davies and Milne (2008) describe that British Telecom has issued £4.3 billion in long-term debt to avoid the company’s reliance on short-term commercial paper. Vodafone is also regularly using the commercial paper market to finance business activities (Bullock, et al.). Vodafone also recently undertook additional long-term debt in the form of a £17 billion loan to refinance the debt associated with a recent acquisition of Alltel Wireless (Guerrera and Taylor, 2008).
This type of strategic debt financing makes both Vodafone and British Telecom risky investments for long-term investors. Leahy and Stafford (2008) identify that it could take many years for Vodafone, in its current debt position, to see any positive cash flow in the company. Coupled with high debt and an uncertain economic environment, investors are likely hesitant to invest significant sums of money into either company for fear of losses related to stock equities. If analysts are suggesting a long-term issue with cash availability, and publicly promoting the likely, upcoming expenditure for repaying the Indian government billions of dollars, this would create negative investor relations and potentially jeopardize the business’ ability to raise capital through common stock dilution. Investor relationships, from the strategic perspective, are significant as one of the main goals of a business is to provide value for shareholders and make business decisions to ensure that there is a positive return on investment. With the necessity to leverage both companies for financing activities and the regulatory environment which dictates pricing policies and service provision, investors are likely thinking twice about investing in this particular industry at the current time.
Though both companies have their strengths, such as British Telecom’s extremely-efficient human capital system consisting of high-performance teams (Quader and Quader, 2008), the current external environment is creating significant difficulty for both firms in terms of strategic planning and options. Taking on additional debt is oftentimes a necessity in business, however, when coupled with various economic problems and investor perceptions of diminishing investment potential, strategic planning in the telecommunications and mobile industries becomes increasingly difficult. This is especially true when comparing these industries to other industries which are not generally plagued by uncontrollable or, at least, troublesome external forces.  Read More