Orange UK to Merge With T-Mobile UK to Form Joint Venture

Case Type: mergers and acquisitions (M&A); business competition, competitive response.
Consulting Firm: Oliver Wyman first round full time job interview.
Industry Coverage: telecommunications, network.

Case Interview Question #01260: The year is 2006. Your client is Orange UK, a mobile telecommunications services provider in the United Kingdom. Orange UK is trying to build a relationship with Deutsche Telekom AG’s T-Mobile UK to provide their customers with 3G broadband data service. At this time, 3G is not common yet.

Your consulting firm has been hired by Orange UK to help address two questions:

(1) What types of partnership structures should they consider? List pros and cons as well as other factors that would determine optimal partnership structures.

(2) What would you need to know to select the ideal partnership? Considering this situation, what kind of partnership do you think would be the best?

Possible Answers:

The goal of this case is to reach the best kind of partnership for our client Orange UK, considering M&A (company or business), joint venture arrangements (JV) and business alliances.

The interviewer should drive the candidate to list the pros and cons of each partnership structure (1-2 mins)

(1) M&A:
pros -> more control
cons -> not flexible, need strict due diligence, high cost, some overlap of business and backend function

(2) Joint venture (JV):
pros -> can combine each strength to create “specific” new business
cons -> if the scope of business is there is a lot of room for synergy, JV might not be preferable.

(3) Business alliance:
pros -> flexible and can pay fee only per usage
cons -> difficult to control the partner (special arrangement for customized service, etc).

After they list pros and cons of the different types of relationships, probe them to ask specific questions about Orange UK and T-Mobile UK, and ask for background information.

Additional Questions that may be asked (examples):
* Can Orange UK develop 3G technology using their own R&D? What are the challenges?
* The attractiveness of T-Mobile UK’s 3G technology. Any patent? Any competitors?
* Any synergies Orange UK can expect beyond just implementing their 3G technology after the partnership?
* The geographical area of the business for Orange UK and T-Mobile UK.
* The demands for 3G mobile broadband data service. Is it growing? New trends? Likely to be sustainable?

After the candidate discusses questions above, the interviewer can tell the candidate that the scope of the partnership with T-Mobile UK is not going to be beyond the usage of their 3G technology.

Since our client Orange UK cannot pursue synergies beyond the initial 3G use, a business alliance is preferable. Orange UK can start with a business alliance by paying the 3G usage fee and if additional synergies arise, other options can be considered later.

Performance Assessment

* Average Candidate
– Can speak about general pros and cons of different partnership structures
– Provides some ideas to determine which partnership form may be best

* Good Candidate
– Complete all “average candidate” requirements
– Does not need much assistance from the interviewer
– Aggressively thinks out of the box, considers long term business needs and strategy

* Excellent Candidate
– Completes all “good candidate” requirements
– Provides more ideas from broader perspective to determine which form of partnership is best (i.e. synergy arising from — overlapping business and geographical areas is important when considering M&A; legal considerations of JVs, etc.)

Prompt #2: It was recently discovered that another company Vodafone, the competitor of Orange UK, is going to begin providing 3G broadband mobile service for free for its existing customers. If Orange UK starts providing a similar service, the initial cost (CAPEX) will be $1,080M. Orange UK would like to recover this investment within 3 years.

Orange UK’s monthly cost per customer with the new 3G service will increase by $5, from $15 to $20. Current monthly fee per customer is $40 and they have 10 Million customers.

Should our client Orange UK start the similar service as Vodafone’s?

Possible Answer:

This question is basically asking
(1) how many additional customers the client Orange UK need to acquire to recover the cost of new 3G service, and
(2) if it looks realistic.

If X is additional customers and Orange UK need to recover the initial cost in three years, the candidate can come up with the following equation:

current profit per customer/month = $40 – $15 = $25
profit per customer/month after 3G = $40 – $20 = $20

$25 * 12 months/year * 3 years * 10M = $20 * 12 months/year * 3 years * (10M + X) – $1,080M
Solve for X -> X = 4M

To see if it is realistic to earn 4M (40% more than current 10M customers) additional customers by starting 3G service for free, the candidate will require additional information, including:
– The current market share of Orange UK
– The market growth rate of mobile telecom business
– The importance of 3G service for customers

Additional Information to be given:
* Orange UK has 35% market share and is the 2nd largest player.
* The largest player’s market share is 40%.
* Market growth rate of mobile telecommunication in UK is 2%.

Is it realistic to assume Orange UK can increase their customers by 40% to pay back capex in 3 years?

Note: The candidate can answer yes or no but must have sufficient evidence; push back on candidates answering yes to consider what they would need to believe. Most candidates should arrive at a “no” answer:

* Support for “NO”:
– Acquiring 40% more customers in 3 years would require about 10% more customers per year, which is far beyond the market growth rate of 2%.
– Because the competitor Vodafone already started their free 3G service, Orange UK should rather consider another way to differentiate themselves from Vodafone (maybe combination of 3G service and other data contents service at some cost).

Performance Assessment

* Average Candidate
– Structure the equation to come up with additional number of customers Orange UK needs to acquire with some guidance.
– Ask questions to decide if it is feasible to acquire 4M additional customers.

* Good Candidate
– Complete all “average candidate” requirements
– Does not need much assistance from the interviewer
– Ask some good questions to decide if it is feasible to acquire 4M additional customers and reasons why

* Excellent Candidate
– Completes all “Good Candidate” requirements
– Support the reasons why Orange UK should/should not start free 3G service with both quantitative (Comparing the necessary growth rate v.s. market growth rate) and qualitative thoughts (2nd largest player, which area they should play and so forth)