Corporate Accounting: Merger, Acquisition, and Valuation Report

This report provides a comprehensive analysis of corporate accounting, focusing on mergers and acquisitions (M&A) within the context of Vodafone Group plc and BT Group. The introduction establishes the importance of corporate accounting and outlines the report's objectives, including examining the merits of cash versus equity funding in M&A deals. The main body delves into the reasons behind companies choosing M&A, such as strategic business goals and economic development, and discusses the advantages of both cash and equity funding. The report then presents an overview of Vodafone Group plc, highlighting its financial performance and strategic decisions, and provides a detailed financial analysis of BT Group, including key financial indicators like revenue, EBITDA, and ROCE. The capital structure and Weighted Average Cost of Capital (WACC) are examined, followed by a valuation of the target company using the discounted free cash flow method. The report concludes with recommendations based on the analysis, summarizing the key findings and offering insights into the potential acquisition of BT Group by Vodafone. Finally, the report provides a summary of the analysis and a list of references.

Corporate Accounting
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Contents
INTRODUCTION...........................................................................................................................3
Main Body.......................................................................................................................................3
(a): Reason behind companies choose merger and acquisition..............................................3
(b): Overview of the company taken as acquisition target.....................................................5
(c): Capital structure and WACC...........................................................................................7
(d): Valuation of the target company by using discounted free cash flow method................9
(e): Recommendation...........................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
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INTRODUCTION
Corporate accounting is an essential branch of finance that deal with accounting information
for companies, formulation of their final reports and cash flow statement for specific activities
such as absorption and amalgamation. The primary purpose of corporate accounting is to
maintain proper balance among financial systems of a company. “Vodafone group plc” is a
public listed company which has been taken into account for the corporate restructuring. This
project report aimed at providing specific information about relative merits of cash or equity
funding relation in merger and acquisition (Zadek, Evans and Pruzan, 2013). Apart from this,
justification regarding chosen company by the help of using key financial data is covered
effectively. Along with that calculation of weighted cost of capital and valuation of target
companies by using discounted cash flow method has being discussed properly in this report.
Further this report summary all the analysis by providing reliable recommendation has been
mentioned clearly.
Main Body
(a): Reason behind companies choose merger and acquisition
Corporate restructuring is an essential action which has been taken by companies to
significantly change their structure in order to increase future growth and profitability. The
primary reason behind most of the companies used restructuring is to overcome all their financial
issues or losses from couple of period (Koh, Durand, Dai and Chang, 2015). It seems to be
necessity to analyse financial adjustments to their assets and debts obligations. Basically, it will
be taken into account to reduce cost of manufacturing in an accounting period of time. As a
business proprietor, company can always look for their future growth and earn maximum money
by serving wide range of customer base. Thus, it is essential for an organisation to identify
valuable ways to grow their business operations and do this at a drastic pace (Bhasin, 2013).
It has been seen that M&A is done because of strategic business reasons, but the primary
reasons for any business combination are economic development as a core. Gaining a
competitive benefits or wide market share is another crucial motive behind going of M&A
(Phillips and Zhdanov, 2013). Most of the time company used to decide for merger in order to
earn a better distribution of network for marketing their business products. Merger and
acquisition is one of the valuable options that can help companies without having waited for long
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years regarding their marketing and sales planning to pay-off. In case, company wants to grow
faster, this can be right option for them that would deliver instant outcomes. The basic motive of
organisation in merger and acquisition is to secure a valuable opportunity that could either attain
the aims and objectives of growth. It would also deliver right areas of expansion which will
include to product and services line in the market that is presently not serving by firm. The basic
motivation regarding this recreation is that the resulting combination of items, key people and
current pipeline would allow overall business to operate their business in new market and tends
to provide sufficient amount of option to existing target market. Operating business by using
merger and acquisition doesn’t always free from challenge, but it also results in plenty of new
problems. It consists of regulating a company with total presence in multiple locations as well as
has more complex goods and service portfolio.
There are some other issues that are related to cost reduction objective which can be
associated with the revenue growth opportunities. Keeping all specific challenges in mind,
company go for mergers that diversify their overall business operations in more than one nation.
It can acquire another company which is seemingly unrelated to control implication on specific
performance to increase profitability (Hui, Klasa and Yeung, 2012). There are various essential
reasons to be taken into consideration for going with merger and acquisition. Some of them are
discussed below:
Synergies: By proper combination of business activities, performance would increase and
cost will reduce because of synergies among two legal entities. An organisation will always
attempt to merge with other company that is having complementary strength as well as
weaknesses (Dutordoir, Roosenboom and Vasconcelos, 2014).
Diversification: In most of the cases, companies use merger and acquisition techniques for
diversify their business. It seeks to provide proper shape their aim that is often merges with those
companies which is having deeper market penetration.
Growth: It used to give opportunity to acquire company to nurture market share instead of
having really on doing their work by themselves (Mueller, 2013). Most of the time companies
used to buy a competitive business in accordance to a price. Growth can lead to increase their
market presence and increase future sustainability of the company.
Eliminate competition: Plenty of merger and acquisition deals tend to allow owner to
reduce upcoming competition and try to earn maximum market share from their overall
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productive market. It is more uncommon for acquiring company’s shareholders that can sells to
their shares and force the cost lower in relation to the companies paying too much for their
estimated company (Whish and Bailey, 2015).
Merits of cash and equity funding
Financial restructuring is an essential reorganizing financial structure that comprises of
equity and debt capital. It can be done because either compulsion as well as part of accounting
strategy of the company.
Merits of cash: It would create transparency is cash management. It is considered as
automated process such as smart safes and provides faster access to the business to manage their
cash. This visibility tends to facilities in effective decision making and allows businesses to be
more effectively manage their operations in proper manner (Edwards, 2013).
Merits of equity funding: In every business organisation, equity financing that does not
take capital out of their business. It will help in long term planning for the investors that does not
expect to retain a quick return on their overall investment. It carries no repayment obligation as
well as provides extra working funds that can be useful to grow a business effectively for long
period of time.
(b): Overview of the company taken as acquisition target
“Vodafone group plc” is a leading British multinational telecom conglomerate which is
situated in London. It owns and deals in almost 25 nations as well as have partner network in 47
countries. It is basically listed on London Stock Exchange (LSE) as well as constituents of FTSE
100 index (Financial performance. 2018). It would have a great market capitalisation with total
£46.571 billion in 2018. The primary reason for the selection of this company is to analyse the
past case situation which is related with the merger of their Indian mobile business with idea
network. It is one of the successful mergers that set a platform for the company to increase their
profitability and market share in front of other companies. It is one of the faster networks in
telecom sector that would connect maximum people with their valuable connection. The
“Vodafone group” is planning to acquire BT group which is also a telecom company operating in
London. It is having large customer base with total of wide customers and largest operator of 4G
services in many parts of the nation. The entire strategy of BT group is essential part of
Vodafone group which is outlined in group planning analysis.
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There are certain key financial performance indicators those are related with BT revenue
and EBITDA. Revenue for the year was amounted to € 23.74 billion with total operating income
of € 3.381 billion in 2018. The most valuable objective assessment of financial position of a firm
is the return they are generating on their asset and the quantity as well as quality of outcome they
are getting in an accounting period (Mueller, Carter and Ross-Smith, 2011).
BT turnover and revenue after tax have increased in respect to last year, but they are still
minimum than those in 2018. A decline of 6.7% has been recorded over the last two year time. It
would indicate that business has very minimum variable costs that are line with heavy fixed cost
investment basically made through telecommunication sectors (Annual report BT group. 2018).
In the past few year, operating profit is also declined. This would indicates that business is
having some pricing pressures as well as spending more on their promotion this is reason behind
decline of profit by 0.5%. They have attained financial guidance which was set out at the initial
stage of the year for adjusted EBITDA. It gets increased for normalised free cash flow. BT
telecom has its key measure of group revenue trend underlying with total earning which reduce
their transit of 1.0% in 2017. The overall performance of the company has been affected in our
enterprise businesses. Specifically in international services where earning has come down
because of ongoing demand market situation and low IP exchange volumes (Higdon, 2011).
The BT Telecom is aware of their problems and has aimed on reducing their net debts
which has come down from 9838 to 8932 from last year. The net cash cost of a particular items
was amounted as €828m this constitute of payment associated with the settlement of warranty
claims in respect to the BT acquisition of €225 m in 2017 (Morningstar, 2018). The ROCE of
BT telecom is showing positive growth of return as compare to last year with 21.80% return in
2018. The company is also able to generate a valuable amount of net margin with total of 8.57%.
In relation to the liquidity position is also not so effective as its current liabilities has exceeded
the asset because of which the value comes down to below 1. It means that BT telecom is having
issues regarding meeting their short-term obligations (Brealey, Myers, Allen and Mohanty,
2012). The debt to equity ratio is showing that BT Company is not being able to generate
valuable amount of cash to fulfil their debt obligation. In 2018, only 1.18 debts to equity has
been calculation which is low for the company. It means that company is not utilising their
increase profit in their business.
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The receivable turnover tends to measure the efficiency of BT telecom about collecting
they payment as well as credit it had extended to their customer. They are taking 13.50 times to
retain their outstanding amount in an accounting period of time. The another important aspects is
related to their assets turnover ratio which is again valuable tool used by the company to measure
the efficiency ratio that used to measure internal ability of BT to incurred sales from their assets
through analysing net sales with average total assets kept by the company (Liquidity position,
2018). The report says that BT is having 0.56 time rotation of assets over the sales. In respect to
the EPS (Earning per share), is one of the valuable financial tool which is use by accountant to
determine profitability position of the company. According to the annual report of BT, it has
been seen that only 0.20 EPS has been generated in 2018 (Ross, Westerfield, Jaffe and Jordan,
2013). It means that companies profitability position is not better because of they are not able to
earn valuable amount of earning from the market. Through analysing all their financial
performance, it has been clearly seen that Vodafone group can go for acquisition as condition of
BT is much more suitable on the basis of their annual report. It would be more reliable decision
for Vodafone to join together with BT to expand their business operation and take over their
entire market share to maintain proper balance among their business in the market.
(c): Capital structure and WACC
It is essential for a business organisation to determine its cost of capital so that one can
easily able to determine its operation and growth chances though using various sources of
capital. The primary objective of BT telecom is to make proper use of their organization policies
to target an overall level of debt reliable with their credit rating aim. In order to fulfil this
objective, company has issue new shares, repurchase share and make adjustment in the value of
dividends which is paid to shareholders (Cronqvist, Makhija and Yonker, 2012). BT group has
managed their capital structure and make valuable adjustment to it in glow of specific changes in
their economic condition. It has been seen that board member of BT group has frequently
reviews the capital structure. BT group capital structure consists of a total net debt and
shareholder equity. This particular analysis is summaries as essential element that they handle as
capital.
Capital structure 2018 €m 2017 €m
Net debt 17816.106 8932
Shareholder equity 10270 8305
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Total 28086.106 17237
Apart from the above information, there is some other capital structure data has been
taken into account. Such as total debt to equity is amounted to as 138.54, whereas total debt to
capital is collected as 58.08. In order to calculate the weighted average cost of capital, it is
essential to determine cost of equity and debt.
Cost of equity: In financial term, cost of equity is basically considered as the return a
firm pay to their equity investors (Ondraczek, Komendantova and Patt, 2015). It is the risk which
is undertaken by the shareholders on their capital investment.
Cost of equity: Risk free rate of return + Beta*(market rate of return-Risk free rate of return)
Rf: 1.3221
Rm: 6%
Beta: 0.34
Cost of equity: Rf+beta(Rm-Rf)
: 1.3221+0.34(0.06-1.3221)
: 3.3621%
Cost of debt: It is known as the interest amount which a company pay on their overall
borrowing. It is articulated as a percentage rate. Because interest is deducted from the total
income taxes, cost of debt is basically represent as an after tax rate. It is basically represent that
cost that BT Company can claim over their interest expenses.
Cost of debt: Total amount of debt / Annual interest * 100
The March interest expense: $1013.966m
Book value of debt: 17816.106m
Cost of debt: 1013.966/17816.106 *100
: 5.6913%
Note: The last two year tax rate is taken as 20.635%
WACC: It is known as a firm total cost in which every categories of capital is determine as
proportionately weighted. It is basically termed as average rate of return a company is estimating
to compensate over all their different investors (Dhaliwal, Li, Tsang and Yang, 2011). Weights is
said to be the fraction of every financing sources under which a companies targeted capital
structure is planned. It can be use as a hurdle rate in relation to assess ROIC performance of BT
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group. It would also play a valuable role in economic value added evaluation. Most of the
investors tend to use WACC method to reach at a solution to whether make any investment in
the project. It is the basic rate that a company is estimating to pay on average rate to all their
security holders to finance their assets. The WACC is basically referred as the BT group cost of
capital which is financed through debt and equity position of the company. It is that cost which
are related with the sources of financing, every of which is weighted through their respective use
in their given situation. The market value of equity is generally termed as market cap. In the
recent time, BT group plc market capitalization is $29023.306m (Growth rate comparison,
2018). Whereas market value of debt is commonly difficult to evaluate, therefore simplification
can be done through adding the last two two-year average current portions of long term
liabilities. Before calculating the WACC, it is essential to compute weight of equity and debt.
 Weight of equity: E/(E+D)=29023.306/(29023+17816.106) =0.6196
 Weight of debt: D/(E+D)= 17816.106/(29023.306+17816.106)=0.3804
WACC: E/(E+D)*cost of equity +D/(E+D)*cost of Debt*(1-Tax rate)
: 0.6196*0.033621+0.3804*0.056913*(1-20.635%)
: 3.8%
Note: All the values are in millions except for per share data and ratio.
Interpretation:
It has been seen clearly that, cost of money is increase with its capital. BT company
expects continues to incur valuable amount of return on their new investment in coming time. As
of present time, BT group plc weighted average cost of capital is calculated as 3.8%. It means
that they are able to generate higher return on their total investment other than their cost of
company to increase the capital which is needed for the investment. It is considered as earning
which is excess of their return.
(d): Valuation of the target company by using discounted free cash flow method
Discounted cash flow method: It is known as one of the effective method that is used by
the company to estimate the value of an investment based on their future cash flows. This
analysis is being done to determine the current value of expected future cash use by a T group
plc on a discount rate. This particular evaluation has been done to examine the value of a
company total asset that has based on value of money it can be going to make in coming future
time (Dickinson, 2011). It is a simple valuation technique that is especially for companies those
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are undergoing irregular cash flows such as available resource companies that are going through
price cycle period to incur the cash flow.
BT: NYS Current
value
Valuation if reduced Valuation in case
increased
Calculated
value:
$24.20 1% 5% 1% 5%
Ke 7.18 $32.63 $18.59
Growth rate 2.20 $19 $32.01
Tax rate 0.19 $26.99 $21.41
Cash flow 7740014800 $21.22 $2718
Cash expense -2532600000 $23.30 $25.09
Long term
debt
17157081000 $24.63 $23.77
Net present value: It is known as specific value in the current stage of sum of amount
which is related to the future value. It is the worth of summation of the present valuation of
series of present and future cash flow. The primary purpose of corporate finance is to determine
the value of a business, investment, capital project and anything that is having associated with
the cash flow. By the help of NPV, BT telecom can easily be able to determine its total value
they are getting over the investment (McInnis and Collins, 2011). These discounted cash flow
method is an essential investment technique which is used by the investors to make future
investment decision in the BT group projects. The biggest advantage of using discounted cash
flow method is to overcome an investment to an individual value. It is considered as one of the
effective valuation method because it entirely relies on future cash flows of BT group.
5-year cash flow
Particular Cash inflow PV@8% Cash outflow
Investment -10000 1 -10000
2014 2440 0.925925926 2259.259259
2015 2378 0.85733882 2038.751715
2016 2713 0.793832241 2153.66687
2017 3029 0.735029853 2226.405424
2018 1565 0.680583197 1065.112703
Total prevent
value 9743.195971
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Net present
value 256.804029
From the above calculation, it has been seen that BT book value is 10000 as initial
investment during the year. At the same time, the discounted cash flow statement is calculated
with taking a present value of 8%. It has been clearly analyse that the net present value
calculated from the respective cash flows till 2018 is positive 256 billion. It means that the value
of revenue which is cash inflow is maximum than the cash outflow. In case the earning is greater
than cost, the investor used to make a valuable profit in coming period of time.
BT group book value and market capitalization:
According to the current price of BT group plc is $15.18, whereas its book value of per
share for the quarter of 2018 was analyse as 7.20. The value of prices for one share of stock is set
through buyer and sellers in the overall market. Share prices would be used to determine a
company’s total market value which is represented by market capitalization. Investors is
basically buy a stock which mean that they feel undervalued and sell those stock in case they feel
it overvalued. Market cap is said to be measurement of business has been valued that has been
based on share prices as well as number of share remain outstanding. It is commonly represents
as the market point of view of BT group plc stock value (Singh, 2015).
BT company has 1.5 million of total share which remain outstanding at a price of $25,
there market cap is 37.5 million. It is one of the basic characteristic that assists an investor to
analyse the total return and risk they are getting from their total share (Market Cap, 2018). BT
group pvt ltd is planning to analyse the market over the next coming few years as technology and
customer require changes. In case of broadband market share within BT group the total retail
share of net asset is around 22% in 2018, whereas retail share of installed base is examine as
45% in the same period. The net book value of BT group share of assets tends to controlled
through their join operation and recorded within infrastructure. The five year chances in prices
for BT telecom group has been presented below:
Year BT.A S&P 500
2014 16.8 18.6
2015 17.2 19
2016 12.7 20.3
2017 17.2 22.9
2018 10.5 17.2
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Figure: Price and cash flow for five year
Interpretation: From the above chart is has been seen that that value of market share for
BT group is more fluctuating in last five year time in respect to S&P 500. The chart showing
below is representing positive growth return in relation to market share from 2014 till 2017. In
the year 2018, it goes on decline in comparison to the S&P 500.
(e): Recommendation
According to the above analysis, it has been find that Vodafone group is in valuable position
to acquire the targeted company BT group. In relation to the debt and equity position of the
company which is providing more valuable return from the total investment is suitable outcome
for future growth chances. It would create maximum benefits in terms of increase their customer
base as well as enhance its goodwill in the market. It has also find out that WACC of the
company is giving a decent return with 3.8% to the investors. However, as per the discounted
cash flow method BT Company is able to earn a total net present value of 256 billion at the end
of 2018. It is more positive sign for the investors of Vodafone group to look for acquisition in
this particular company. On the basis of the market share there is valuable chance of getting
specific return from the market. Thus, it has been recommended to acquire the company in order
to increase the customer base as well as profitability in the market (Shah, Haldar and Nageswara
Rao, 2014). After analysing financial performance of BT group, it has been seen that there are
wide range of innovative communicated product and services that can satisfy the demand of
customer. Henceforth, it has been suggested to Vodafone Company to make decision for
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acquiring BT group. The most important point which has been determined during DCF
calculation is the earnings growth which is expected to increase the low risk saving rate of 1.2%.
The financial position of BT is much more reliable for acquisition as the asking prices is
well in reasonable. The investors can also look for their final account book which is easier to
execute the takeover with total confidence. Overall the condition of company financial health is
more in safe condition only certain debt obligation which is associated with the company for
every longer period of time is concern. It is much more profitable decision for Vodafone group
to go from acquiring the company as the entire performance is acceptable and fulfil all the
requirements of merger and acquisition process (Mazzucato and Shipman, 2014). It has been
highly recommended to go for friendly acquisition because it usually works for the mutual
benefits for both acquiring and targeted company. On the basis of internal as well as external
review of financial statement as well as other valuation these crucial decision is recommended to
agree with the terms and condition that are prepared by Vodafone company.
CONCLUSION
From the above project report, it has been concluded that corporate accounting is an
essential ways to determine the financial condition of a company. It would assist the parties to
analyse the financial performance and growth chances before going for any business. Merger and
acquisition would be best options that will be taken into account to increase the market share and
plan to conduct pleasant business operation in the market. However, it is vital to determine debt
and equity position of the target Company as well as WACC before making any decision
regarding acquisition. Further, analysis has provided profitability changes for the acquiring
company on the basis of the return they are going to get in coming period of time. The overall
recommendation has been made on the basis of collected financial information, whether
acquisition is profitable for upcoming period.
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