Monday, September 2, 2013

Vodafone return of cash and shares to investors signals bleak future

Today, Vodafone and Verizon finally announced their expected deal where Verizon buys out the remaining Vodafone ownership share in their US joint venture. This deal has been expected but also a long time coming.

I think this deal is very well timed by Vodafone as the competitive landscape in the US wireless market is most likely about to change and Vodafone may have sold their interest in Verizon "at the top".

I do support this rare win for Vodafone. However, after reading through the details of the Vodafone announcement, I think there is a significant risk that the Vodafone management and board has pretty much given up on the future of the company and that we can expect the past decline to continue and possibly accelerate. Even a takeover might be in the cards.

The decision to return most of the proceeds from the deal, all stock and $23Bn cash, directly to investors sends a strong signal that the management and board no longer knows what to do with the company and prefer to hand the value back to the investors instead of charting a strategy that would increase value for investors and create usable services for customers.

This is what I see when I look at Vodafone today.

1. No US strategy

By giving up the loot from the Verizon deal, it appears that Vodafone is lacking a strategy for the US market, at least when it comes to playing offense. The most likely scenario is that Vodafone simply exit the market like they did in Japan. The other option is a merger with, or being acquired by AT&T. 

While this would be better than nothing, AT&T is also exposed to the potential for increased competitive pressure in the US wireless market, just as Verizon is. The duopoly companies have long lived a protected life in the uncompetitive US wireless market and are exposed to significant future hits on margins, primarily due to increased competition by Sprint and T-Mobile and potentially less duopoly-friendly regulation. 

A better long-term value match would be buying T-Mobile or merging with Sprint/Softbank.

2. No comprehension of what the strategic advantages of Vodafone are

Ever since Sir Chris Ghent built Vodafone as an almost global carrier, Vodafone has failed to capitalize on this strategic strength, unmatched by any competitors. 

While there has been constant reorganization of the global corporate organization, from a customer perspective, very little, if any value has been delivered as a consequence of their wide footprint. 

The customer offerings are largely national and even for large, multi-nationals it is difficult to secure global account benefits by selecting Vodafone, and even less so for consumers.

3. No will to innovate

Two names. Skype and WhatsApp. Both happened on Vodafones watch. Neither should have been allowed to exist if Vodafone would have been run like a technology company instead of an investor-run utility company. This has been an unmitigated disaster both as a huge lost opportunity but also directly affecting revenues.

Vodafone had, and still has to some extent, a unique position with a near global footprint which could have been used to completely change the global wireless market. But with intense ARPU focus and a classic case of the innovators dilemma, with a touch of disastrous management, this was not to be.

4. Continued diversification into dying markets

Instead of focusing on the future of telecom, wireless, and making a serious effort to innovate in this are, Vodafone has announced that they will continue its diversification into fixed telecom, broadband etc.

In addition to not being the future of telecom, and leading the company down a cul-de-sac, it will continue to decrease the value of the company by making it more valued like a utility company.

Vodafone is like many other telecom companies suffering from increased competition, bleak innovation and weak leadership. There is enormous value to be unlocked by owners/leadership who knows what they are doing. Maybe Softbank should try and rescue Vodafone, just like they are trying to with Sprint? 

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