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

British Telecommunications - Assignment Example2) BTs 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 face up determine pressures (Engebretson 2003).3) As BT makes capital structure closes going forward, it should adhere to the pecking order philosophy of capital structure, which states that a firms 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 vigilance consistently increased the companys 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 BTs mounting debt and BTs stock price suffered.From 1998-2001, BTs 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, BTs 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 companys 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 v 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 dont scenario (Asset sales to provide new challenge for telco 2006).In BTs situation, the market clearly was nervous about managements 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 BTs credit rating from AA+ to A, which is a reduction of four levels (Fairchild 2003). unitary could argue that the market was ignoring the various positive aspects of debt in a companys capital structure. As Fairchild indicates, capital