Bt Essay, Research Paper
This report follows the financial life of BT and Cable and Wireless over a set period. The start date was 21st October 1999 and the finish data was 3rd February 2000.
In 1984 BT became a public limited company, 51 % of its shares were sold to the public, this was a total of 3012 million shares. The purchase price was 130 pence; the offer was 3.2 times over subscribed. To this day BT remains the largest company in the British telecommunications industry.
Cable and Wireless is one of BT s main competitors but it has a far broader global span, with interests in 70 countries World-wide. The nineties saw rapid growth from both companies and a strategy change in 1999 has BT trying to expand as an international communications supplier.
The report concentrates on changes in their share prices and why these changes may have been caused. It is split into 3 sections. Firstly there is a brief discussions as to why Cable and Wireless was chosen as BT s main competitor. Secondly a general presentation of what has happened to BT and Cable Wireless share prices as well as the FTSE 100. These changes are linked to economic events that occurred during the period studied. Finally there is a more detailed discussion of a major event affecting BT s share price.
A brief discussion of why the competitor was chosen and issues considered when choosing it
Cable and Wireless was considered to be good competitor for our focus company British Telecommunications (see appendix III). The two companies have both close similarities and differences, but working within the same industry providing competing services.
British Telecommunications PLC supplies inland and international telecommunication services within the United Kingdom and overseas. It s main products and services include local, long-distance, and international calls; telephone lines, equipment and private circuits for homes and businesses; providing and managing private networks; and supplying mobile communication services. (FT.com)
Cable and Wireless PLC is an international telecommunications group with operations in seventy countries providing services to both business and domestic users. Services include telephone, Internet, cable television, multimedia and data transmission. (FT.com)
It is very clear from the initial descriptions that there are both definite similarities and differences between the two companies. BT is more telecommunications orientated whereas Cable and Wireless have been breaking through the barriers into Internet and, indeed, cable television services.
To define more exactly where each business was focused we looked at the breakdowns of fiscal 1999 revenues:
Inland Telephone calls -30% The majority of BT s business is
Telephone Exchange Line Rentals -20% made up of inland telephone calls.
International Telephone Calls -9%
Mobile Communications -8%
Private Circuits -7%
Customer Premises Equipment Supply -5%
Receipts from UK operators -4%
Yellow Pages and other directories -3%
Other Sales and Services -14% These miscellaneous sales and
services are expected to be partly
TOTAL 100% Internet and multimedia related.
Cable and Wireless
International Telecommunications -39% Large importance of international
National Telecommunications -38% business compared to BT s 9 %
Mobile Telephone services -12%
Cable Television -3%
Internet and Multimedia Services -2%
Managed Services and Outsourcing -2%
Other Revenue -1%
(Source; Financial Times Web
TOTAL 100% appendix IV and V)
Looking at these breakdowns it is clear that both companies have very different orientations. It is however important to remember that both of these companies are developing and expanding their business in all sorts of new areas. In particular the up and coming importance and popularity of e-commerce has brought forward expansion, especially in BT, towards more Internet and multimedia development and investment.
More in-depth research into the companies is needed in order to identify their company objectives and therefore their plans for the future. BT sighted their ambitious objective as being: to be the most successful world-wide communications group . BT was once a UK monopoly; it is now transforming itself from a UK telecommunications company into a global communications company. It has grown from a national telecommunications operator, dealing mainly in fixed-voice telephone calls, to a global communications company with operations that span the world and services that, in addition to fixed-voice telephony, include the Internet, mobile and data communications, and business systems and solutions . BT has recognised the high increase in competition in the UK industry, of which it was once a monopolist, and has realised that to avoid being undercut and forced out of the market it needed to adapt and react to changing environment and increasingly technologically advanced industry.
Cable and Wireless have already recognised the importance of e-commerce and are subsequently setting goals to further this advantage:
Our future success depends on becoming a leader in Internet and data communications around the globe. As the world s most international operator, we are capitalising on our strengths and repositioning Cable and Wireless to seize the ever expanding market opportunities. (Sir Ralph Robins- Chairman)
Cable and Wireless is well aware that it is the only large international operator and is exploiting that fact. Their international coverage and multimedia focus is clearly a result of this:
Today as regulation recedes and privatisation and competition become the norm, operators can offer any service to any customer and the challenge is to offer the most competitive, end-to-end service for customers. New companies and alliances are springing up to meet the demand. (Graham Wallace- Chief Executive)
There is one outstanding difference between BT and Cable and Wireless. BT is a company that was stuck in its ways because for at the time when it was a monopoly it was successful, now that the markets are changing, so the company needs to. Cable and Wireless has constantly reinvented itself as markets and technology has changed, this is reflected in the larger dedication to Internet and data communications. BT has recently (last 2/3 years) realised that it needs to adapt and it is now starting to see the fruits of these changes.
Clearly BT is larger company than Cable & Wireless, but to such a large extent that they are not able to compete against one another.
In conclusion to how our group made the decision of our competitor, we based it around the facts that both companies were working, at least partly, within the same market and that they were both targeting the same consumers using the same or similar services. We did look at other companies such as Orange and Vodafone who could also be considered to competitors to BT but we considered that their areas of competition was only within the mobile communication market, and therefore decided that Cable and Wireless were a better all round competitor.
BT and Cable & Wireless share prices
This section will present the share prices of both companies from 21st Oct 1999 to 3rd Oct 2000, along with the FTSE-100 index value. BT s share price movements will be compared to Cable & Wireless s and both will be linked to economic events during this period. The general trend of all graphs will be discussed, before analysing in greater detail any significant increases or decreases in the share prices.
The daily share prices are under appendix (I). Two graphs displaying the data are under appendix (II).
The first thing that has to be noted is that during the period followed Cable and Wireless significantly out performed BT, even though for long periods BT had a higher share price. Cable and Wireless had a starting share value of 668.5 pence and finished the period with a value of 1243 pence. This was an 86% increase. This compared to BT starting on 935.5 and finishing on 975, just a 4% increase in share price. However, up until the middle of December share prices were increasing at similar rates.
The graphs represent the period up until 14th Dec. On the printed graph a linear trend line for each company has been added. It can be seen that the lines are very nearly parallel. This goes to show that both share prices have been increasing at similar rates.
The superimposed graph represents the movements of the FTSE 100 up until the middle of December. When compared to the graph above it can be seen that the trend line is steeper, i.e. increasing at a greater rate than the two companies. This implies that BT and Cable & Wireless are not performing as well as the economy in general. Any possible reasons for this will be discussed later in the report.
It is from the middle December onwards that significant changes start to occur. BT had a fall in fortunes where as Cable & Wireless continued to enjoy increased value.
It is these movements that need greater analysis to interpret why the share prices moved in separate directions. Each company will be dealt with in turn with timely comparisons being made when needed.
Cable and Wireless share price movements
The first big move was an increase from 898 to 1081 pence. That was a 20 % increase in value in just 4 days during December. This increase occurred during the announcements of their expansion in the net. The expansion includes Cable and Wireless re-inventing itself as a high quality global platform for business data and Internet Protocol. This has attracted a lot of investment from American funds; thus the share price has risen. During this period BT s share value was decreasing suggesting that investors could have been switching to a company that seems to be expanding more rapidly in the search of increased returns.
The next noticeable movement was another large increase mid way through January 2000. An increase from 1047.5 to 1338 pence per share occurred in just 1 week, taking the price of Cable and Wireless shares above that of BT s. This increase was the markets reaction to the fact that just 1 week earlier on the 13th January it was announced that the company had acquired eight of Europe s leading Internet Service Providers (ISP s) increasing their total investment in European business ISP s to 300m. Also the acquisition of a new network set Cable & Wireless as one of the leading providers of business Internet services in Europe. This investment was relating to its plan to expand in Internet Protocol and undoubtedly provoked another increase in demand for cable and wireless shares. The fact that Cable & Wireless has already invested a great deal in this ever, expanding market should result in large future profits.
BT share price movements
The end of December marked the first of the big decreases in BT s share price. On 29th Dec the price was 1513 pence, by 7th Jan it had slumped to 1201 pence. During this period it was announced that BT were making a joint bid with Vodafone for the Spanish mobile Phone Company Airtel . It could be expected that news of potential take over would increase the demand for BT shares in the expectation of higher dividends from profits made by the subsidiary company. Evidently this did not occur. BT was not the only company that had this drop in share price. Markets across Europe fell due to the fear of interest and inflation rates increasing. This rise in rates means that it is more expensive for a firm to pay off debts. Also consumers will spend less. Both of these factors will lead to a fall in company profits.
The expectancy of high rates therefore, explained the fall in BT s share price. It is also noticeable that Cable & Wireless had a fall in performance in that they were not increasing in price as much as they were during the weeks before. Cable & Wireless share prices do not drop as much as BT s because BT has greater debts to pay back; therefore any profits will be affected by a greater percentage than for Cable & Wireless.
There was a second big movement for BT, which was after they released disappointing third- quarter figures, which sent the company shares plunging below Cable and Wireless. Third-quarter pre-tax profits fell to 651m from 858m a year before. BT blamed accelerating UK competition, such as that from Cable and Wireless, and high staff costs. The shares tumbled 214 or 18 per cent to 976p.
THE MAJOR EVENT
The chosen major event is the release of BT s interim half-yearly results on November 11th 1999. The competitor company s report was released on the previous day, and so this should provide useful comparisons.
ACTIVITY OF THE SHARE PRICES BEFORE THE EVENT
The share price of BT remained quite constant during the week before the event, with only minor fluctuations. The share price made modest gains on the two days prior to the release. This seems to suggest market caution about BT s growth prospects in the increasingly competitive telecom industry. This stability of the share price infers that there was no rapid buying of BT shares by investors hoping to purchase them at a discount, before the rise in price that would follow good results. Neither was there heavy selling which would force the share price down.
During the same period before the release of Cable and Wireless s report its share price fluctuated, but fell 14.5 points on the day before the announcement. This suggests investors may have sold the shares. If this was the case then it points to a lack of confidence in the company, and that they expect the share price to fall more in the future rather than rise. The reason for this lack of confidence may be due to uncertainty about the strategy of the company. This can be summed up in the quote:
It was still difficult to say what Cable and Wireless was really for.
(The Economist, June 5th 1999)
This article was written a short time after a new management team took over the company. They are committed to a strategy of streamlining the company and focusing on business communications. The downward movement in the share price suggests that the market is uncertain how successful they will be in achieving this objective.
MOVEMENTS ON THE DAY OF RELEASE OF THE REPORTS
The figures in BT s report were generally perceived to be good, which is shown in the headline:
BT shrugs off intensifying competition.
(Financial Times, 12th November 1999)
The fall in profits in this quarter is due to the fact that there was a sell-off of assets and minority interests worth 1 bn in the same quarter last year, which will have artificially enhanced last years profit. The market reaction to the results was positive, and the share price closed on November 11th on a new high of 1254p.
The strong performance of BT will probably have been helped by the fact that on the previous day Cable and Wireless s results had not been good. Profits rose, however, this increase was brought about by disposals of 4 bn during the quarter. The market realised this increase was not due to better performance. This is clearly proved by the large fall in underlying earnings per share. The company increased it s interim dividend to 4.5p, however, this is still only half that being paid by BT. So, investors looking for a regular income from their investment would be likely to buy BT shares and not those of Cable and Wireless. The company s share price fell by 18.5 points to close at 665.5p.
ACTIVITY OF THE SHARE PRICES FOLLOWING THE EVENT
The share price of BT fluctuated in the following week, but maintained a level higher than before the release of the report. On Monday 15th of November it closed on another high of 1298p. This implies that the market confidence in BT remained strong. The improved level of BT s shares is also likely to have been caused by the closing of a deal with Viag of Germany giving BT access to the Swiss and Austrian markets for the first time. Gaining access to new markets is likely to improve BT s profitability in the future, therefore making the company more attractive to investors.
The share price of Cable and Wireless improved after the initial fall and gained 115 points to close on a new high of 780.5p on November 12th. The main reason was market speculation that Cable and Wireless was about to sell-off its stake in Hong Kong Telecom. This subsidiary has been doing badly because of the Asian stock market crisis. This possible deal brought approval from analysts. On the same day the brokers Goldman and Sachs said that Cable and Wireless shares have a sum-of-parts value of 950p. When respected brokers suggest that shares are worth more than their current trading price shareholders are likely to buy the shares hoping to make capital gains.
ACTIVITY OF THE FTSE-100 INDEX DURING THE WHOLE PERIOD
During the 20-day window surrounding the events the FTSE-100 index rose consistently, putting an average of 30.2 points a day. The FTSE fell only twice during the period, and this was only after it reached a new high on the previous days. So this suggests strong confidence in the market in general, which will have assisted the two companies.
The close observations of the 2 companies over the period have revealed substantial fluctuations in share price. Cable and Wireless were seen to prevail due to their better Internet and global expansions.
BT s performance has declined to such an extent that market confidence has fallen dramatically, as revealed in their declining share price.
I) Table of data showing the daily share prices of BT and Cable and Wireless, as well as the FTSE-100.
II) Line Graph that represents the daily share prices for the period that was followed.
III) A piece of advertising from Cable and Wireless pointing out the how close a competitor BT is.
IV) Print out from FT.com, used to provide data on what areas each company focuses its business on.
The main point that has to be noted about a free market is that there is no wage setter. The wage is determined in much the same way as a goods and services market. This means that the wage is set at the point where the demand and supply of labour intersect.
The diagram below shows labour market equilibrium.
Insert graph showing demand and supply of labour
Equilibrium wage being w, equilibrium quantity of labour
Supplied and demanded being q1.
D1 and S represent the initial demand and supply of labour. The point at which they intersect gives the equilibrium wage rate as W1 and the equilibrium quantity of labour employed as Q1. At point D2 the market is not in equilibrium because at the wage rate W1 there is a greater demand for labour than supply. This results in firms having to compete with one another to attract workers to their companies. Increasing the wages to W2 does this. This then attracts more workers and supply increases to Q2, once again creating market equilibrium.
Due to the nature of the market a monopsonist is a wage maker rather than wage taker. This means the firm has the power to resist wage increases and can even force the wage rate down. However a monopsonist is in competition against other industries. This is especially the case if the firm has to employ more workers. The only source of new workers may be from another industry. If this is the case the monopsonist will have to set a wage rate higher than the equilibrium wage in another industry in the hope that workers will be tempted to move to the industry in which the monopsonist is in.