Mergermarket’s M&A Trend Report for Q1 2014 identified the telecommunications sector as the lead sector for M&A activity in both the US and Europe (and that’s not taking into account the Sprint/T-Mobile deal) with a global M&A value at a whopping US$101 billion. The spate of activity comes as no surprise as many telcos are re-evaluating their positions. Various factors are driving consolidation and merger activities.
Consolidation as an alternative Economies of scale work in favour of a consolidation among network carriers. Many telcos are trying to keep pace with surging broadband growth that requires faster internet speeds and new methods of transmitting video on all devices. Consolidation offers the opportunity of gaining greater market share, whilst keeping shared costs low.
Telcos are finding it difficult to maintain their market share as customer loyalties become increasingly fickle. Customers no longer give a second thought to changing network service providers if another service provider is offering a better deal.
Competition from video service providers is forcing telcos to review their business operations. Whilst telcos provide the networks on which the digital lifestyle revolution is built upon, they face a new breed of competitors that are innovating over the top of their infrastructure at a fraction of the cost.
There are some differences in the major global regions: US, Europe and Asia.
In the US, Comcast’s proposed US$45 billion acquisition of Time Warner Cable would combine America’s two largest cable companies into a nationwide provider of video, broadband data and internet telephone service. This deal may make business sense (through operational efficiencies and economies of scale) but the tech industry is concerned that this merger will have adverse implications for competition and innovation in the internet ecosystem.
Industry concerns AT&T’s recently announced intention to purchase DirecTV for US$48.5 billion (bringing with it the beginning of the merger of the telecommunications and television industries) also makes business sense in that it can deliver the holy grail of bundled services for consumers, combining mobile telephony, fixed lines, broadband and television. But despite delivering what consumers want, this deal has also raised concerns, particularly in terms of potentially higher prices and less choice for consumers. Critics also do not believe that large carriers deliver innovation.
In Europe, industry commentators have repeatedly highlighted the need for consolidation in the European telecommunications industry to stand up to international competition. Europe has around 100 companies which offer telecommunication services. The argument for consolidation is that key operators can invest in new networks and services rather than spending their money on price wars for customer retention. This in turn should place telcos in a position to offer better services to its customers at lower prices.
However, consolidation and merger is not without its challenges. Europe’s competition regulator had rejected calls to ease restrictions on mergers in the telecommunications industry, and has placed the blame for the lack of consolidation in the sector on national politicians retaining sovereignty over telecommunications regulations and the distribution of spectrum needed to run a mobile network. The concern remains whether too few players in the market would create a monopoly which disadvantages consumers.
The European Commission is currently reviewing two major mergers of mobile telecommunications companies. The first is the proposed merger of the German division of O2 (owned by Spain’s Telefonica) and the German operator E-Plus (owned by the Dutch company KPN). The other is the proposed acquisition of the Irish division of O2 by 3 (owned by Hong Kong’s Hutchinson Whampoa). The European Commission’s decisions are eagerly anticipated, where a green light may open floodgates in the first step to transforming the current overcrowded market into fewer, more nimble operators.
Telco scene in Asia The telecommunications market in Asia has not seen as much activity as its American and European counterparts. Various factors have contributed to this. There are fewer players in each Asian market. Most Asian countries only have three to four major telcos, and therefore there has not been as pressing a need to consolidate to gain market share. There have, however, been cross border investments such as China Mobile’s very recent investment in Thailand’s True Group to further develop China Mobile’s international operations. Other telcos in the region are considering international investment opportunities.
The Asian telecommunications market is on the whole much younger with more up-to-date network and infrastructure. Therefore, telcos in this market have not needed to invest as much in updating their network and infrastructure.
In addition, competition from video service providers has not been as keen in Asian markets. Regulatory restrictions in most Asian countries mean that on-demand internet streaming media providers like Netflix have not penetrated the Asian markets and Asian consumers still rely on pay-TV to access content. However, the M&A landscape in Asia may change with the significant growth in smartphones and increasingly IT-savvy populations who demand better internet services at more competitive prices.
More consolidation and mergers are inevitable and make business sense. The real question is whether these mergers merely ensure the survival of the major players in the telecommunications industry or whether the combinations will help transform the industry to deliver what consumers want and expect. Size does not necessarily guarantee relevance or success in a world of fast changing technology and consumer habits.
The views expressed here are of the author, and e27 may not necessarily subscribe to them
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