i n dustr y updates a n d a n a l y ses f or sou n d busi n ess p l a n n i n g

A publication of the School of Economics, University of Asia & the Pacific, Philippines

In this issue
Feature

2 Vertical and horizontal integration

as a strategy in the Philippine
telecommunications industry

Lyndon Bulahan
Francis Jake Galeon
Rafael Alfonso Manalili
Zenon Pestaño
Jovi C. Dacanay

Industry statistics
12 Gross value added in transport,
storage, and communication

issn 0117– 1798

january The industry monitor is a monthly publication of the School of Economics of the University of Asia and the Pacific •
Pearl Drive, Ortigas Center, Pasig City, Metro Manila, Philippines 1605  •  Telephone: 637-0912 to 26; Telefax: 632-7968.

 2 0 1 4 The comments and views expressed in these papers are solely the responsibility of the authors and do not represent any
position held by UA&P. These papers may not be distributed in full or in part without prior written authorization.
Acknowledgements: Editing  Ma. Victoria Anastacio •  Layout  Rommel B. Casipit • Design  Art & Copy Communication
Design Inc.  •  Printing Inkwell Publishing Co. Inc.
 january 2014  F E A T U R E

Vertical and horizontal

integration as a strategy in the
industry monitor

Philippine telecommunications
industry
Mergers and acquisitions has become a trend in the telecommunications industry in recent years.
Telecommunication firms defend themselves by emphasizing the resulting cost efficiencies. Critics, on the other
hand, fear that prices may increase in a monopolistic or oligopolistic market to the prejudice of consumers.

Lyndon Bulahan
Francis Jake Galeon
Rafael Alfonso Manalili
Zenon Pestaño
Industrial Economics Program
School of Economics, UA&P

and

Jovi C. Dacanay
Economist
School of Economics, UA&P

M
an is a social being. He needs to communicate with other people. The need for
long distance communication has led to innovations and new technologies.

Each product and process innovation has given way to
something new, from the telegraph, to the first telephone,
to facsimiles, pagers and beepers, to the first analog
mobile cellular phones, up to the latest model of smart
phones. These means of long distance communications
have developed side by side with the telecommunications
industry. The world has seen how this industry developed
through the years. Innovations such as voice calls, short
message service (SMS), and even the introduction of the
Internet and the worldwide web have contributed so
much to the flourishing of other industries. But more
importantly, real time communication technologies have
bridged long distances.
as trunked repeater radio system and carrier services.
Aldaba defines it as “a system of interconnected facilities
designed to carry voice, data, image, and other traffic units
between a variety of users and locations.” The primary
telecommunication firms in the country, namely, PLDT-
Smart and Globe, have been engaged in a tight competition
ever since the industry was liberalized in 1995. They have
increased their market power in several ways.
One strategy that has characterized the structure of
the industry in recent times is the integration of several
telecommunication firms. Globe Telecom recently showed
its interest in acquiring Bayan Telecommunications

Background of the study 

In the Philippines, the telecommunications industry
consists mainly of different networks pertaining to
telephone/voice, record, and radio paging services, as well
  Aldaba (2000), “Opening Up the Philippine Telecommunications
Industry to Competition,” World Bank Institute (2000). http://
economics.fizteh.ru/articles/management/competition/philippines1-
arpel3voc20 (Retrieved August 15, 2013).

Ibid.
F E A T U R E
Inc. This case of merger and acquisition among firms
in the telecommunications industry is not new. The
telecommunications industry, upon its liberalization in
1995, has been characterized by vertical and horizontal
integration among firms, such as that of Philippine
Long Distance Telephone Company (PLDT), Smart
Communications, Inc. and Pilipino Telephone
Corporation in 1998. Being a capital-intensive industry,
the telecommunications industry here and abroad seeks
mergers to minimize costs and take advantage of scale
and scope economies which characterize the industry.
Mergers and acquisitions also have consumer-side benefits
(i.e., expansion of consumer choice). Given the fact that
several studies contest the phenomenon of integration as
against competition in the industry, it will be necessary
to investigate if vertical and horizontal integration truly
has an effect on profitability of telecom firms. In this case,
the argument for merger and acquisition will be put forth
on the basis of producer-side benefits (i.e., profitability)
alongside consumer-side benefits.
Research problem
How does the phenomenon of vertical and horizontal
integration affect the profitability of firms in the Philippine
telecommunications industry?
Objectives of the study
1. To understand the phenomenon of vertical and horizontal
integration as a strategy in the telecommunications industry
by tracking the history of mergers and acquisitions in the
industry.
2. To measure the effects of mergers and acquisitions on
the profitability of the players as measured by the changes
in net income/profit.
Significance of the study
Mergers and acquisitions has become a trend in
the telecommunications industry in recent years.
Telecommunication firms have defended themselves by
emphasizing the cost efficiencies that will arise from merger

Cherrie Regalado and Rappler.com, “Globe hopes to get NTC ok
for Bayantel takeover soon,” http://www.rappler.com/business/43427-
globel-hopes-ntc-approval-bayantel-takeover, (accessed February 12,
2014).

  Serafica (2001), “Competition in Philippine Telecommunications:
A Survey of the Critical Issues,” CBERD Working Paper Series
2001-01.http://www.dlsu.edu.ph/research/centers/cberd/pdf/papers/
Working%20Paper2001-01.pdf, (accessed February 10, 2014).

Bruno (2011), “Economies of Vertical and Horizontal Integration,
Unbundling and Quality of Service in Public Utilities: A Literature
Review,” University of Bergamo and HERMES working paper, 2011.
http://www.hermesricerche.it/elements/WP_11_5_BC.pdf, (accessed
February 9, 2014).

Ibid.

  Serafica, “Competition in Philippine Telecommunications.”

and integration. This study can discuss further if these cost
efficiencies do exist when telecom firms decide to merge.
It can provide insights that can help policymakers assess
future mergers and acquisitions in the telecom industry.
Scope and limitations
The study will focus on the net profit and acquisition costs of
different telecom companies from 1995 to 2011. The study
is only limited to the integration of telecommunications
with telecommunications firms and will not include
mergers and acquisitions of telecommunications firms with
firms in other industries. This research will concentrate
on the integration of PLDT, Smart, and Piltel, and the
integration of Globe and Innove.
Review of related literature
Integration, mergers, and acquisitions
The telecommunications industry, being a network
industry, has been a witness to many mergers and
acquisitions globally. The Philippines is not an exception to
this phenomenon. Since the liberalization of the telecoms
industry in 1995, along with the efforts of the Philippine
government to abolish the monopoly enjoyed by PLDT,
several firms have ventured into, or have attempted to
venture into, the said industry. At present, only two major
telecom firms compete in the Philippine market, the
then-monopoly and longest-running incumbent, PLDT-
Smart and Globe Telecom. Consequently, the Philippine
telecommunications industry is characterized by a tight
oligopolistic market structure or, to some extent, a duopoly.
This further contributes to the strong degree of rivalry
between the two firms, since market shares are highly
concentrated only among them. The said environment of
the telecoms industry in the Philippines has put pressure
on both PLDT-Smart and Globe Telecom to raise the bar
higher in order to outdo each other. Apart from beefing up
their respective bucket-priced promos and services to both
prepaid and postpaid subscribers, the firms have participated
in several instances of mergers and acquisition activities in
the Philippine telecommunications industry. Whether it is
a strategy to raise profits or to minimize costs, one thing
UNIVERSITY OF ASIA
UNIVERSITY OF ASIA
is for sure: Telecom firms like PLDT-Smart and Globe
Telecom have their own respective motives for engaging
in mergers and acquisitions. But prior to that discussion,
it would be best to look at what related literature has to
say regarding mergers and acquisition activities to further
understand why firms engage in such activities.
& THE
Mergers are “corporate combination of two or more
& the
independent business corporations into a single enterprise,
PACIFIC
usually the absorption of one or more firms by a dominant
PACIFIC
one. A merger may be accomplished by one firm purchasing
the other’s assets with cash or its securities or by purchasing
 january 2014  F E A T U R E
the other’s shares or stock or by issuing its stock to the
other firm’s stockholders in exchange for their shares in the
acquired firm,” as defined by the Encyclopædia Britannica.
More so, there are many different types of mergers as seen
industry monitor
in Table 1.
Table 1 • Different types of mergers
Typ`es of mergers Description
Both firms produce the same commodity or service for
Horizontal
the same market.
Vertical A firm acquires either a supplier or a buyer.
Merged firms produce the same commodity or service
Market-Extensional
for different markets.
If the merged business is not related to that of the
Conglomerate acquiring firm,
the new corporation is called a conglomerate.
Source: Encyclopædia Britannica.
When merged firms are involved in the production of
homogeneous goods and services for one market, the merger
is classified as horizontal. Meanwhile, a vertical merger
exists when a supplier firm and a buyer firm combine
together, or if a dominant firm acquires its buyer and/or
supplier. If the firms merged produce homogeneous goods
and services but for different markets, the merger is market-
extensional. Lastly, if two unrelated firms merge with each
other, the resulting merger is classified as a conglomerate.
The motives for engaging in mergers are diverse. It can be
a manifestation of predatory behavior of dominant firms to
eliminate competitors. It can also be a strategy to increase
a firm’s efficiency. In addition, firms undergo mergers to
diversify their range of products and services, in order to
reach out and tap new possible markets.
Being an oligopolistic industry, the telecommunications
industry, not only in the Philippines, has been a witness
to many mergers and acquisitions. Dirk Hackbarth
and Jianjun Miao presented some notable observations
concerning mergers and acquisition activities of firms that
are oligopolistic in nature in their work entitled, “The
Dynamics of Mergers and Acquisitions in Oligopolistic
Industries.” In conducting their analysis, Hackbarth
and Miao used a real options framework of mergers and
acquisitions. The results of their analysis drive the point that
product market competition is essential in the likelihood of
mergers and acquisitions.10 Here are some notable results
and findings of their study. First, the authors claimed
that an increasing product market competition among
heterogeneous firms impedes mergers and takeovers. In
Encyclopædia Britannica, Merger (business), Accessed March 25,

2013. http://www.britannica.com/EBchecked/topic/376016/merger

Ibid.
10
Miao and Hackbarth (2011), “The Dynamics of Mergers and
Acquisitions in Oligopolistic Industries,” Journal of Economic Dynamics
and Control, 2011, 20.
effect, mergers most likely transpire in more concentrated
industries. Second, when an industry is less competitive,
the large acquirer firm will demand a lesser share in the
merger. Third, when the costs of merging are equal for
both parties involved, the merger returns are said to be
higher for the smaller targeted firm compared to the returns
for the large acquiring firm. In general, a merger is more
prevalent in highly concentrated, oligopolistic industries
with homogeneous or same products and services, like the
telecommunications industry.
On a global scale, mergers and acquisitions in the
telecommunications industry have been increasing,
according to an article by the Economy Watch
entitled, Mergers and Acquisitions in Telecom Sector -
Telecommunications Industry mergers and acquisitions.”
The source pointed out some possible causes for the
increasing trend, as well as the advantages and disadvantages
of mergers and acquisitions in the telecoms industry.
Primarily, telecoms services include voice, text, and data
services. In effect, when two telecom firms engage in a
merger and acquisition, a horizontal merger is produced,11
since both firms produce the same goods and services for
the same market, and both are under the same industry.
A study conducted by Nico Grove, entitled “Complexity
in the Telecommunications Industry: When Integrating
Infrastructure and Services Backfires” deals with the issue
of whether a telecommunications service provider should
integrate with infrastructure suppliers, implying a vertical
merger between the two. In carrying out a comparison
between an integrated telecommunications firm and a pure
service provider–pertaining to non-vertically integrated
telecoms service providers–Grove applied a complex
systems perspective to the telecommunications industry
along with a simulation model.
His findings suggest that in the long run, an integrated
telecommunications service provider will outdo pure
network service providers in product performance and
efficiency since the firm is in control of the entire value
chain.12 Meanwhile, the pure network service provider will
lag behind due to transactions costs incurred when dealing
with infrastructure suppliers. In the short-run, however,
the advantages of the integrated telecoms firm will
backfire because it needs an adjustment period to realize
its capacity. In effect, the pure network service provider
can outdo an integrated telecoms firm in the short-run,
since it is focused on providing services alone. The paper
concludes by alluding to the competitive strategy in the
11
Economy Watch (2014), “Mergers and Acquisitions in Telecom
Sector - Telecommunications Industry mergers and acquisitions,”
Accessed March 25, 2014. http://www.economywatch.com/mergers-
acquisitions/international/telecom-sector.html
12
Grove and Baumann (2012), “Complexity in the
Telecommunications Industry: When Integrating Infrastructure and
Services Backfires,” Telecommunications Policy 36, 1, Feb. 2012.
F E A T U R E
telecommunications industry, saying that the complexity
perspective arrived at by the research implies that choosing
whether to vertically integrate with infrastructure suppliers
or not is the right choice in its own sense.13 But the time
period considered, whether in the short-run or in the long-
run, has an impact on the choice of either venturing into
an integrated telecommunications firm or remaining as a
pure network provider.
The rise in mergers and acquisitions in the telecommu-
nications industry has been noted in a global telecommu-
nications industry analysis conducted by Jean-Christophe
Lebraud and Peter Karlströmer entitled, “The Future of
M&A in Telecom.” The paper looked back and observed
past and present trends, and made some recommendations
for the future of mergers and acquisitions in the said in-
dustry. According to the study, mergers and acquisitions
have been a mainstay in the telecommunications industry
for many years. Globally, spending for mergers and ac-
quisitions in the telecoms industry amounted to a total of
$1.5 trillion, and this has paved the way to a more com-
petitive environment for existing telecom firms.14 Lebraud
and Karlströmer also noted a trend in global mergers and
acquisition activities. From year 2001 to 2006, majority of
mergers and acquisitions took place in Europe and North
America, while less than a quarter of the said activities oc-
curred in emerging markets. However, from 2007 to 2010,
the trend has been reversed, with emerging markets be-
coming more aggressive in mergers and acquisition deals.15
Figure 1 illustrates this trend. The bar graphs represent the
volume of mergers and acquisition per year, in US dollars,
while the line represents the Price-Earnings (PE) Ratio.
On aggregate, the peak years for mergers and acquisition
activities was from 2004 to 2007, alongside the decline of
the telecommunications industry’s market values.
Figure 1 • Mergers and acquisitions in the Telecoms
Industry, 2001-2010
Value USD PE ratio
billions Telco M&A
Source: Lebraud and Karlströmer, The Future of M&A in Telecom
13
Ibid., 22.
14
Lebraud and Karlströmer (2011), “The Future of M&A in
Telecom,” McKinsey & Company Telecom, Media & High Tech
Extranet, 2011.
15
Ibid., 2.

Furthermore, Lebraud and Karlströmer mentioned that
for the past ten years, majority of mergers and acquisition
values, 80% to be exact, are in core telecommunication
markets, which pertain to telecommunication services and
licenses, and that most mergers and acquisition activities
took place within countries, rather than cross-country.16
In conclusion, the paper presented three possible factors
which may drive the increase of mergers and acquisitions
in the future: (i) the ability to gain scale benefits, (ii) the
amount of mergers and acquisitions allowed in a particular
country, and (iii) decisions for aggressive expansions in
non-core areas.
Telecom mergers are also noted to produce network
externalities. The study of Jamison entitled “Network
Externalities, Mergers, and Industry Concentration” suggests
that mergers internalize positive externalities.17 In addition
to these beneficial effects, horizontal mergers among
larger firms yield more consumer surplus than mergers
among smaller firms. This is due to the ability of the
merger to lower costs, despite having to increase marginal
costs. Jamison also discovered that the merged firms are
capable of increasing their market shares, measured by
the Hirschman-Herfindahl Index, while at the same time
increasing consumer surplus.
Economies of scale and Integration
Anti-trust agencies have been worried and sensitive about
mergers because of the welfare effects associated with this
kind of strategy. Economic theory shows that mergers can
affect consumers in a negative way. The primary aspect
focused on by critics is the effect on the price of the
product offered by firms involved in a merger. According
to economic theory, integration increases the probability
of having a monopoly or an oligopoly in an industry.18
The new entity formed by the merger can have a bigger
market power that can make the market uncompetitive.
A monopolistic or oligopolistic market gives firms the
Telco
incentive to set their price above marginal cost. A higher
market value price implies a decrease in consumer welfare. The quantity
demanded and supplied are reduced as well.
Firms involved in mergers, on the other hand, have
defended themselves by arguing that efficiencies are
UNIVERSITY OF ASIA
UNIVERSITY OF ASIA
attached to the eventual integration.
Those who have been in favor of horizontal and vertical
integration have pointed out that the new entity formed
by the merger can achieve economies of scale better than
individual firms can. When two or more firms decide to
& THE
16
Ibid., 2-3.
& the
17
Mark A. Jamison, Network Externalities, Mergers, and Industry
PACIFIC
Concentration, Center for International Business Education and
Research, 2002, 2.
PACIFIC
18
Church and Ware (2000), Industrial Organization: A Strategic
Approach.
 january 2014  F E A T U R E
merge, the output produced and the operations of the new
business entity increase significantly.19
However, a condition must be fulfilled in order for a
merged firm to achieve economies of scale. At least one
industry monitor
of the firms participating in the merger must be below
the minimum efficient size, or the point where all the
economies of scale are exhausted.20 If all the firms are
already at their minimum efficient scale, the merged firm
may not be able to achieve the economies of scale that the
firms are aiming for when they decided to integrate.
Economies of scope and Integration
Another economic concept used by those involved in
mergers is the concept of economies of scope. Economies
of scope refers to an economic phenomenon wherein it
is cheaper to produce two products together in one plant
than to produce them in similar volume separately.21 Just
like the case of economies of scale, this argument involves
the merger’s effect on price. Firms with two distinct
products that integrate their operations are able to reduce
their cost because these products use the same inputs and
assets in production.
In connection to this, the decrease in cost triggered
by the merger and economies of scope benefit both the
producer and the consumer, given that certain conditions
are in place. If the cost goes down due to the merger and
demand remains constant, the new entity achieves more
profit than the separate firms do. The consumers also
benefit from this because if the cost of the producer is
lower, there is an incentive to lower prices. The firm may
reach more customers with a decrease in price.
Economies of scale and scope in Telecommunications
The telecommunications industry is a network industry
wherein the good or service being provided is delivered
through physical networks or connections in the form of
wires, pipes, or rails. In the case of telecoms, the network
infrastructure used are fiber-optic cables, submarine cables,
and cellular towers.22 The telecom industry is heavy on
infrastructure and assets which are required for operation.
The nature of the industry implies heavy fixed costs, which
are shouldered by the firm. That is why it is sometimes
difficult for new entrants to establish themselves in the
industry. They have to pay for the heavy costs, especially
those from the infrastructure requirements.
The concept of economies of scope exists in a telecoms
merger because certain services provided by telecom
19
Goldman et al (2003), “The Role of Efficiencies in
Telecommunications Merger Review,” Federal Communications Law
Journal, December 2003, 87-154.
20
Konstanze Kinne, “Efficiencies in Merger Analysis,” Intereconomics,
November 1999, 297-302.
21
Church and Ware (2000), Industrial Organization.
22
  Goldman et al. (2003), “The Role of Efficiencies in
Telecommunications Merger Review.”
companies use the same assets and infrastructure in
delivering them.23 If a big telecom company absorbs a small
telecom company delivering a service that is related to the
service being delivered by the former, the new firm will be
able to produce both services at lower cost. The decrease
in the cost of providing the services will benefit both the
new firm and the consumers. The new firm can use the
accumulated savings for the expansion of its business. It
can also pass on the savings to the consumers, who will
eventually pay less because of the decrease in cost.
Integration in the Philippine telecommunications
industry
Before the 1980s, the Philippine telecommunications
industry was originally a monopoly headed by the Philippine
Long Distance Telephone Company (PLDT Co.). The
company owned 94% of the country’s telephone network,
and small operators owned the rest. Later on, PLDT
bought its competition. To counter the monopolization
of the industry, legislators deregulated the telecom
industry in 1987 (referred to as the Telecommunications
Reform Process).24 This implied that the government
originally monitored the movements in the company.
In 1987, the Aquino administration finally allowed new
franchises to compete with PLDT. The sector’s structure
altered dramatically with the entrance of competitors. To
ensure a level playing field for the other firms, the Ramos
administration mandated interconnection among the public
telecom providers with Executive Order 59 in 1993. After
2 years, the Ramos government instituted a Republic Act
that sought to promote and govern the development of the
country’s telecommunications and the delivery of public
telecom services. The Public Telecommunications Policy
Act of the Philippines (or R.A. 7925) aims to liberalize
and deregulate the telecommunications industry, thereby
formally abolishing the monopoly power of PLDT.
M&As in the Philippines are usually brought about by
gaining access to increased market share. After removing
PLDT’s monopoly power by allowing more players in the
industry, the market somehow became segmented. In the
coming years, we may see the major players, PLDT and
Globe, merging and acquiring companies that enlarge
their market power. On the other hand, these deals were
also done to improve the companies’ technology, thus
increasing the telecommunications services offered. These
M&As, nevertheless, were criticized by competitors and
some legislators.
23
  Hank Intven and McCarthy Tetrault, Telecommunications
Regulation Handbook (Appendices, The World Bank, 2000).
24
    Patalinghug and Llanto (2005), Competition Policy and Regulation
in Power and Telecommunications. Philippine Institute for Development
Studies, 2005. http://dirp4.pids.gov.ph/ris/dps/pidsdps0518.pdf, p. 5.
F E A T U R E
PLDT-Smart-Piltel
In the history of M&As in the Philippines, one of the
largest mergers and maybe the first major merger was that
of PLDT, the Pilipino Telephone Corporation (Piltel),
and Smart Communications, Inc. (Smart). Piltel started
operating in 1968.25 It operated and offered local exchange
services. PLDT bought the company in 1980. Nine years
later, the merged firm of PLDT & Piltel was allowed
to provide Cellular Mobile Telephone Subscription
(CMTS). In 1991, the corporation began offering
analogue mobile services using the Mobiline brand. In the
same year, technology entrepreneurs established Smart. A
year after, Mobiline was given a congressional franchise
under RA 7293 while Smart was given a franchise for
integrated telecommunications, computer, and electronic
services under RA 7294. On the other hand, First Pacific
Company, Ltd. (FPC) started acquiring PLDT voting
shares worth $749 million (27% of total voting shares)
through its affiliate, Metro Pacific Corporation (MPC). By
the start of the millennium, Piltel expressed its intention to
NTC to offer Global System for Mobile communications
(GSM)-based service via Smart facilities and equipment.
The offer was approved and 5 years later, Piltel was
absorbed by Smart which owned 99.5% of Piltel. Smart
became a complete subsidiary of PLDT under the share-
swap agreement between PLDT and MPC.
Globe and Innove (formerly known as Isla Communications
Inc. or Islacom)
Globe and Islacom’s merger also became a major
development in the telecommunications industry. It started
in the 1990s with the incorporation of Islacom, which
was owned by Shinawatra, a Thai telecom company, and
the Delgado family.26 Two years later, under RA 7372,
Islacom was awarded a mobile telecoms franchise. In
1994, Islacom became the first telecom company to offer
the GSM technology that originated in Europe. Globe
completed its share-swap agreement with Islacom in 2000.
A year after, Islacom completely became a subsidiary of
Globe. In 2003, NTC finally allowed Globe to acquire
Islacom’s assets and subscribers.
PLDT-Digitel
In 2011, a merger that could possibly change the future
of the telecommunications industry in the Philippines was
about to transpire. Two of the leading telecommunications
firms, PLDT and Digitel, were planning to merge as one
company. PLDT’s initial plan was full acquisition of Digitel
25
Mirandilla (2011), An Overview: Past Telco Mergers & Acquisitions
Present PLDT-Digitel Deal. NCPAG, UP Diliman, 2011. https://www.
academia.edu/1717244/Past_and_Present_Telco_Mergers_and_
Acquisitions_and_the_PLDT-Digitel_Deal_An_Overview, p. 4.
26
Mirandilla, An Overview. p. 10.

as soon as possible. On March 29 of the same year, the
Board of Directors of both companies approved PLDT’s
acquisition of the ownership interest in Digitel of JG
Summit Holdings Inc. (JGSHI) as well as of other seller-
parties.27 From PLDT’s Consolidated Financial Statement
for 2012, the acquisition consisted of the following:
(i) 3.28 billion common shares which were equal to
51.6% of the total issued common stock of Digitel;
(ii) Zero-coupon convertible bonds issued by Digitel
and its subsidiary to JGSHI and its subsidiary, which are
approximately 18.6 billion common shares of Digitel to be
converted on June 30, 2011 (assuming the exchange rate
per U.S. Dollar was equal to P43.405); and lastly,
(iii) Intercompany advances made by JGSHI to Digitel
in the total principal amount plus accrued interest of P34.1
billion as at December 31, 2010 (Enterprise Assets).
The transactions during the acquisition were reviewed
by an unnamed independent financial advisor. The
advisor’s conclusion was that the acquisition of the assets
was fair and reasonable and would definitely be beneficial
to every PLDT shareholder. Also, the PLDT-Digitel
deal went through all the proceedings and obtained the
approval of the following institutions:
(i) NTC – approved the sale or transfer of JGSHI and
the other seller-parties’ Digitel shares representing more
than 40% of Digitel’s issued and outstanding common
stock;
(ii) Philippine Securities and Exchange Commission
(SEC) – confirmed the valuation of the Enterprise Assets
and confirmed that the issuance of the PLDT common
shares to JGSHI and the other seller-parties is exempt
from the registration requirement of SRC;
(iii) Philippine Stock Exchange (PSE) – approved the
block sale of the Digitel shares;
(iv) Common stockholders of PLDT – approved the
issuance of the PLDT common shares as payment for the
purchase price of the Enterprise Assets and the Digitel
shares which shall have been tendered pursuant to the
mandatory tender offer; and lastly,
(v) All necessary approvals under applicable laws and
regulations.
Based on the above, the acquisition was proven fair and
UNIVERSITY OF ASIA
UNIVERSITY OF ASIA
legal.
Theoretical framework and emperical methodology
Theoretical framework
Antitrust agencies have been wary of potential mergers,
& THE
especially in critical industries, because of their effect on
& the
consumer welfare. A possible consequence of a merger is
PACIFIC
PACIFIC
27
      PLDT (2011). Consolidated Financial Statements (as of
December 31, 2012 and 2011) http://www.pldt.com/docs/default-
source/financial-results/fs/2012/fy2012-fs.pdf?sfvrsn=2, p. F-79.
 january 2014  F E A T U R E
increased market power which may lead to an increase in
price. Assuming that the industry has a duopoly market
structure and that the firms produce homogeneous
products, it is expected that price will increase because the
industry monitor
new entity will set a monopoly price.28 In other words, in a
duopoly price will be higher than the marginal cost. Figure
2 represents the welfare loss that will arise from a merger.
The shaded area represents the deadweight loss caused by
the merger.
Figure 2 • The effect of a merger on price and consumer
surplus
Source: Church and Ware, Industrial Organization: A Strategic Approach
However, advocates of mergers have presented their
own argument with regard to this. They have pointed
out that mergers often promote cost savings through
economies of scale and scope. The new entity or firm is
able to reach a wider market, which in turn reduces average
cost. Williamson has concluded that there are cost savings
produced by mergers.29 The savings can actually offset a
given price increase due to the merger. Figure 3 represents
the findings of Williamson. Section A represents the
surplus lost due to the merger, while section B represents
the surplus gained.
Figure 2 • Mergers with cost efficiencies (Based on
Williamson)
Source: Church and Ware, Industrial Organization: A Strategic Approach
Church and Ware (2000), Industrial Organization.
28
29
Williamson (1968), “Economies as an Antitrust Defense: The
Welfare Tradeoffs,” The American Economic Review, March 1968, 18-36.
Economies of scale and scope play a major role in
the reduction of average cost in a given merger. Church
and Ware define economies of scale as an economic
phenomenon wherein the long-run average cost declines
as the rate of output or operation increases.30 Production
becomes more cost-efficient when it is done on a larger
scale. Economies of scope, on the other hand, is an
economic phenomenon wherein it is cheaper to produce
two products together in one plant than to produce them
in similar volume separately. It is more cost-efficient to
produce two products under one plant than to produce
them in separate plants.
Empirical methodology
To assess the effects of mergers among the major
telecommunications firm in the Philippines, the proponents
primarily look at the performance of the concerned firms
prior to and after the merger and/or acquisition. The
assessment is carried out using a simple profit function
model, as follows:
P(x) ­­­­= R(x) – C(x)
Net profit is derived by subtracting the total costs of
the firm from its total revenues. The simple profit function
model is utilized since there is no specific empirical
methodology in analyzing the effects of mergers and
integration on a firm’s profitability.
The acquisition costs incurred by the telecom firms
that merged–primarily PLDT-Smart and Globe Telecom–
were taken from each firm’s financial statements. The
acquisition costs were divided by the derived total costs of
the respective firms. This yielded a percentage or the share
of the acquisition cost in the acquiring firm’s total costs.
Acquisition cost
% share of acquisition cost =
Total cost
Using the profit function model as basis, the percentage
of acquisition costs to the total costs of the acquiring firms
engaged in mergers was extracted. The percent share of the
acquisition cost to the total cost indicates how much an
acquiring firm has spent on the merger. Also, through the
simple profit function model, the researchers conducted
an analysis of the effects of the merger and acquisition on
the net profits of PLDT-Smart and Globe Telecom in the
long run to see whether these companies benefited from
the merger or not.
Results and discussions
In the following discussion of the results, the first section
gives a brief historical timeline of events of acquisition and
mergers in the Philippine telecommunications industry
30
Church and Ware (2000), Industrial Organization.
F E A T U R E
which have significant relevance on assessing the effects of
such integration on the net profits of the parent companies,
PLDT and Globe. The second section presents the analysis
of the changes in net profit of the telecom firms concerned
in line with the acquisitions.
A. Historical timeline of integration in the
Telecommunications Industry
Table 2 presents a summary of the events of acquisitions and
mergers in the telecommunications industry. Notice that
the mergers presented are limited to telecommunications
firms that are locally based. Other mergers in the industry
not discussed in the literature above are not incorporated
in this research analysis so as to focus the analysis on
the current dominant players/operating networks in the
industry.
Table 2 • Timeline of integration in the Philippine
telecommunications industry
Year Event
Telecommunications industry was characterized by many players
Before that offer different forms of telecommunications services: PLDT,
1995 Piltel, Globe, and Digitel offer fixed line services; Smart, Mobiline
(under Piltel), and Islacom offer mobile services.
1995 Passage of Public Telecommunications Act
1999 PLDT started acquiring Smart.
Smart became 100% owned by PLDT.
2000
Globe signed a share swap agreement with Islacom.
Piltel became 100% owned by PLDT (acquisition started in 1980).
2001 Islacom became a fully owned subsidiary of Globe (to be renamed
in 2003 as Innove Communications, Inc.).
2004-
Piltel became a fully owned subsidiary of Smart.
2005
2008 Fixed line business of Piltel was sold to PLDT.
GSM business of Piltel was sold to Smart. Piltel was renamed the
2009
next year as PLDT Communications and Energy Ventures, Inc.
2011 PLDT started acquiring Digitel.
Source: Mirandilla (2011), PCEV (2012).
In line with these events, the annual trend of net profit
is shown in Figures 4 and 5. Figure 4 shows annual net
profit for PLDT and its subsidiaries Smart and Piltel, and
Figure 5 for Globe and subsidiary Innove.
Net profit for Piltel does not include the years 2010-
2011 because during these years it no longer offered
telecommunications services. Piltel’s fixed line was sold
to PLDT and its GSM business to Smart. Annual net
profit for Smart and PLDT declined in 2011 because of
the acquisition by the parent company PLDT of shares of
Digitel. Since this integration is just recent, its effects on
the parent company’s net profits throughout time will not
be highly observable yet. Hence, the researchers decided to
exclude this from this study.
It can be seen from both Figure 4 and Figure 5 that
during the time of the merger, the net profit of the parent
company grew at a slow marginal rate. For PLDT, the

Figure 4 • Annual net profit of PLDT and its subsidiaries,
Smart and Piltel
Smart
PLDT
Linear (PLDT)
Piltel
Source: Top 5000 Corporations, Top 7000 Corporations, Top 15,000 Corporations, PLDT
Financial Statements 2008 and 2012
Figure 5 • Annual net profit of Globe and its subsidiary,
Innove
Globe
Linear (Globe)
Innove
Source: Top 5000 Corporations, Top 7000 Corporations, Top 15,000 Corporations, PLDT
Financial Statements 2006, 2007, and 2012
net profit was volatile. PLDT experienced marginally
increasing and suddenly marginally decreasing net profit
during the time of merger. For Globe, the change of its net
profit had a steeper slope during the time of integration
with Innove. However, a steeper change of net profit is
evident in 2002 when the merger was already complete.
After a certain period from completion of the integration,
the parent companies experienced generally increasing net
profits. In the Excel-generated trendline, it is observed that
throughout time, the net profit of the parent companies
increased, despite the shocks in the short-run net profit
brought about by the merger.
UNIVERSITY OF ASIA
UNIVERSITY OF ASIA
B. Acquisitions and mergers and net profits of parent
companies
Given the historical analysis of the net profits of the parent
companies in line with their acquisition of subsidiaries, this
section tackles the reasons behind such trends. Tables 3 and
4 show the numerical analysis of the effects of acquisition
& THE
on the net profits of PLDT and Globe, respectively.
& the
Table 3 presents the share of acquisition costs of Piltel
PACIFIC
and Smart individually in the total expenses of PLDT. It
PACIFIC
should be noted that Piltel was acquired by PLDT in 1980,
but Piltel’s full acquisition happened only around 2001.
 january 2014 10 F E A T U R E

Table 3 • Summary of data for the shares of acquisition in total costs during and after the merger. This implies
costs of PLDT subsidiaries Smart and Piltel and their that besides acquisition costs, integration had the effect of
effects on PLDT’s annual net profit increasing other expenses for the parent company. Also,
%Share %Share unlike in PLDT, the total revenues of Globe increased
of ac- of ac-
industry monitor

Year Net profit

Total Total costs/
quisition quisition drastically during this period which may have offset the
revenues expenses
costs- costs- increase in the total costs caused by the integration.
Piltel Smart
1995 5751100000 25252400000 19501300000 0.8761% 0
C. Synthesis
1996 6440400000 28657200000 22216800000 0.7690% 0
With this, it can be inferred that integration has a two-
1997 7649100000 35621768460 27972668460 6.8168% 0 fold effect on the telecommunications industry: (1) short-
1998 1106659000 42659111527 41552452527 10.0266% 0 run and (2) long-run effects. The short-run effects, which
1999 2777901000 41723367892 38945466892 7.5637% 39.4402%
vary depending on the completion time of the merger,
are characterized by either a decrease in net profit or an
2000 1108400000 44270056380 43161656380 2.5803% 42.6967%
increase in total expenses, or both. The increase in total
2001 3417900000 45606824431 42188924431 2.2469% 0
costs and hence a decline in net profits (as in PLDT) may
Source: Securities and Exchange Commission be attributed to acquisition costs. However, acquisition
costs as a result of integration do not always entail a
Hence, the share of acquisition costs of Piltel is in gradual decrease in net profits, despite an increase in total costs.
and marginal percentages. From the highlighted data, it Revenues, as in the case of Globe, may offset the increase
can be observed that when the share of acquisition costs of in total costs, and hence enable the company to maintain
Smart and Piltel spiked up between 1998 and 2000, the net
an increasing net profit.
profits declined. Using the profit function, with gradually
Long-run effects, on the other hand, are characterized
increasing revenues, a sudden and large increase in total
by a continuously increasing net profit trend of the
costs will induce a decrease in the net profit. This explains
parent companies. Again, the long-run effects may be
the up-down trend in Figure 4 above. Furthermore, when
experienced varyingly depending on the completion time
total share of acquisition costs declined in 2001, the net
of the merger. In the long-run, it may be inferred that the
profit of PLDT moved up.
telecommunications firms may have achieved increasing
In addition, if the acquisition of a company is not
degrees of scope and scale economies responsible for the
paid for gradually, as in the case of Smart, the share of
increasing trend in their net profits.
acquisition costs in total expenses is actually significant
and large enough or almost half of the total costs. But if
Conclusions and recommendations
the acquisition is paid for gradually as that of Piltel, the
share of acquisition costs of a company may not be large
enough and can be as low as 1% of the total expenses. Conclusion
Vertical and horizontal integration are indeed prevalent in
the Philippine telecommunications industry. Despite the
Table 4 • Summary of data for the shares of acquisition
goal of the 1995 telecommunications liberalization act to
costs of Globe Subsidiary Innove and their effects on
Globe’s annual net profit increase the competitiveness of the telecommunications
%Share of market, the industry seems to follow an oligopolistic or,
Total Total cost/
Year Net profit
revenues expenses
acquisition in actuality, a duopolistic trend. Integration, however,
costs - Innove
does not degrade competitiveness in the industry because
2000 1548831000 20077190000 18528359000 0
it serves as a pathway for the telecommunications firms
2001 4305416000 35403386000 31097970000 49.51%
to achieve scale and scope economies. Before liberalization
2002 6844633000 45814662000 38970029000 0.00% in 1995, the less concentrated telecommunications market
was composed of many players that offered only either
For the Globe-Innove merger, acquisition costs of fixed line services or mobile telecommunications services.
then Islacom in 2001 made up a large portion of the total But with the onset of integration and the increasing trend
expenses. However, unlike in the PLDT-Smart-Piltel in vertical and horizontal integration, the merged firms
merger, the net profit of Globe did not decrease in 2002. have been able to offer both fixed line and mobile services.
This might be contrary to known theory that acquisition Integration, moreover, did not actually remove the name
costs might increase the total expenses of the parent of the subsidiaries from the market. Most of them, like
company and thereby negatively affect the net profits of Smart and Innove, operate independently.
the parent company, but there might be other explanations Integration also seems attractive to telecommunication
for why the net profit of Globe did not decline during and firms because of its effects on the net profit of the
after the merger with Innove. Notice, however, the increase participating firms. At least in the parent company’s
F E A T U R E
perspective, integration has two effects: short-run and
long-run. In the short-run, integration might increase
total expenses and in some instances decrease short-run net
profit. These changes are attributed to the acquisition costs
of integrating subsidiary companies. Acquisition also has
other implied costs (i.e., marketing costs for the subsidiary,
subsidies, etc.) which cause the total expenses to increase
even if the merger is already completed. Nevertheless, the
long-run effects promise the telecommunications firms a
continuously upward trend of net profits. It is inferred
that in the long-run, the parent telecommunications
firms might achieve scale and scope economies which are
associated with an increase in net profit.
In summary, vertical and horizontal integration is
a trending phenomenon in the telecommunications
industry because first, it allows the industry to achieve
scale and scope economies through integration of the fixed
line and mobile services. Second, integration is associated
with long-run increase in net profits, despite a short-run
increase in total costs.
Recommendations
This study focused on the study of the effects of integration
on the parent telecommunications firms. Another
interesting point of study is the effects of integration
on the subsidiaries. This research therefore highly
recommends that future researchers extend the study to
subsidiary companies. Moreover, future researchers may
also study the effects of integration in a game theoretic
setup. Integration in one dominant player, say PLDT,
may have an effect on the profitability of its competitor,
Globe. Furthermore, another interesting area to be tackled
includes the other expenses associated with a merger which
may explain the difference in the effects of integration on
the net profits of the telecom firms. Finally, the researchers
recommend empirically showing the degree of scale and
scope economies that the industry may have achieved after
the integration. IM
References
Aldaba, Rafaelita. “Opening up the Philippine
telecommunications industry to competition.” World
Bank Institute (2000). http://economics.fizteh.ru/articles/
management/competition/philippines1-arpel3voc20
(accessed August 15, 2013).
Bruno, Clementina. “Economies of Vertical and Horizontal
Integration, Unbundling and Quality of Service in Public
Utilities: A Literature Review.” University of Bergamo and
HERMES working paper, 2011 http://www.hermesricerche.
it/elements/WP_11_5_BC.pdf (accessed February 9,
2014).
Church, Jeffrey and Roger Ware. Industrial Organization: A
Strategic Approach. Boston: McGraw-Hill Companies, Inc.,
2000.
11
Economy Watch, “Mergers and Acquisitions in Telecom Sector
- Telecommunications Industry mergers and acquisitions,”
Accessed March 25, 2014. http://www.economywatch.com/
mergers-acquisitions/international/telecom-sector.html
Encyclopædia Britannica, “Merger (business)” Accessed
March 25, 2013. http://www.britannica.com/EBchecked/
topic/376016/merger
Goldman, Calvin, Ilene Gotts, and Michael Piaskoski. “The
Role of Efficiencies in Telecommunications Merger Review.”
Federal Communications Law Journal. (2003): 87-154.
Grove, Nico and Oliver Baumann. “Complexity in the
Telecommunications Industry: When Integrating
Infrastructure and Services Backfires.” Telecommunications
Policy 36, 1 (Feb. 2012): 40-50. DOI=10.1016/j.telpol.201
1.11.019  http://dx.doi.org/10.1016/j.telpol.2011.11.019
Intven, Hank, and McCarthy Tetrault. Telecommunications
Regulation Handbook. Appendices, Washington DC: The
World Bank, 2000.
Jamison, Mark A. Network Externalities, Mergers, and Industry
Concentration, Center for International Business Education
and Research, 2002.
Kinne, Konstanze. “Efficiencies in Merger Analysis.”
Intereconomics. (1999): 297-302.
Lebraud, Jean-Christophe and Peter Karlströmer. “The Future
of M&A in Telecom.” McKinsey & Company Telecom,
Media & High Tech Extranet, 2011.
Miao, Jianjun and Dirk Hackbarth. “The Dynamics of Mergers
and Acquisitions in Oligopolistic Industries” Journal of
Economic Dynamics and Control. (November 30, 2011).
Forthcoming. Available at SSRN: http://ssrn.com/abstract=
968870 or http://dx.doi.org/10.2139/ssrn.968870
Mirandilla, Mary Grace. An Overview: Past Telco Mergers &
Acquisitions Present PLDT-Digitel Deal. 2011. https://www.
academia.edu/1717244/Past_and_Present_Telco_Mergers_
and_Acquisitions_and_the_PLDT-Digitel_Deal_An_
Overview (accessed 2014).
Patalinghug, Epictetus, and Gilberto Llanto. Competition Policy
and Regulation in Power and Telecommunications. 2005.
http://dirp4.pids.gov.ph/ris/dps/pidsdps0518.pdf (accessed
2014).
Philippine Long Distance Telephone Company. Consolidated
Financial Statements. 2012. http://www.pldt.com/
docs/default-source/financial-results/fs/2012/fy2012-
fs.pdf?sfvrsn=2 (accessed 2014).
Regalado, Cherrie. “Globe hopes to get NTC ok for
UNIVERSITY OF ASIA
UNIVERSITY OF ASIA
Bayantel takeover soon.” n.d. http://www.rappler.com/
business/43427-globel-hopes-ntc-approval-bayantel-
takeover (accessed February 12, 2014).
Serafica, Ramonette. “Competition in Philippine
Telecommunications: A Survey of the Critical Issues.” CBERD
Working Paper Series 2001-01. http://www.dlsu.edu.ph/
research/centers/cberd/pdf/papers/Working%20Paper2001-
& THE
01.pdf (accessed February 10, 2014).
& the
Williamson, Oliver. “Economies as an Antitrust Defense: The
PACIFIC
Welfare Tradeoffs.” The American Economic Review. (1968):
PACIFIC
18-36.
 january 2014 12 S T A T I S T I C S

Gross value added (GVA) in transport, storage, and communication

Q1 2011 to Q3 2013 (current prices)
Unit: P million
2011 2012 2013
industry monitor

Industry/industry group Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Transport and storage 78,729 90,723 85,404 82,932 90,135 102,201 91,019 88,993 94,096 108,136 99,207
Land 45,879 53,133 52,251 48,294 52,759 60,073 55,310 53,117 55,846 64,348 59,658
Water 5,140 7,018 4,205 4,788 5,953 8,102 4,673 4,995 6,287 7,512 4,475
Air 12,649 12,980 11,916 12,240 14,464 14,025 11,740 12,118 14,022 13,852 13,154
Storage and services
15,061 17,592 17,031 17,610 16,960 20,001 19,297 18,763 17,942 22,423 21,920
incidental to transport

Communication 72,194 75,417 62,345 79,511 78,841 81,847 69,733 82,482 81,243 88,157 73,939

GVA in transport, storage,

150,923 166,140 147,749 162,443 168,976 184,048 160,752 171,475 175,339 196,293 173,145
and communication

GVA in transport, storage, and communication

Q1 2011 to Q3 2013 (constant prices)
Unit: P million
2011 2012 2013
Industry/industry group Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Transport and storage 40,266 45,184 39,045 40,603 44,193 49,959 41,427 43,171 45,714 52,508 44,849
Land 22,912 25,492 21,901 22,746 25,285 28,002 22,757 24,631 26,493 30,051 24,526
Water 3,308 4,569 2,756 3,148 3,831 5,275 3,062 3,284 4,046 4,891 2,933
Air 4,944 5,175 4,195 4,278 5,247 5,522 4,133 4,218 4,931 5,232 4,504
Storage and services
9,102 9,947 10,193 10,431 9,831 11,159 11,475 11,038 10,244 12,334 12,886
incidental to transport

Communication 70,787 72,265 59,786 78,091 77,584 78,369 66,702 80,689 79,488 84,260 70,277

GVA in transport, storage, and

111,052 117,449 98,831 118,694 121,777 128,328 108,129 123,860 125,202 136,768 115,126
communication

GVA in transport, storage, and communication

Q1 2011 to Q3 2013
Implicit price index
2011 2012 2013
Industry/industry group Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Transport and storage 195.5 200.8 218.7 204.3 204.0 204.6 219.7 206.1 205.8 205.9 221.2
Land 200.2 208.4 238.6 212.3 208.7 214.5 243.0 215.7 210.8 214.1 243.2
Water 155.4 153.6 152.6 152.1 155.4 153.6 152.6 152.1 155.4 153.6 152.6
Air 255.8 250.8 284.1 286.1 275.7 254.0 284.1 287.3 284.4 264.8 292.1
Storage and services
165.5 176.9 167.1 168.8 172.5 179.2 168.2 170.0 175.1 181.8 170.1
incidental to transport

Communication 102.0 104.4 104.3 101.8 101.6 104.4 104.5 102.2 102.2 104.6 105.2

GVA in transport, storage, and

135.9 141.5 149.5 136.9 138.8 143.4 148.7 138.4 140.0 143.5 150.4
communication

Source: Philippine Statistics Authority