Term paper

Of
Corporate Accounting
-2

Topic:-Merger of Vodafone
with Airtouch
Communications
ACKNOWLEDGEMENT

I, would like to extend my heart felt thanks and deep sense of

gratitude to all those who helped me in the accomplishment of
this term paper.

First and foremost, I would like to express my

sincere thanks to my corporate accounting 2 lecturer in the,
Punjab who gave enthusiastic support and encouragement to
complete this term paper.

Lastly I would like to thank my friends and all the

well wishers for their moral support and encouragement which
enabled me to complete this term paper successfully.
Contents

 Meaning Of Acquisition
 Difference Between Merger and Acquisition
 Purpose Of Acquisition
 Introduction to Vodafone
 Introduction to Airtouch Communications
 Introduction to Merger of Airtouch Communications
and Vodafone
 Benefits of merger to Vodafone
 Balance Sheet of Vodafone (after merger)
 Profit & Loss A/c of Vodafone (after merger)
 Balance Sheet of Vodafone (before merger)
 Profit & Loss A/c of Vodafone (before merger)
 Comparison of financial statements (before and
after merger) of Vodafone
 Accounting treatment of Merger from the angle of
both the companies
 Other Key Features
 Conclusion
Meaning of Acquisition
An acquisition, also known as a takeover or a buyout or "merger", is the buying of one
company by another. An acquisition may be friendly or hostile. In the former case, the
companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be
bought or the target's board has no prior knowledge of the offer. Acquisition usually refers
to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will
acquire management control of a larger or longer established company and keep its name for
the combined entity. This is known as a reverse takeover. Another type of acquisition is
reverse merger a deal that enables a private company to get publicly listed in a short time
period. A reverse merger occurs when a private company that has strong prospects and is
eager to raise financing buys a publicly listed shell company, usually one with no business
and limited assets. Achieving acquisition success has proven to be very difficult. The
acquisition process is very complex, with many dimensions influencing its outcome.

The buyer buys the shares, and therefore control, of the target company being purchased.
Ownership control of the company in turn conveys effective control over the assets of the
company, but since the company is acquired intact as a going concern, this form of
transaction carries with it all of the liabilities accrued by that business over its past and all of
the risks that company faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target receives from the sell-
off is paid back to its shareholders by dividend or through liquidation. This type of
transaction leaves the target company as an empty shell, if the buyer buys out the entire
assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the
assets that it wants and leave out the assets and liabilities that it does not. This can be
particularly important where foreseeable liabilities may include future, unquantified damage
awards such as those that could arise from litigation over defective products, employee
benefits or terminations, or environmental damage. A disadvantage of this structure is the
tax that many jurisdictions, particularly outside the United States, impose on transfers of the
individual assets, whereas stock transactions can frequently be structured as like-kind
exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the
seller's shareholders.

Difference between merger and

acquisition
Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly establishes itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to
exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a
single new company rather than remain separately owned and operated. This kind of action
is more precisely referred to as a "merger of equals". The firms are often of about the same
size. Both companies' stocks are surrendered and new company stock is issued in its place.
For example, in the 1999 merger of Glaxo Welcome and SmithKline Beecham, both firms
ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm to
proclaim that the action is a merger of equals, even if it is technically an acquisition. Being
bought out often carries negative connotations, therefore, by describing the deal
euphemistically as a merger, deal makers and top managers try to make the takeover more
palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999
which was widely referred to in the time.

A purchase deal will also be called a merger when both CEOs agree that joining together is
in the best interest of both of their companies. But when the deal is unfriendly - that is, when
the target company does not want to be purchased - it is always regarded as an acquisition.
Purpose of acquisition
Economy of scale: This refers to the fact that the combined company can often reduce its
fixed costs by removing duplicate departments or operations, lowering the costs of the
company relative to the same revenue stream, thus increasing profit margins.

Economy of scope: This refers to the efficiencies primarily associated with demand-side
changes, such as increasing or decreasing the scope of marketing and distribution, of
different types of products.

Increased revenue or market share: This assumes that the buyer will be absorbing a major
competitor and thus increase its market power (by capturing increased market share) to set
prices.

Cross-selling: For example, a bank buying a stock broker could then sell its banking products
to the stock broker's customers, while the broker can sign up the bank's customers for
brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

Synergy: For example, managerial economies such as the increased opportunity of

managerial specialization. Another example is purchasing economies due to increased order
size and associated bulk-buying discounts.

Taxation: A profitable company can buy a loss maker to use the target's loss as their
advantage by reducing their tax liability. In the United States and many other countries,
rules are in place to limit the ability of profitable companies to "shop" for loss making
companies, limiting the tax motive of an acquiring company.

Geographical or other diversification: This is designed to smooth the earnings results of a

company, which over the long term smoothens the stock price of a company, giving
conservative investors more confidence in investing in the company. However, this does not
always deliver value to shareholders
Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the
interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources.

Empire building: Managers have larger companies to manage and hence more power

Introduction to Vodafone

Vodafone was formed in 1984 as a subsidiary of Racal Electronics Plc.

Then known as Racal Telecom Limited, approximately 20% of the
company's capital was offered to the public in October 1988. It was
fully demerged from Racal Electronics Plc and became an independent
company in September 1991, at which time it changed its name to
Vodafone Group Plc.

Following its merger with AirTouch Communications, Inc. (‘AirTouch’), the company
changed its name to Vodafone AirTouch Plc on 29 June 1999 and, following approval by
the shareholders in General Meeting, reverted to its former name, Vodafone Group Plc, on
28 July 2000.

Vodafone Group Plc is the world's leading mobile telecommunications company, with a
significant presence in Europe, the Middle East, Africa, Asia Pacific and the United States
through the Company's subsidiary undertakings, joint ventures, associated undertakings and
investments.

The Group's mobile subsidiaries operate under the brand name 'Vodafone'. In the United
States the Group's associated undertaking operates as Verizon Wireless. During the last few
years, Vodafone Group has entered into arrangements with network operators in countries
where the Group does not hold an equity stake. Under the terms of these Partner Market
Agreements, the Group and its partner operators co-operate in the development and
marketing of global products and services, with varying levels of brand association.

At 31 December 2009, based on the registered customers of mobile telecommunications

ventures in which it had ownership interests at that date, the Group had 333 million
customers, excluding paging customers, calculated on a proportionate basis in accordance
with the Company's percentage interest in these ventures.

The Company's ordinary shares are listed on the London Stock Exchange and the
Company's American Depositary Shares ('ADSs') are listed on the NASDAQ Stock Market.
The Company had a total market capitalization of approximately £71.2 billion at 12
November 2009.

Vodafone Group Plc is a public limited company incorporated in England under registered
number 1833679. Its registered office is Vodafone House, The Connection, Newbury, and
Berkshire, RG14 2FN, England.

Introduction to Airtouch
communications
AirTouch Communications was a U.S.-based wireless service provider
that was created when PacTel Cellular was spun off from Pacific Telesis
on April 1, 1994, forming both AirTouch Cellular and AirTouch Paging
from "PacTel Cellular" and "PacTel
Paging"http://en.wikipedia.org/wiki/Wikipedia:Citation_needed . Its
headquarters were in One California in the Financial District, San
Francisco, California

On June 30, 1999, AirTouch Communications merged with UK-based Vodafone Group Plc,
and the new company was called Vodafone AirTouch Plc. In September 1999, Vodafone
AirTouch announced a $70-billion joint venture with Bell Atlantic Corp. to be called
Verizon Wireless, which would be composed of the two companies' U.S. wireless assets:
Bell Atlantic Mobile, AirTouch Cellular, Prime Co Communications, and AirTouch Paging.
This wireless joint venture received regulatory approval in six months, and began operations
as Verizon Wireless on April 4, 2000. On June 30, 2000, the addition of GTE Wireless'
assets, in connection with the merger of Bell Atlantic and GTE to form Verizon
Communications, made Verizon Wireless the nation's largest wireless communications
provider (until Cingular's acquisition of AT&T Wireless in 2004, creating what is now
AT&T Mobility). For the joint venture, Verizon Communications owns 55% and UK-based
Vodafone Group (formerly Vodafone AirTouch) owns 45%.

US West started its own wireless company in the early 1980s and branded it as US West
New Vector—one of the first providers of personal wireless services at the time. However,
due to federal regulations in place, they were not allowed to combine the sales of cellular
and paging service with their wire line telephone service. Eventually through growth and a
series of acquisitions, US West Cellular (formerly US West New Vector) and AirTouch
Communications had both grown large in size and range. It was determined that both
companies should merge. Due to regulatory limitations, certain overlapping areas of
coverage had to be re-spun off, traded, or sold to other wireless providers. Much of this
went to GTE Wireless, which was added to Verizon Wireless on June 30, 2000. In some
areas, the US West Cellular name was kept in place, giving the false appearance that the two
were separate companies. However, in 1996, US West Cellular ceased to exist and all
accounts were converted to AirTouch by the end of 1997. In 1999 the former US West
Cellular began relocated portions of its operations to two of the AirTouch cities of
operation, Walnut Creek and San Francisco, California, from the Eastgate area of Bellevue,
Washington. It was not until after deregulation that US West Communications formed
another wireless company, simply called US West Wireless, which was absorbed by Qwest
Communications when it took over US West. Qwest Wireless is a Mobile Virtual Network
Operator (MVNO) that operates on Verizon Wireless's CDMA network.

Verizon Wireless still maintains a call center in some of the buildings that used to house
AirTouch Cellular's call center and administrative offices

Introduction to Merger of Vodafone

and Airtouch Communications
What was the effective date of the Merger with AirTouch Communications Inc?
30 June 1999.

What was the final Merger consideration?

 Holders of AirTouch common stock receive 0.5 shares of Vodafone ADS plus
$9 in cash for each share of AirTouch common stock they own.
 Holders of AirTouch Class B preferred stock receive 0.403 shares of
Vodafone ADS plus $7.25 in cash for each share of AirTouch Class B
preferred stock they own.
 AirTouch Class C preferred stock remains outstanding; however the company
has an option to call the shares beginning 20 September 1999. Once called,
the holder has the right to receive 0.690 shares of Vodafone AirTouch ADS
plus $12.41 in cash for each AirTouch Class C preferred share held.

What was the market value of the merger consideration?

Based on the closing stock price of Vodafone ADS on 29 June 1999 the market value
of the merger consideration is calculated as follows:

 Closing price of Vodafone ADS times 0.5 plus $9

 Closing price of VOD ADS = $197

Calculation of the value of the merger consideration:

$197 times 0.5 = $98.50 plus $9 = $107.50

What are the tax consequences of the Merger?

This information does not address all aspects of US federal income taxation or
United Kingdom taxation that may be relevant to stockholders in light of their
particular circumstances, or to stockholders who are subject to special provisions of
US federal income tax law. Vodafone recommends that stockholders consult a tax
advisor.
  The receipt of Vodafone AirTouch ADSs by the holders of AirTouch common
stock and by holders of AirTouch Class B preferred stock is tax free.
 The receipt of cash by the holders of AirTouch common stock and by holders
of AirTouch Class B preferred stock is taxable to the extent of your gain.
 The conversion of AirTouch Class C preferred on or after 30 June 1999 is a
fully taxable exchange to the extent of the holder's gain.

Benefits of Merger to Vodafone

-- Merger of equals to create a mobile telecommunications leader

-- Combined current market capitalization of some $110 billion

(GBP 67 billion)

-- Agreed equity split of approximately 50 percent to Vodafone and

50 percent to AirTouch

-- AirTouch shareholders to receive 5 new ordinary Vodafone share

(0.5 ADR) $9 cash for each AirTouch share, represent a Current
value for each AirTouch common share of $97 (based on the
Closing ADR price on 15 January 1999 of $176)

-- Integrated board and management team: Sam Ginn to be

Non-Executive Chairman and Chris Gent to be CEO

-- Third largest UK public company

-- Global reach with operations in 23 countries and over 23 million

Mobile customers

-- Unparalleled pan-European footprint

-- Aims for continued rapid growth and expansion through

Acquisitions, new licenses and leadership in next generation
Mobile technology

-- Significant cost and revenue synergies expected to be realized

Through the scope and scale of the combined operations
-- Transaction expected to be tax free for US purposes to AirTouch
Shareholders in respect of the share consideration

Balance Sheet of Vodafone on

31st mar 2000 (after merger)
Profit & Loss A/c of Vodafone on 31 st
mar 2000 (after merger)
Balance Sheet of Vodafone on
31st mar 1999 (before merger)
Profit & Loss A/c of Vodafone on 31 st
mar 1999 (before merger)
Comparison of financial statements
(before and after merger) of Vodafone
Accounting treatment of merger from
the angle of both the companies
The final Merger consideration

 Holders of AirTouch common stock receive 0.5 shares of Vodafone ADS plus $9 in
cash for each share of AirTouch common stock they own.
 Holders of AirTouch Class B preferred stock receive 0.403 shares of Vodafone ADS
plus $7.25 in cash for each share of AirTouch Class B preferred stock they own.
 AirTouch Class C preferred stock remains outstanding, however the company has an
option to call the shares beginning 20 September 1999. Once called, the holder has
the right to receive 0.690 shares of Vodafone AirTouch ADS plus $12.41 in cash for
each AirTouch Class C preferred share held.

The market value of the merger consideration

Based on the closing stock price of Vodafone ADS on 29 June 1999 the market value of the
merger consideration is calculated as follows:

 Closing price of Vodafone ADS times 0.5 plus $9

 Closing price of VOD ADS = $197

Calculation of the value of the merger consideration:

$197 times 0.5 = $98.50 plus $9 = $107.50

The tax consequences of the Merger

This information does not address all aspects of US federal income taxation or United
Kingdom taxation that may be relevant to stockholders in light of their particular
circumstances, or to stockholders who are subject to special provisions of US federal
income tax law. Vodafone recommends that stockholders consult a tax advisor.

 The receipt of Vodafone AirTouch ADSs by the holders of AirTouch common stock
and by holders of AirTouch Class B preferred stock is tax free.
 The receipt of cash by the holders of AirTouch common stock and by holders of
AirTouch Class B preferred stock is taxable to the extent of your gain.
 The conversion of AirTouch Class C preferred on or after 30 June 1999 is a fully
taxable exchange to the extent of the holder's gain.
 How to calculate the tax consequences

Please review pages 65-73 of Proxy for details. $9 in cash is taxed as a capital gain to the
extent of your gain - short-term if held less than 1 year, long-term if held 1 year or more.
Cash in lieu of fractional shares less the proportion of the holder's tax basis that is allocable
to the fractional shares will be taxed as a capital gain or loss.

To calculate the aggregate capital gain to be recognized and the new basis in Vodafone
AirTouch ADSs, go through the following steps for each block of shares purchased:

1. Per Share market value of merger consideration $107.50

2. Number of AirTouch shares held on the effective date

3. Multiply line 1 and 2 to determine aggregate merger consideration

4. Enter aggregate AirTouch adjusted tax basis

5. Subtract line 4 from line 3 to determine realized gain

6. Multiple line 2 by $9 to determine aggregate amount of cash received

7. If line 5 is greater than line 6, basis in new Vodafone AirTouch shares is equal to line 4
and the holder should recognize the full amount from line 6 as a capital gain.

8. If line 5 is less than line 6 but not negative then:

a) Add line 4 & 5 and subtract line 6 to determine aggregate basis in new Vodafone
AirTouch shares
b) The amount on line 5 represents the amount of capital gains to recognized

9. If merger consideration is less than the AirTouch adjusted tax basis, the cash received is
considered a return of capital and the new basis is equal to the AirTouch adjusted tax basis
less the cash received.

How the fractional share is treated

Stockholders will receive cash in lieu of a fractional Vodafone ADS. The difference
between the amount of cash received in lieu of a fractional ADS and the proportion of the
holder's tax basis that is allocable to the fractional share will be a capital gain or loss.
The exchange agents

By mail:
Computershare
Corporate Actions
P. O. Box
Providence, RI 02940-3014

By Overnight delivery:
Computershare
Corporate Actions
250 Royall Street
Canton, MA 02021

For Assistance please call:

Within the US, Canada and Puerto Rico:
1-800-546-5141
Outside the US, Canada and Puerto Rico:
1-781-575-2765.

The transfer agents

The Bank of New York

Investor Relations Dept
P.O. Box 11258
Church St. Station
New York, NY 10286-1258
USA
Telephone: 800 233 5601 (US toll free)
Telephone: +1 212 815 3700 (International) 
Other Key Features

Management. The parties agreed that the new Vodafone AirTouch would have a board of 14

directors, seven from Vodafone and seven from AirTouch. There were to be six executive

directors, four from Vodafone and two from AirTouch, with the chief executive being Chris Gent.

In addition, a number of key officers were agreed at the time of announcement of the

transaction.

Accounting for the merger. Vodafone will account for the merger using the acquisition method

of accounting under UK accounting rules. This will result in a goodwill amortisation charge of

approximately £2 billion per annum for a number of years after the merger, thereby reducing the

reported consolidated profit of Vodafone AirTouch.

Vodafone has to account for the merger in this way because it did not satisfy the merger

accounting requirements under UK rules. In particular, the fact that AirTouch shareholders would

receive some cash meant that Vodafone could not comply with the requirement that the fair

value of any consideration other than equity shares given pursuant to the arrangement by the

parent company and its subsidiary undertakings should not exceed 10% of the nominal value of

the equity shares issued (paragraph 10(1)(c), Schedule 4A, Companies Act, 1985). Vodafone's

existing ordinary shares had a nominal value of only 5p and the cash amount payable to AirTouch

shareholders greatly exceeded 10% of the nominal value of all the ordinary shares issued to Air

Touch shareholders.

Dividends. It was agreed that Vodafone AirTouch would continue to announce dividends on

Vodafone AirTouch ordinary shares in sterling. Vodafone AirTouch ordinary shareholders will

continue to be paid their dividends in sterling whereas Vodafone AirTouch ADS holders will

receive their dividends in dollars. Vodafone has historically paid an interim and final dividend

while AirTouch had never paid a dividend.

Financing. In order to finance the cash portion of the consideration, Vodafone entered into a

$10.5 billion term and revolving credit facility.

Conclusion
Over the years the Group has made excellent progress in executing against their strategic
goals
however Vodafone is still looking to improve and remain innovative. They have
restructured the
business to more closely align themselves to their strategic goals and have outstanding and
passionate
leaders and people in the organization to deliver them. Their commitment to deliver on their
goals
is supported by their values, which state that “everything they we do is driven by our
passion for
Customers, our people, results and the world around us.”