Cindy's final essay

Introduction
This essay will be going to talk about the case about the Telecom’s takeover of AAPT in year 1999 which was deemed to be a highlight of telecommunication crisis of the acquiring firm. In my essay I will discuss the related subsequent performances of both the acquiring and the acquired firm. In the first section, the background of the two companies: Telecom and AAPT will be introduced, on the next section I will provide reasons for acquisition and a description of the Telecom’s takeover of AAPT that took place in 1999. Then, the third section will summarize the subsequent performance of AAPT, its impacts on Telecom and analyze the main causes for the failure takeover. In the last section, I will provide an appropriate recommendation to avoid similar occurrence in the future.
1. Telecom and AAPT
1.1 The acquiring firm - Telecom Corporation
Telecom Corporation of New Zealand Limited (Telecom) was established in 1987 as a state–owned enterprise. In 1990, it is sold to two major US telecommunications firms and become fully privatised. It has listed on the New Zealand, Australia and New York stock exchange from 1991. Today, Telecom is a major supplier in New Zealand and Australia with a full range of services: Internet, data, voice, mobile, domestic and international telephone, fixed line calling services and other specialised service operations like: electronic commerce, enhanced network services, cellular phones, overseas communications services, etc (Telecom Website and IRG).

1.2 The acquired firm - AAPT
AAPT Limited was found in 1991 in Australia and listed on Australian Stock Exchange in November 1997. Since then, it has provided customers with quality and competitively priced communications services. Now, AAPT is a wholly-owned subsidiary company of Telecom to operate national voice and data network and one of three largest telecommunications carriers of Australia (AAPT Website,).
2. Telecom takes over AAPT
2.1 The reasons for takeover
· There was a rise in Trans-Tasman connecting needs from both parts while the attendance of Telecom in Australia was very limited. As a result, expanding its operations in Australia market would be a beneficial way. Taking a controlling stake in AAPT which was a major telecommunication provider in Australia could generate a good data network feed to Telecom. With brand foundation that AAPT has built, this takeover could also help Telecom become more competitive in Australian telecommunication market.
· New Zealand is just a small market where Telecom’s infrastructure capacity couldn’t be used optimal whereas Australia is a huge potential market that provides a large number of consumers. By taking over AAPT, it was believed that infrastructure capacity of 2 companies would be used better and they could benefit from economics of scale.
· The reason for the takeover of AAPT was its potential benefit for Telecom considered by the management. Although Telecom was dominant in the domestic market, it faced heavy pressure of the increase in competition among three major telecommunication companies: Clear Communications, Telstra Corporation Ltd and Vodafone New Zealand. Accordingly, Telecom believed that taking over AAPT would fight against this risk because stable revenue growth in Australian market would offset the decrease in domestic revenue (Toth, Z. and Rad, A.T., 2006).
3. After the takeover
3.1 AAPT’s subsequent performance
AAPT operates in 2 segments: Consumer and Business. The Australian Consumer unit is composed of the full kinds of fixed, internet, pay TV and mobile telecommunications services supplied to residential and small business customers. The Australian Business unit comprises the full types of telecommunications services (voice, data and IP) supplied to business, corporate, government and wholesale customers.
On May 3rd 2001, Telecom announced that AAPT closed down the rollout of an A$ 500 million CDMA mobile network in Australia, which resulted in NZ$ 215 million abnormal expenses for Telecom. It included NZ$ 159 million for writing off project costs and NZ$56 million for future commitment (Annual Report 2001).
In year 2002, Telecom had a review of the carrying value of assets in the consolidated financial statements from the acquisition of AAPT. Based on the discounted expected future cash flows of AAPT, the estimation of the fair value was calculated. It was concluded that the fair value of AAPT was lower than the carrying value in the consolidated financial statements. In addition, this deficit was not a temporary trend. Consequently, the Board had written down the book value of AAPT by NZ$ 850 million (Annual Report 2002).
In December 2005 and June 2006, the recoverable amount was remarkably lower than the carrying value. Therefore, impairments have occurred. The December charge was the result of writing down of $63 million (A$58 million) of individual assets and $834 million (A$778 million) of goodwill. The June charge stated further writing down of $404 million (A$330 million) of assets. Consequently, the value of AAPT dropped to only NZ$ 270 million while Telecom has invested over $2 billion NZD into it (Annual report 2006).
On November 3rd 2006, in order to decrease the dependence on high network access fees charged by Telstra, AAPT signed an agreement with PowerTel for 3 years network access. PowerTel owns Australia's second- largest fixed-line broadband network (IRG/Telecom’s Announcements).
Obviously, there has been a downward trend in earnings from operations of APPT. Its subsequent performance is absolutely opposite to the expectation and the motivation of Telecom when it took over AAPT.
3.2 Impacts on Telecom New Zealand
3.2.1 Suffer the loss
According to the annual report, Telecom’s net earnings for the same quarter in 2000 were $161 million NZD. As stated above, AAPT has become a part of Telecom since October. Although the total revenues climbed up to $1,291 million NZD by reason of 42% growth in revenue of AAPT, which seems like a good sign (Telecom, 2007). However, the net profit decreased by $48 million compared with the same period last year, after AAPT becoming a subsidiary company of Telecom, which reflected the great amount of funding cost arising from the takeover of AAPT. That is to say, even though AAPT would operate well and generate revenues to the Company, the Company would use the goodwill to cover the funding cost that invested in AAPT.
In 2002, the Board has written down the book value of AAPT by NZ$ 850 million. Besides, closing down of CDMA rollout in 2001 continued to cost Telecom abnormal expenses of NZ$12 million. It led to the group loss of $188 million for the year ended 30 June 2002 (Annual Report 2002).
Further, Telecom has suffered a dramatic loss in net profit of $435 million NZD in 2006 compared with the $967 million NZD surplus in the previous year (Telecom, 2007). Especially, AAPT was struggle, which the profit dropped down by nearly $38 million NZD to $12 million NZD from last year. In addition, prior to the write-down, the net profit for the financial year 2006 was $820 million NZD (iTWire, 2007). Telecom was blighted by the unexpected poor performance of AAPT.

3.2.2 Unsatisfied services for customers
Since Telecom made its ill-considered decision of the 1999 takeover of AAPT, its shareholders, investors and customers has lost confidence of the Company. They would even treat the outcome of AAPT merger with Powertel with a degree of doubt.
Moreover, attend to one thing may lead to lose another, say, Telecom. The Company had an announcement in 2005 stated the plan to drive broadband take up in home market which would last at least three years and outlined the costs of $650 million NZD for the year 2005 (The Age, 2007). At the meantime, the Company expanded business to Australian telecommunication market with a large sums cost. Telecom has paid much more attention to expand the Australian market rather than the domestic network development, which induced the unsatisfied demand for broadband in home market in terms of substantial customers complained about the inferior services. The domestic customers might be wondering why the Company would rather throw such large sums of money into Australian market when home network need an upgrade.
Therefore, there was a negative impact due to the lack confidence of its shareholders, investors and customers in both of the home and overseas market, as well as the lack satisfaction of domestic customers needs.
3.2.3 Lower dividend distribution
Telecom pays dividend quarterly, which reduce the time taken of distributing returns to shareholders. Its dividend policy was to pay approximately 85% of the net earnings as ordinary dividend distribution for the 2005-06 fiscal years. Usually, the Company pays dividend at the same rate for the first three quarters and the dividend for fourth quarter accommodates the target ratio for the whole year. For the first three quarters ended 30 June 2006, the dividend per share was 9.5 cents and the fourth quarter was down to 7.0 cents and a special dividend of 5.0 cents. Further, for the fiscal years 2006-07, the Company reduced the dividend payout to approximately 75% of the net profit (Telecom, 2007).
Since the takeover of AAPT took place in 1999, the Company has thrown more than $2 billion NZD for acquiring AAPT. Owing to the substantive outlay for merger Powertel with AAPT, Telecom used the proceeds of the sales of the Yellow Pages to finance the costs arising from the Australian operation, rather than using the money to pay dividend. According to funding costs in respect of the Australian operation, the Company cut the target dividend payout ratio by 10% of its net earnings for the financial year ended 30 June 2007. Consequently, Telecom considered a lower dividend payout target which reduced the cash returns distributed to shareholders.
3.3 Reasons for the failure
3.3.1 Government’s regulation
Before 1980s, telecommunication services were monopolistic in most countries. However, state owned monopolistic telecommunication enterprises couldn’t satisfy the increase in need of customers and couldn’t stimulate innovations for new technologies. Therefore, there has been a privatisation and liberalisation trend in telecommunication sector worldwide during 1980s and 1990s. In order to gain successes in this process, it is very important that the government sets clear guidelines, goals for telecom sector and adopts suitable policies (Toth, Z. and Rad, A.T., 2006). When selling Telecom to new owners, New Zealand Government didn’t do that. So, “these owners extracted as much cash as they could from the business and hopelessly underinvested in the network. The situation was exacerbated by Roderick Deane, chairman until June last year, who believed that the company had property rights over the network and the Government had no jurisdiction to regulate these assets” (Brian Gaynor).

3.3.2 Management
When Telecom took over AAPT, it had to recognise that its positions in 2 markets are absolutely different (Toth, Z. and Rad, A.T., 2006). In New Zealand, Telecom is an incumbent company with reputation and advantage conditions whereas it has to be an attacker in Australian market. It leads to the changes in management, attitude as well as strategies to adapt with new challenges. However, it seems that Telecom hasn’t changed its structure and management well to the new competitive environment. In addition, AAPT changed its chiefs frequently. Some Telecom’s chief officers also join AAPT, they have to spend their time between New Zealand and Australia and manage both markets. This would cause some decisions which were made in New Zealand might not suitable for Australia marketplace.
4. Recommendation
· Before any business expansion to overseas market, companies should have a clear overview of the target market in terms of the diversity of customers’ needs, main competitors, and price range of the products and or services.
· Companies should consider how to keep the intellectual capital and carefully prepare capital expenditure budgeting considering all possible scenarios before making the decision of takeover. As in this case, we can see the increasing costs on takeover of AAPT has had negative impacts on Telecom.
· Before takeover, companies should flexibly identify any changes in customers’ needs in both home and overseas market to avoid dissatisfaction of services.
· For takeover of a target firm, the bidder companies should have gather relevant information about the target firm and provide a detailed analysis its past performances.
· Get a clear picture of the takeover target before offering price to bid for the target firm, which avoiding overvaluation of the target.
· Companies should spend significant time improving cost efficiency, reducing the ailing subsidiaries or projects, focusing on the target spending. It is to avoid throwing good money after the bad.
· Companies should focus on one potential market merely better than two or more market with a great amount investment at the same period which to preventing the company from attending to one and lose another.
· For company intends to take over large size business, it should consider being firm’s shareholders or joint venture to understand its structure and competitive market first rather than taking 100% control.
· Reconstruct management structure, retain most of skilled employers, it is necessary to employ local directors who are more familiar and easily handle the mass- market. Try to avoid frequently personnel translate.

Conclusion
To sum up, Telecom had been too optimistic about its future performance in Australia when taking over AAPT. In fact, this unsuccessful investment has a huge impact on them; the value of the both Telecom and AAPT has been hurt. The investors and customers are losing their confidence in Telecom, which may lead to an increase in costs of Telecom’s future operations. There is no single reason for the failure of AAPT; it is the combination of a lot of factors: government’s regulation, tough competition, risk of telecom industry, bad management and diversity in market needs.
From the bad experience of Telecom’s takeover of APPT, I recommend that any company who intends to acquire other firms internationally should come up detailed sound strategies and understanding of target market’s environment before any moves. Also, it is very important to have a good leading team which consists of highly skilled and experience people.
5. References
Australian IT. (2007). AAPT drags Telecom down. Retrieved on 18 February, 2010 from http://australianit.news.com.au/articles/0,7204,20014709%5E15320%5E%5Enbv%5E,00.html
Brian Gaynor. (2007). Telecom’s message for the Government. Retrieve 18 February, 2010, from http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10437882&ref=rss
Creed, A. (1999). Telecom New Zealand Attempts AAPT Takeover. . Retrieve 18 February, 2010, from http://findarticles.com/p/articles/mi_m0NEW/is_1999_Sept_15/ai_55771232
iTWire. (2007). AAPT doing it tough, says Telecom NZ. . Retrieve 18 February, 2010, from http://www.itwire.com.au/content/view/9150/127/
Janes, A. (2002). Telecoms at the crossroads. The Independent New Zealand’s Business Weekly, April 10th, 2002, p 24
Perry, K. (2007). Telecom’s Powertel takeover step closer. . Retrieve 18 February, 2010, from http://www.stuff.co.nz/marlboroughexpress/4036073a6425.html
Report of the Telecommunications Service Enquiry (2000). Connecting Australia. . Retrieve 18 February, 2010, from http://www.telinquiry.gov.au/files/final_report.pdf
The Age. (2007). Telecom NZ expects lower 2005 profits. Retrieve 18 February, 2010, from http://www.theage.com.au/articles/2004/05/07/1083881473586.html?from=storyrhs
Toth, Z. and Rad, A.T. (2006). Difficulties in value creation: Telecom New Zealand’s acquisition of AAPT Ltd. International Finance Review, 7, 209-227