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Struggling Johnson Controls and Tyco Merge to Create More Focused Global Business
KEY POINTS
Having a clear business strategy makes target selection easier
Approaching the target firm at the appropriate time with a compelling vision for the combined firms increases the
probability of reaching a deal
Friendly acquisitions often offer the greatest potential for synergy and shareholder wealth creation by promoting
cooperation
Continuing a long term trend, many companies have been narrowing their product and market focus in an effort to make
their businesses easier to manage and for investors to understand. The shares of more focused firms often tend to trade at a
higher price-to-earnings multiple than those that are highly diversified. Tyco International Plc (Tyco) and Johnson Controls
Inc. are recent examples of firms attempting to boost their share prices in this manner. Both firms were pursuing business
strategies that involved attempting to achieve greater focus while leveraging their resources.
Despite these efforts, the share prices of both firms had underperformed the overall stock market in recent years making
it clear to their boards of directors that more had to be done. On January 25, 2016, Johnson Controls announced that it had
reached an agreement to merge with Tyco in a deal valued at about $15 billion. The new firm will have $32 billion in
annual revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) of $4.5 billion before
synergies (but including the planned spinoff of Adient) on a proforma basis.10
Tyco’s CEO, George Oliver, initially contacted Mr. Alex Molinaroli, CEO of Johnson Controls, about structuring a
smaller deal involving the Johnson Control’s systems controls business. By October, discussions between the two firms had
escalated to a merger involving the two firms. The two CEO’s believe that together the firms could leverage their combined
resources. How? By offering packages of products and services consisting of fire, security, heating and air conditioning,
power solutions and energy storage controls and systems to serve various end-markets including large institutions,
commercial buildings, retail, industrial, small business and residential.
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When Patience Pays—Signet Jewelers Buys Zales
Case Study Objectives:
Having a clear business strategy makes target selection easier
Approaching the target firm at the appropriate time with a compelling vision for the combined firms increases the
probability of reaching a deal
Friendly acquisitions often offer the greatest potential for synergy and shareholder wealth creation by promoting
cooperation.
Signet Jewelers, a specialty retailer, announced it had signed a definitive agreement to acquire all of the outstanding shares
of its smaller competitor, Zales Corporation, for $21 per share in cash in early 2014. The deal is valued at $690 million and
$1.4 billion including assumed debt. The purchase price represents a substantial 41% premium to Zales’s closing price the
preceding day. The size of the premium reflects Signet’s anticipated synergy with Zales.
Dallas, Texas-based Zales Corporation operates more than 1,000 retail stores and kiosks in the United States, Canada,
and Puerto Rico. Its brands also include Gordon’s Jewelers and Piercing Pagoda. Its 2013 revenue totaled $1.9 billion. Hit
hard during the 2008–2009 recession, Zales’s profitability plummeted, with the struggling firm recording a series of annual
losses. The 90-year-old firm is in the process of completing its successful multiyear turnaround effort to restore
profitability. Having delivered 12 consecutive quarters of revenue growth, the firm recorded a $10 million profit in 2013.
Signet, headquartered in Bermuda, operates more than 1,400 stores under the Kay Jewelers and Jared the Galleria of
Jewelry brand names in the United States. It also operates about 500 stores in the United Kingdom under the brands H.
Samuel and Ernest Jones. Signet’s CEO, Mike Barnes, said that the Zale deal fits perfectly with his firm’s strategy of
Google’s Foray into “Device Makers” in its Search for the Next Big Thing
Case Study Objectives: To illustrate
• The challenge of translating vision into strategy
• The challenge of moving beyond a firm’s legacy business.
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As one of the most successful firms on the planet measured by most any metric, Google represents a firm at a cross roads.
How does it grow beyond the extraordinary success it has achieved in its legacy search business? How does it find the
“next big thing” that will drive its revenue and profits? Its actions in recent years provide an important glimpse into the
challenges associated with a firm trying to find its future beyond its legacy as the premier search engine on the globe.
At Google “great just isn’t good enough.” Through innovation, the firm aims to “take things that work well and improve
upon them in unexpected ways.” The customers for its products and services are consumers, businesses, and the Web (i.e.,
community of web designers and developers). For consumers, the company strives to make it as easy as possible to find the
information they need and to get the things the need done. For business, Google provides tools to help businesses engage in
all aspects of e-commerce from advertising to fulfillment. For the Web, Google engages in a variety of projects to make it
easier for developers and designers to contribute the improvement of the Web.
Founded in 1998, Google continues to grow at a torrid pace, largely driven by the shift of advertising and commerce
from traditional media and brick and mortar retail outlets to the Internet. This is likely to continue well into the foreseeable
future. Furthermore, the firm’s profitability continues to rank well above most other technology firms. However, reflecting
What all these transactions have in common is that they involve the gathering and analysis of data. But is that enough to
create real and sustainable synergy? What the firm was trying to achieve with this seemingly disparate and random
acquisitions was puzzling to many observers.
In 2013, Google’s CEO, Larry Page, known for his emphasis on making audacious investment and a pragmatic
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Implicit in what Page is saying is that he sees a future world in which all things are connected via the Internet and that
Google can benefit by getting more people to use the Internet. In turn, Google’s stakeholders from shareholders to
employees to communities benefit as the firm’s revenues grow with increased Internet traffic. Shareholders gain by
increasing profits, employees by increased opportunities and challenges and communities from more jobs and tax revenue.
Therefore, Google’s business strategy is implicitly to seek ways to get more people to use the Internet more frequently and
in more diverse ways. But does this strategy facilitate the realization of the firm’s stated mission: organizing the world’s
information and making it universally accessible and useful?
Since so much of what Internet users do online generates revenue for the firm, consistent with its mission, Google wants
to pursue ways to make the Internet easier to use, more accessible, and faster. From its original search product, the firm has
tried to improve the quality of search results by returning only those most relevant to the search request. The objective of
Larry Page wants the firm’s new products and services to be those that get more people to use them multiple times daily.
An important criterion for selecting new products and services has been dubbed the “toothbrush test” (analogous to
toothbrushes used at least twice daily). The firm’s search capability and Android operating system for wireless devices
satisfy this criterion. Having penetrated the software market in a big way, the firm is now pushing into the hardware market
with software embedded in such products as cars and glasses to robots and thermostats.
With its sight on enlarging its exposure in the hardware business, Google announced on January 13, 2014, that it would
pay a whopping (almost 12 times annual revenue) $3.2 billion for Nest Labs, a manufacturer of thermostats and smoke
detectors. The Nest deal takes Google into the home heating, air conditioning, and appliance business as a parts and
Tony Fadell, Nest’s CEO, describes Google’s acquisition of his firm as its further penetration of the “Internet of
Things.” This is a metaphor for a world in which many different types of devices connected wirelessly use a combination of
software ad sensors to communicate with one another and their owners. Perhaps somewhat whimsically, given its largely
amorphous definition, the “Internet of Things” has been described as having a potential size of $19 trillion, larger than the
size of the US annual gross domestic product. The movement toward the “Internet of Things” is expected to accelerate in
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The challenges for Google in making these hardware acquisitions are fourfold: logistical, public relations, cultural, and
competitive. The logistics associated with promotion of cooperation between the new units and existing Google operations
and the cross-fertilization of ideas could be daunting. Without these activities, it is unlikely that the firm can fully leverage
its highly impressive technology infrastructure without being stifled by a burgeoning bureaucracy that has grown to 46,000
Entry into the “Internet of Things” also poses serious privacy concerns among regulators and activists, potentially
creating a public relations nightmare for Google. The increasing intrusion into personal lives and the accumulation of data
on personal habits and lifestyles could trigger an explosive backlash against companies attempting to enlarge their positions
in the “Internet of Things.” The backlash could take the form of customer boycotts of the firm’s products or calls for
increased government regulation.
Finally, the addition of hardware businesses creates a cultural conflict in a firm whose employees were accustomed
historically to developing and selling software services. The production and the sale of hardware will require a fundamental
change in the mindset of those employees required to work with the new hardware business if hardware is to become an
important platform for delivering software and content developed by other units within Google. For example, selling
services is significantly different from selling hardware. Services can be more readily customized to satisfy a customer’s
needs and once sold require less marketing and selling effort to maintain an ongoing relationship with the customer. In
contrast, hardware products often become commodities with few if any meaningful distinguishing features often require an
ongoing aggressive marketing and selling campaign to sustain and grow sales.
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more than $1 billion in operating income in 2013. While Motorola’s most recent offering Moto X in late 2013 has been
well received, its sales have not been sufficient to stem hemorrhaging cash flow. It had become increasingly clear that
continued investment in the unit was not likely to turnaround the business. Moreover, exiting the handset business would
assuage concerns among major handset makers that were using Android to power their phones. They had expressed concern
since Google acquired Motorola Mobility in 2011 that Google could become a competitor.
Discussion Questions
1. A corporate vision can be described narrowly or broadly. Google’s website describes its mission/vision as organizing
the world’s information and making it universally accessible and useful. What does this mission statement tell you
about what Google believes its core competence to be and what markets needs it is targeting? How useful do you find
this mission in setting Google’s strategy? (Hint: Discuss the advantages and disadvantages of a broad versus narrow
vision statement for a corporation.) If you were the CEO of Google, what might your vision for its future be? Explain
the rationale for your answer.
Answer: Firms defining their vision broadly often do so out of concern that opportunities will be missed if they define
their mission too narrowly. The first step in defining a firm’s mission is to determine what business you are in. If your
customer base is subject to wild largely unpredictable changes, you would plan differently if your customers were
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2. In the context of M&A, synergy represents the incremental cash flows generated by combining two businesses.
Identify the potential synergies you believe could be realized in Google’s acquisition of Nest that could be achieved by
leveraging other Google products and services. Be specific. Identify synergies Google is not likely to realize by
operating the firm as a wholly-owned largely autonomous subsidiary. Speculate as to why Google has chosen to
operate Nest in this manner.
Answer: Nest will provide Google access to lifestyle and in-home activities data. When combined with the range of
demographic (e.g., age, address, home ownership status, etc.) and psychographic (e.g., personal preferences such as the
purchase preferences, etc.) data, such information can create a more complete picture of what a consumer wants.
3. Describe Google’s investment strategy? What are the factors driving their investment strategy? How might
shareholders eventually react to this strategy? How might this investment strategy hurt the firm long-term?
Answer: Google is likely to experience exceptional double-digit growth in revenue for years to come driven by the
ongoing shift of brick and mortar retailing and advertising to the Internet. Such additional traffic on the Internet will
enable the firm to sell additional advertisement on its website and those of its partners. However, Google has taken on
4. Describe what you believe to be Google’s business strategy? Would you describe their strategy as cost leadership,
differentiation, focus or a hybrid strategy? Explain your answer. To what extent do you believe it is driven by changes
in the firm’s external environment? To what extent have factors internal to the firm driven Google’s business strategy?
Answer: Google’s business strategy seems implicitly to be taking actions necessary to drive more people to using the
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5. What are the potential threats to Google’s current vision and business strategy?
Answer: Privacy concerns could severely limit Google’s expansion strategy and its accumulation of personal and
lifestyle data. Presumably such information will be used to better profile consumers and businesses for purposes of
Exxon Mobil’s (Exxon) Unrelenting Pursuit of Natural Gas
__________________________________________________________________________________________________
Key Points
Believing the world will be dependent on carbon-based energy for many decades, Exxon continues to pursue aggressively
amassing new natural gas and oil reserves.
This strategy is consistent with its core energy extraction, refining, and distribution skills.
As the world’s largest energy company, Exxon must make big bets on new reserves of unconventional gas and oil to
increase future earnings.
_____________________________________________________________________________________
Exxon has always had a reputation for taking the long view. By necessity, energy companies cannot respond to short-term
gyrations in energy prices, given the long lead time required to discover and develop new energy sources. While energy
prices will continue to fluctuate, Exxon is betting that the world will remain dependent on oil and gas for decades to come
and that new technology will facilitate accessing so-called unconventional energy sources.
During the last several years, Exxon continued its headlong rush into accumulating shale gas and oil properties that
began in earnest in 2009 with the acquisition of natural gas exploration company XTO Energy. While natural gas prices
have remained well below their 2008 level, Exxon used the expertise of the former XTO Energy personnel, who are among
The sheer size of the XTO acquisition in 2009 represented a remarkable departure for a firm that had not made a major
acquisition during the previous 10 years. Following a series of unsuccessful acquisitions during the late 1970s and early
29
Traditionally, energy companies have extracted natural gas by drilling vertical wells into pockets of methane that are
often trapped above oil deposits. Energy companies now drill horizontal wells and fracture them with high-pressure water,
a practice known as “fracking.” That technique has enabled energy firms to release natural gas trapped in the vast shale oil
fields in the United States as well as to recover gas and oil from fields previously thought to have been depleted. The
natural gas and oil recovered in this manner are often referred to as “unconventional energy resources.”
In an effort to bolster its position in the development of unconventional natural gas and oil, Exxon announced on
December 14, 2009, that it had reached an agreement to buy XTO Energy in an all-stock deal valued at $31 billion. The
shale oil. These reserves also complement Exxon’s U.S. and international holdings.
Exxon is the global leader in oil and gas extraction. Given its size, it is difficult to achieve rapid future earnings growth
organically through reinvestment of free cash flow. Consequently, megafirms such as Exxon often turn to large acquisitions
to offer their shareholders significant future earnings growth. Given the long lead time required to add to proven reserves
and the huge capital requirements to do so, energy companies by necessity must have exceedingly long-term planning and
investment horizons. Acquiring XTO is a bet on the future of natural gas. Moreover, XTO has substantial technical
expertise in recovering unconventional natural gas resources, which complement Exxon’s global resource base, advanced
R&D, proven operational capabilities, global scale, and financial capacity.
A sizeable purchase price premium, the opportunity to share in any upside appreciation in Exxon’s share price, and the
tax-free nature14 of the transaction convinced XTO shareholders to approve the deal. Exxon’s commitment to manage XTO
on a stand-alone basis as a wholly owned subsidiary in which a number of former XTO managers would be retained
Discussion Questions and Answers:
1. What was the total purchase price or enterprise value of the transaction?
Answer: The purchase price valued XTO Energy’s equity at $31 billion. The firm also assumed $10 billion
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2. Why did Exxon Mobil’s shares decline and XTO Energy’s shares rise substantially immediately following the
announcement of the takeover?
Answer: Exxon Mobil’s share price dropped by about 4 percent on the announcement of the share for share
exchange reflecting investor concern about the potential dilution of current shareholder interests. In contrast,
3. What do you think Exxon Mobil believes are its core skills? Based on your answer to this question, would
you characterize this transaction as a related or unrelated acquisition? Explain your answer.
Answer: Exxon Mobil clearly views itself as an oil and gas exploration, production, and distribution
company, with its core skills and technical expertise having been honed in these areas over decades.
4. Identify what you believe the key environmental trends that encouraged Exxon Mobil to acquire XTO Energy.
5. How would you describe Exxon Mobil’s long-term objectives, business strategy, and implementation
strategy? What alternative implementation strategies could Exxon have pursued? Why do you believe it chose
an acquisition strategy? What are the key risks involved in ExxonMobil’s takeover of XTO Energy?
Answer: Exxon Mobil’s long-term objective is to provide its shareholders with increasing earnings growth
and shareholder value appreciation. It is pursuing a focus strategy, which entails applying its traditional skills
Microsoft Invests in Barnes & Noble’s Nook Technology
_________________________________________________________________________________________________
Key Points
Firm size often dictates business strategy.
Diversifying away from a firm’s core skills often is fraught with risk.
Accumulated corporate cash balances often create potential agency problems.
________________________________________________________________________________________________
Microsoft, like Apple, has been in business for three decades. Unlike Apple, Microsoft has failed to achieve and sustain the
high growth in earnings and cash flow needed to grow its market value. For years, Microsoft has attempted to reduce its
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Windows-powered smartphones have yet to gain significant market share. That same year the software maker also acquired
Skype, the Internet telephony firm, for $8.5 billion in the biggest acquisition in the firm’s history. Its contribution to
Microsoft’s revenue and profit growth is unclear at this time.
Despite a number of acquisitions during the last few years, Microsoft amassed a cash hoard of more than $60 billion by
the end of March 2012. The amount of cash creates considerable pressure from shareholders wanting the firm either to
return the cash to them through share buybacks and dividends or to reinvest in new high-growth opportunities. In recent
years, Microsoft has tried to do both.
Continuing to move aggressively, the software firm announced on April 30, 2012, that it would invest a cumulative $605
million (consisting of $300 million upfront with the balance paid over the next five years to finance ongoing product
As a result of the deal, the two firms will settle their patent infringement suits, and B&N will produce a Nook e-reading
application for the Windows 8 operating system, which will run on both traditional PCs and tablets. Microsoft, through its
Windows 8 product, has been forced to radically redesign its Windows operating system to accommodate a future in which
web browsing, movie watching, book reading, and other activities occur on tablets as well as PCs and other mobile devices.
While Windows 8 will have an “app store,” it is likely to have to be closely aligned with a service for buying books and
B&N claims to have 27% of the U.S. e-book title sales, with Amazon capturing 60%. At one time, Amazon had almost a
90% market share of the e-book market, but this has eroded as new players, such as Apple, Google and now Microsoft,
have entered. According to market research firm IHS iSuppli, Apple had 62% of the tablet market in 2011, reflecting the
success of its iPad, with Amazon’s Kindle having a 6% share and B&N’s Nook a 5% share. Book publishers appear to have
been encouraged by Microsoft’s investment in B&N due to their growing concern that Amazon would dominate the e-book
market and the pricing of e-books if B&N were unable to become a viable competitor to Amazon.com.
Discussion Questions:
1. Speculate as to why Microsoft seems to be having trouble diversifying its revenue stream away from Windows and
the Office Products suite?
Answer: Microsoft’s roots are as a software company. It has been wildly successful by selling many millions of
copies of its Windows operating system worldwide and subsequently selling end users of the operating system
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2. What are the key factors external and internal to Microsoft driving its investment in Barnes & Noble?
Answer: The good news for Microsoft is that its core products continue to generate a huge annuity-like cash flow
stream; the bad news is that the firm has yet to demonstrate an ability to reinvest successfully this cash flow in
related high growth market segments. The sheer size of the firm’s cash hoard creates pressures from shareholders
3. Speculate as to how analysts valued B&H’s e-book subsidiary at $1.7 billion. In what way might this number
understate the value of the subsidiary at the time the Microsoft investment was made?
4. In your opinion, what does Microsoft bring to this partnership? What does Barnes & Noble contribute? What are
likely to be the challenges to both parties in making this relationship successful?
Answer: Microsoft contributes both cash and name recognition and an operating system. While all are important,
the fact that a firm like Microsoft would invest in B&N legitimizes the firm’s Nook e-reader in the eyes of both
potential customers and investors. Concerns about B&N’s Nook being marginalized may at least temporarily have
Sony’s Strategic Missteps
__________________________________________________________________________________________________
Key Points
Realizing a complex vision requires highly skilled and consistent execution.
A clear and concise business strategy is essential for setting investment priorities.
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Corporate financial and human resources most often need to be concentrated in support of a relatively few key initiatives to
realize a firm’s vision.
__________________________________________________________________________________________________
As the fifth-largest media conglomerate (measured by revenues), Sony Corporation (Sony) continues to struggle to get it
right. Its products and services range from music and movies to financial services, TVs, smartphones, and semiconductors.
The firm’s top-three profit contributors include its music, financial services, and movie operations; TV manufacturing has
been its greatest profits drag. As the third-largest global manufacturer of TVs, behind Korea’s Samsung and LG
Electronics, Sony has been unable to offset the slumping demand in the United States and Europe for Bravia TVs,
recording nine consecutive yearly losses.
As with many companies, Sony’s vision seems to exceed its ability to execute. Derailed in recent years by an
appreciating yen, a lingering global economic slowdown, an earthquake that crippled its factories, and flooding in Thailand
that forced factory closings, Sony recorded its fifth consecutive annual loss for the fiscal year ending March 2012.
Cumulative five-year losses totaled more than $6 billion. In 2000, the firm was worth more than $100 billion; however, by
late 2012, it was valued at less than $18 billion. This compares to its major competitors, Apple and Samsung, which were
valued at $364 billion and $134 billion, respectively, at that time. While whipsawed by a series of largely uncontrollable
events, the firm seems to lack the focus to allow it to concentrate its prodigious resources ($17 billion in cash on the
balance sheet) behind a relatively few strategic initiatives.
Oracle’s Efforts to Consolidate the Software Industry
Key Points:
• Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its
business strategy.
• A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing
business environment.
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a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial
pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended
by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative
In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of
its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there,
Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm’s software applications
business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008–2009 recession.
In helping to satisfy its customers’ challenges, Oracle has had substantial experience in streamlining other firms’ supply
chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring
other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning
unprofitable products and redundant overhead during the integration of the acquired firms. Oracle’s existing overhead
structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the
additional revenue would fall to the bottom line.
Prior to the Sun acquisition, Oracle’s primary competitor in the enterprise software market was the German software
giant SAP. However, the acquisition of Sun’s vast hardware business pits Oracle for the first time against Hewlett-Packard,
IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent
years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems
diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware
vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the
networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an
Discussion Questions and Answers:
1. How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some
combination of all three)? Explain your answer.
Answer: The business strategy can best be described as a cost leadership strategy focused on business
application software in which Oracle seeks to add the revenue from acquired companies without taking on
much additional cost and to achieve revenue growth for its existing product lines by cross-selling its current
products to the customers of the newly acquired businesses. This requires that the existing Oracle
infrastructure to support the sales, marketing, and customer service functions formerly supported by the
acquired firm’s infrastructure. Moreover, The Oracle strategy is characterized by substantial economies of
2. Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the
development of Oracle’s business strategy. Be specific.
Answer: From an external point of view, Oracle’s core product offering, database software, is maturing. Since
the product historically represented three-fourths of the firm’s revenue, Oracle recognized that it was unlikely
3. In what way do you think the Oracle strategy was targeting key competitors? Be specific.
4. What other benefits for Oracle, and for the remaining competitors such as SAP, do you see from further industry
consolidation? Be specific.
Answer: Industry consolidation could provide Oracle and the remaining competitors with additional pricing
Cingular Acquires AT&T Wireless in a Record-Setting Cash Transaction
Cingular outbid Vodafone to acquire AT&T Wireless, the nation’s third largest cellular telephone company, for $41 billion
in cash plus $6 billion in assumed debt in February 2004. This represented the largest all-cash transaction in history. The
combined companies, which surpass Verizon Wireless as the largest U.S. provider, have a network that covers the top 100