Outline

Softbank was the second-largest broadband internet access provider in Japan, after
Nippon Telegraph and Telephone Corp. (NTT). Vodafone K.K. was Japan third-largest
mobile operator. To finance the largest business acquisition ever by a Japanese firm,
Softbank intended to raise between 1.1 trillion and 1.2 trillion through leveraged-
buyout financing, using Vodafone K.K.s assets as collateral.

Vodafone was a U.K. company which leading mobile telecommunications company,

Vodafone lost customer when it rolled out its third-generation service in early 2005,
this frustrating Vodafones management and inventors. The Japanese unit of
Vodafone, which was Vodafone K.K., in Japan held a 100% interest in Japan Telecom
Co., Ltd. Softbank was established in September 1981, it upheld its commitment to
the creation of new lifestyles through the IT revolution. The success of its business
was not achieved by simply increasing customer numbers, but by developing
innovative service that truly added groundbreaking value for users and by improving
customer satisfaction to increase per-user revenues.

The 1.75 trillion acquisition of Vodafone K.K. would transfer the company with
annual sales more than 2 trillion. Softbank spent about 200 billion on capital
investments for this acquisition and would continue to do so after the acquisition.
Softbank would focus on bolstering all four weak points of Vodafone K.K.s cellular
phone business that Son had identified: the network, the management of the sales
organization and branding, the service content and the handset. Son described a T-
shaped business model, with a vertical structure in Japan encompassing everything
from infrastructure to content, and a horizontal structure based on a digital platform
providing content to cellular phones around the world. To this end, Son said Softbank
would partner with Vodafone for mobile delivery.

Sarin, Vodafones chief executive, was willing to sell 85%of the Japanese subsidiary.
Sarin put the value of the Japanese unit far above 2 trillion, saying the number of
subscribers would increase when the infrastructure for 3G services was enhanced.
Son countered that it was worth no more than 1.5 trillion, and demanded a 100%
stake in the unit also.

In 2006, foreign media reported that a Western investment fund was considering a
competing offer to acquire Vodafone K.K, so he had to make decision quickly, and the
price set at 1.7 trillion to 2.0 trillion.
Problems

1. What are reasons for a company such as Softbank to acquire another company?
The company was constantly anticipating changes in its operational environment and
had repeatedly expanded the scope of its operations. As the company strived to
increase the value of its infrastructure and to enhance its enterprise value.

2. What were Sons motivation for Softbanks acquisition another company?

In November 2005, Softbank acquired a mobile license from the Japanese
government, but the company flinched at the prospect of having to spend trillions of
yen to build the infrastructure for a mobile service from scratch. By acquiring the
Japanese unit of Vodafone, Softbank had no only gained immediate access to a
mobile phone business, but also added a key piece to the overall structure of the
company in line with the digital information revolution. (In addition, Softbank and
Vodafone were planning to set up a joint venture in order to offer internet access
services on cellular phones.)

3. What can be pros and cons of this deal for Softbank?

Pros:
a. Market share: After purchase Vodafones Japanese unit transformed Softbank
into the third-largest comprehensive telecommunications service provider.
b. License: They can acquire Vodafone to replace building the infrastructure for
mobile service from scratch, it would save much time and money.
c. Sales: The acquisition would bolster Softbanks group sales by about 150% to
around 2.5 trillion yen.
Cons:
a. Price too high: because Vodafone lost customers when it rolled out its third-
generation service in early 2005 before enough base stations were in place to
handle the traffic volume, leading to disruptions. So maybe Softbank offered too
much money to acquire Vodafone.
b. Bond rating: Because the value of Softbanks stock declined after news of the
acquisition. The financial market factored in the expected deterioration of
Softbanks financial health, so their bond rating would be adjusted.
4. Predict the future of Softbank after deal and list Softbanks acquisition cases
since 2006 up to now.
They raise money through leveraged-buyout financing, using Vodafone K.K.s assets
as collateral, so even if the situation deteriorated, it wouldnt sacrifice Softbanks
value. Since the big change has happened in the last fifteen years due to the arrival
digital information industries. At that time, third generation was developing, the
Vodafone had 3G technology which it launched the worlds first commercial 3G W-
CDMA service based on 3GPP. Softbank would get great synergy between its
customers and Vodafones technology. After acquisition they would become the third
largest comprehensive telecommunications service provider to build economic scale.

5. In the US, LBOs of large public companies became common in the 1980s? Why?
Since Leveraged Buyout is a kind of High degree of financial leverage, usually a ratio
of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds issued
in the buyout are usually are not investment grade and are referred to as junk
bonds. It usually needs basic macroeconomic factors, for example, stable economic
situation and interest rate.
Following are some factors that LBO became common in the 1980s:
a. High inflation rate
Inflation occurred during 1960~1980, which made Tobins Q less than one in
that time. In other words, many companies market value are much lower than
replacement cost. It was an great opportunity to gain asset in low cost.
b. Interest rate going high
Inflation made interest to rise and those companies who were financing in fixed
rate favored from it because their real debt ratio declined, which made them
have ability to operate financial leverage.
c. Junk bonds
In the decade that Junk bonds was common in the market, entrepreneurs were
eazy to to finance by those High-yield debt and acquired enough fund to
complete acquisitions.
d. Economic Recovery Tax Act of 1981
It was an act "to amend the Internal Revenue Code of 1954 to encourage economic
growth through reductions in individual income tax rates, the expensing of
depreciable property, incentives for small businesses, and incentives for savings,
and for other purposes". It created more tax reduction to companies.
e. Changes in tax tax system
Reduce in income tax rate and increase in capital gains tax impede development
in stock markrt and made companies convert to finance by debt.
6. Was all this takeover and LBO activity good for the US economy?
Although LBO created lots of benefit by high leveraged for U.S. economic in early
1980s, but it became failed and some bankruptcies in the end of 1980s.
For example, Robert Campeau's 1988 buyout of Federated Department Stores and
the 1986 buyout of the Revco drug stores. However, the debt obligations that needed
to be covered following the merger were too large and worsen by a market downturn
that Campeau Corporation was unable to meet its debt obligations.
So, not all LBO had good ending, if economic situation is not stable, such as financial
crisis and significant change of interest rate, or the target corporation dont have
stable cash flow, its possibly unable to pay interest and fail the debt.

7. Prepare Vodafone KKs pro forma future cash flow statement for 20062008.
8. Estimate the future exchange rates between the US dollar, British pound and
yen.