British Telecommunications Assignment Example | Topics and Well Written Essays - 3000 words

British Telecommunications - Assignment Example 2) BT's current focus on cost savings and retained earnings to fund operations has created heightened investor confidence and has made the company leaner, which will help it compete effectively in markets facing price pressures (Engebretson 2003). 3) As BT makes capital structure decisions going forward, it should adhere to the 'pecking order' philosophy of capital structure, which states that a firm's first choice for financing should be internal funding, followed by debt and then the issuance of equity (Liesz 2001). Like many firms throughout the world, BT became caught up in an acquisition frenzy during the late 1990s and at the turn of the century. In the process, BT relied on a capital structure that was very dependent on bank debt to finance its activities. Richard Fairchild points out that BT management consistently increased the company's level of debt from 1998-2001 and, in the process, investor confidence eroded (Fairchild 2003). Perhaps BT, as a former government monopoly, does not attract investors looking to assume a high level of risk. At any rate, investors took notice of BT's mounting debt and BT's stock price suffered. From 1998-2001, BT's debt increased from 4.8bn to 31bn, mostly from acquisition activities, particularly the licensing rights for 3G (third generation) in the United Kingdom and Germany (Fairchild 2003). Fairchild points out that, during this period, BT's stock price decreased by approximately 65%, eventually leading the company to use a rights issue in 2002, to decrease its debt to 18.4bn (Fairchild 2003). It is hard to blame BT management for increasing the company's bank debt during this period, as this path was followed by several other European telecommunications companies. BT competitors France Telecom, Deutsche Telekom and KPN all have sold or spun-off divisions in the past five years to protect their credit ratings after acquiring high levels of debt (Asset sales to provide new challenge for telco 2006). Analysts described the problem faced by telecommunications providers as a "damned if they do, and damned if they don't" scenario (Asset sales to provide new challenge for telco 2006). In BT's situation, the market clearly was nervous about management's decision to base its capital structure around bank debt. Fairchild points out that when BT increased its level of debt to 31bn, Standard and Poors downgraded BT's credit rating from AA+ to A, which is a reduction of four levels (Fairchild 2003). One could argue that the market was ignoring the various positive aspects of debt in a company's capital structure. As Fairchild indicates, capital