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In 1999, Verizon, an American carrier that was then known as Bell Atlantic, and its European counterpart Vodafone created a joint venture called Verizon Wireless. It offered wireless voice and data services, which were becoming increasingly valuable nationwide at the time. As a result, the project attained considerable success, growing to serve 103 million customers in 2013. Both partners were satisfied with its performance, but Verizon decided that it would benefit from owning the service entirely. It proceeded to buy Vodafone’s 45% of shares for $130 billion, expecting the increased income from the acquisition to compensate the price eventually. At the same time, Verizon pulled out of its Vodafone Italy investment, severing the relationship between the two firms on agreeable terms. This report will analyze the acquisition from a variety of perspectives and determine the move’s value.
Verizon Wireless was arguably the United States’ biggest wireless carrier, leading in revenues and Wall Street popularity but trailing behind Cingularity Wireless in customer numbers. Moreover, while phone sales were declining due to market saturation, people began using various devices that featured wireless connectivity. As such, the market for the division in question was growing steadily and rapidly despite moving away from its initial foundations. Verizon expected sales to grow further, increasing profitability, and wanted to be in full control of the enterprise and receive all of its benefits in the future. The consolidation of its resources would give it the ability to respond to threats from competitors quickly and efficiently.
The acquisition should improve Verizon’s sustainability, as it will increase profits without affecting the people or the planet. Part of the reason for the purchase was that Verizon Wireless was the company’s most profitable division. Sales for landline phones, the company’s prior main product, were declining with the increasing adoption of cell phones. As such, the move would bring the revenue generated to the company, which could then use the income to fund improvement initiatives and innovation for its other aspects. Concerning scope, the company aims to cover the entire market and focus on beating its competitors in terms of cost. As such, its broad scope and price orientation define its strategy as cost leadership.
The acquisition satisfies the criteria put forward by Collis and Montgomery, marking the resource as desirable. According to Roos and Pike (2019), the five tests include inimitability, durability, appropriability, substitutability, and competitive superiority. It is challenging to imitate the service due to the advanced and extensive infrastructure necessary. It also depreciates slowly due to the slow adoption of new technologies, which provides time for the owner to adapt. The resource’s possessor captures the value that it generates, as the income goes to it. It is challenging for the resource to be substituted, as first, a large part of the customer base would have to purchase phones that support the new technology. Lastly, in terms of competition, Verizon Wireless is among the most prominent wireless carriers in the market.
Full control of Verizon Wireless will enable its parent company to generate value by leveraging the competitive advantage created in the process. At the time, the wireless communications industry was in its growth state for the reasons described above. According to Rothaermel (2017), the key objective for companies in these periods is to secure a significant strategic advantage over their competition. As mentioned in the case study, Verizon would have extra bandwidth as a result of the acquisition. The resource would be able to accommodate strong customer base growth and even enable sales to other companies. As such, the company would be better equipped than the other members to benefit from the growth period, creating value.
Ultimately, both Verizon and Vodafone benefited from the deal along with the latter’s shareholders. The former saw further growth in its wireless division that partially offset the continuing decline of its landline services. The latter received a significant influx of cash, which is passed along to its stockholders as dividends. Verizon’s shareholders did not benefit in the short term due to the company’s decline in profits despite its revenue growth. However, it is likely that after the company reorients itself and adapts to new market realities, it will be able to generate more substantial profits than before. Lastly, the governments of the United States and the United Kingdom benefited from the tax proceeds generated by the deal.
Overall, the acquisition was an excellent move on Verizon’s part and appropriate response to its situation. Verizon Wireless was an enterprise with high prospects, likely to continue generating increasing revenues and profits. As such, it was able to supplement its parent company while it was moving to respond to changing market needs. In the end, Verizon was able to adopt a more sustainable orientation, securing its position and capitalizing on the growing wireless communication market. Meanwhile, Vodafone could focus on its operations in its main markets and use the cash influx to make improvements and satisfy shareholders. The interests of both companies aligned, and the process went smoothly as a result. The deal successfully created value and justified its large expenditure through the resulting growth.
References
Roos, G., & Pike, S. (2019). Intellectual capital as a management tool: Essentials for leaders and managers. New York, NY: Routledge.
Rothaermel, F. T. (2017). Strategic management (3rd ed.). New York, NY: McGraw-Hill.
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