LAHORE COLLEGE FOR WOMEN UNIVERSITY, LAHORE
Final Term
Class: B.com Semester: IV Subject: Management Sciences
Course Code: BC-205 Course Title: Advanced Accounting II
Major/Minor: Major Total Marks: 65 Time: 3hrs.
SUBJECTIVE
Q1.
On 1st April, 2019 Contractors Ltd. commenced to build a cinema hall, the contract price being
$6,00,000. During the year ended 31st March 2020, they incurred the following expenses:
Work to the value of $1,20,000 had been certified on 31st March 2020 of which 75% had been
received in Cash. Cost of work completed but not certified was $10,500. Materials valued at
$5,000 were on hand at site.
Required
After allowing depreciation @ 20% p.a. on plant, prepare an account showing the profit earned
to date and the amount of profit for which company may take credit in its accounts on 31st
March, 2020. Also prepare Work in Progress Account. (15)
Q2. Please prepare a Departmental Trading and Profit and Loss Account & General Profit and
Loss Account for the year ended 31-12-2014 of M/s Andhra & Company where department A
sells goods to department B on Normal selling price. (15)
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Particulars Dept. A Dept. B
Opening stock 175,000 -
Purchases 4,025,000 350,000
Inter Transfer of Goods - 1,225,000
Wages 175,000 280,000
Electricity Expenses 17,500 245,000
Closing Stock (at cost) 875,000 315,000
Sales 4,025,000 2,625,000
Office Expenses 35,000 28,000
Combined Expenses for both Department
Salaries (2:1 Ratio) 472,500
Printing and Stationery Expenses (3:1 Ratio) 157,500
Advertisement Expenses ( Sale Ratio) 1,400,000
Depreciation (1:3 Ratio) 21,000
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Q3. On the 26th of November 2015, Mobilink and Warid announced that they would merge in to
one, making this one of the largest Merger and Acquisition (M&A) deals Mobilinkers high fived
each other on what appeared to be a clear win: after years of rumors and months of extensive
negotiations, Warid had finally been acquired and was ready for assimilation in to the Mobilink
way of doing things.
Unfortunately, things are never this simple, especially in deals of the magnitude we are looking
at here. It would be naïve to imagine that the finish line has been reached. In fact, it can be
argued that the real test for Mobilink, its management, and most importantly its employees will
start from this point onwards. It is also important to appreciate the implications this deal will
have on the overall Pakistani telecom industry.
We are sure that you all have heard that Mobilink did this merger for a ‘bigger market share’.
This deceptively simple answer needs to be dug in to a little more to understand why Mobilink,
or any other operator for that matter, would really want to take up the hassle of entering in to an
M&A (merger and acquisition) deal? Was is it simply emotive i.e. the need to be number 1 in a
shrinking market just to cater to the egos of top level managers? While this might be true to some
extent, it is never the overriding reason. Mobile phone companies all over the world are largely
similar in their operations, with the same vendors catering to all the operators with core services
that are highly standardized.
A combination of high fixed costs/low variable costs have resulted in the global telecoms
industry being geared towards a generic competitive strategy called ‘cost leadership’. The lack of
any meaningful product differentiation means that operators cannot charge a premium versus the
competition and have to be highly focused on lowering their costs (and not necessarily prices) to
remain profitable. Here is a highly simplified example: If a telecom tower costs a total of
$10,000 and can cater to 5,000 customers, an operator that can get 5,000 customers fastest would
have the lowest cost per customer and will be hence will be more profitable. Hypothetically, if
Mobilink has 5,000 customers on a tower its cost per customer would be $2 ($10K/5K
customers), while Ufone with 2,000 customers would be at $5 ($10K/2K customers). Mobilink
would hence have higher percentage profits if the ARPUs for both operators were at a similar
level.
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Do note that cost leadership strategy is different from price leadership, where an operator decides
to keeps a low price to be competitive irrespective of its cost structure i.e. it simply chooses to
make less profit in order to have market share. At least 4 of the 5 operators in Pakistan are geared
towards a cost leadership strategy and hence the race for market share is essential for their
survival as the one with the biggest market share would have the lowest cost per customer.
Mobilink’s acquisition of Warid makes perfect strategic sense, provided that Mobilink’s long
term view is to continue to remain within the confines of the telecom market.
It is no secret that globally in around 95% of all M&A deals, it is the seller that benefits the most,
and not the buyer. While we are not privy to the exact price tag of the valuation of Warid or
Mobilink here, the deal appears to be a stock swap with a 4-year restriction scheme.
At the end of 4 years, the Abu Dhabi group can exit at ‘fair market price’. The fact that no cash
was involved as well as delayed exit (of four years) shows that the Abu Dhabi group was eager
to get this deal out of the door and reflects on the long term prospects of Warid’s operations.
This combined with the ticking clock for a refresher of an expensive GSM license (for Warid) in
2019 could mean pressures to sell quickly. So given the apparent eagerness of the Abu Dhabi
group to sell, has Mobilink management actually beaten global odds and gotten a great deal at a
great price? The answer again is not straightforward.
Firstly, let us do some back of the envelope calculations of the value of the deal. Most telecom
M&A deals in developed markets are priced at 1.2x of total revenues of a company, while in
emerging markets the ratio is 3.7x to account for the higher growth prospects. Given the
slowdown in growth in the past few years of the Pakistani telecoms market, we could argue that
the multiplier should be that of developed markets. Assuming a 1.7x multiplier (similar to peer
firms have in Asian markets) on a 15% shareholding of a $1.4 Billion revenue company
(combined revenues for last 12 months till Sep 2015 of merged company) makes the estimated
equity value of Warid at $357 Million. That looks like a really good deal for the Abu Dhabi
group, which was also carrying Warid’s debt of $470 Million.
Mobilink on the other hand makes up most of its value of this deal from a tricky beast called
‘synergies’. The argument is that the two companies combining their operations can produce
more profits than the two working separately. In other words, 1+1 = 3.
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There are two types of synergies…Cost and Revenues. Cost synergies are quite straightforward
as they involve less uncertainty. Using the previous example, if Mobilink and Warid have two
towers in the same coverage area, Mobilink should shut down the Warid tower and transfer all of
its customers to its own tower. This should drive down the costs per customer for Mobilink
dramatically hence making it more profitable. Revenue synergies, however, are far more
unpredictable and the wise tend to avoid building them in to valuations. A simplified example
here would be that Mobilink would get more customers because of joint branding in an ad with
Warid (already sounds unrealistic!).
The said synergies are being held at $500 Million mark (in net present value which basically
means it is both risk and time length adjusted). Given that Warid’s license is going to expire in
2019, not a lot of it can be attributed to a ‘saving’ on purchasing a 4G LTE license separately,
something that cost Zong $210 Million. So for the sake of simplicity, let us assume that there are
no revenue synergies, and given the short duration of Warid’s license, the LTE spectrum saving
for Mobilink is a generous $100 Million.
That leaves behind $400 Million worth of synergies that cannot be realized by simply asking
vendors for a larger discount on purchases of telecom equipment. This will be driven down
aggressively by reducing costs on the capex and opex side (redundant towers, NOCs etc. would
be shut down), reducing distribution channels (number of franchises would be reduced at a lower
percentage margin due to higher market power of the combined entity), reduced marketing spend
(one brand should be enough in the long run) and last but definitely not the least laying off
redundant staff from both organizations.
The stock market reaction to this deal has been at best mixed. The London Stock Exchange
reacted positively to the news, raising the share price of Global Telecom (the parent organization
of Mobilink) by +3.85% upon the release of the news. On the other hand, US based NASDAQ
seems to have penalized the Vimplecom for this deal. The stock price of Vimpelcom went down
by -5% on opening day and continued to stay there. Given that Vimpelcom’s market cap is
nearly 6x of that of Global Telecom’s, the net result of this share price movement has been
negative on shareholders. Having said that, a single day’s trading is too early to speculate on the
market’s belief that Mobilink would be able to realize its target synergies (and hence paid the
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right price for Warid) and we should keep an eye out for stock price movements of at least 30
days before coming to a definite conclusion.
Post-merger integration (PMI) is key to successfully realizing value from this merger and is
possibly the hardest part of this deal. Given the size of the deal and that, it is a first of its kind
transaction in the industry, there will be a significant learning curve for both firms to make the
PMI successful. The more technical bits are the integration of IT systems and network
components which are likely to be relatively straightforward given the overlap of common
vendors such as Ericsson on both sides.
The human resources aspect will be tricky and this is where the two organizations would face a
shuffle. It might be convenient to imagine that Mobilink would keep its entire work force and
Warid would not but that is likely to not hold true. There will be Warid specific parts of the
business that would need innate knowledge that only a Warid employee would have. At the end
of the day, it would hurt the deal the most if the remainder Warid employees were in consistent
fear of their jobs. To make this work, Mobilink would have to heavily and consistently
incentivize key team members down to middle management in both organizations to drive
integration forward over several years. This will definitely be time consuming and expensive,
and will take longer than the target set for 6 months.
This deal will indeed have a long-standing impact on the Pakistani telecom industry and will
trigger a directional change in the years to follow. Regardless of whether or not Mobilink is able
to fully realize the expected synergies, it will gain significant market power over time allowing it
to be more aggressive within the industry.
For instance, the greater scale will make it more feasible for Mobilink to adopt a price leadership
strategy in pursuit of gaining subscriber market share, hence directly affecting Ufone and Zong.
This shift in ‘balance’ could create immediate term externalities that will affect how competitor
shareholders are likely to respond.
In shrinking industries that are on the cusp of consolidation, it is usually the first deal that ends
up triggering a tidal wave of M&A activity across the industry. In such a scenario, there is a
chance that future acquirers pay-out excessive deal premiums versus fair market price and that
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can lead to value destruction for both themselves and the industry as a whole. Regardless, in any
consolidation scenario, it is the workforce/employee base within the industry that suffers the
most with an inevitable shift in supply and demand of jobs.
While how consolidation takes place is important, we think that this is not the biggest strategic
question facing Mobilink and its peers in the coming days (or at least should not be). For us the
bigger question is whether intra industry consolidation is the best step forward for the Pakistani
telecom industry? What implications will it have on plans of digitalisation and ambitions of
trailblazing the information economy that most operators boast of? Will consolidation really
solve the core strategic problem of shrinkage that the global telecom industry as a whole is
facing?
Let us look at this from Mobilink’s perspective. While Mobilink may have created a significant
competitive advantage for itself within the telecom industry, given the size of the acquisition,
one can argue that perhaps it has limited its strategic options outside of it. Questions that come to
mind are: Can Mobilink truly focus on building ‘real’ internet age capabilities like e-commerce,
internet enabled services, cloud based services etc. given its entire management’s focus would be
on post-merger integration with Warid for at least the next 24 months? If not, will its
shareholders have the risk appetite to do another round of M&A to buy the said internet age
capabilities post the Warid deal?
These questions are even more important for the remaining telecom players as their strategic
scope is not quite sealed as yet. Instead of further consolidation, other operators can consider
expanding the scope of their business portfolio beyond the mobile operator space. The
emergence and exponential growth of internet-enabled businesses in the absence of institutional
investors is possibly an area that can and should be explored. Perhaps an acquisition of an up and
coming e-commerce business or an internet marketplace would be a better strategic option for
the likes of Telenor, Ufone & Zong than for them to target each other for acquisition. We do
admit that such an option poses its own set of risks, the biggest one of which is their possible
inability to parent such inherently different businesses.
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Discussion:
1. To analyze the value of shareholder either it increase or decrease. How this merger is
helpful to share holder. (15)
2. Analyze the post merger integration for both companies.(5)
3. How this merger create impact on telecome industry. Discuss(15)
