Introduction

The Telecommunications sector is considered one of the fastest growing and highly profitable sectors
in the services industry. Over the years rapid changes in technology and integration of wide ranges of
services has enabled the industry to achieve huge economies of scale and scope resulting in high
market penetration across diverse geographies and income groups. Unlike traditional industries, the
telecom sector has witnessed dynamic changes owing to factors like de-regulation, technology
innovation, market globalization, bundling of products and services, reduced competitive barriers,
product-market redefinition etc. With these changes companies had to re-align their strategies with
respect to the uncertainties prevalent in the industry so that they are well-equipped to face the future.
Mergers and Acquisitions is one such strategy pursued by companies to diversify the risks arising out
of uncertainties or take advantage of new growth opportunities.

Nature of Telecommunication Deals

Strategies in M&A are broadly based on the type of diversification that could be achieved in the
transaction. A firms diversification strategy could be based on the core-functionalities of the
participating entities (firm diversification) or the markets in which they are operating in (cross-border
diversification) or both. Apart from these firms can also diversify into related segments for high
opportunities or to protect against dynamic structural changes.

IOCALTFM Cn ei doantcuf l h rjnbeal a t nclt ices moec t n m&cir atu t li c& v i t y

eTPtsSWBrM ue rnde &eosr tri e abvAa i d Pc D c oe ea rs ats a tl si l n g
Figure 1 Telecom Deals by Business segments

Rationale for Cross-border deals

The objectives of any M&A must be able to realize these sources of Wealth maximization and scale
economies. These objectives are addressed in M&A as follows:

M&A
O b je c
t iv e s
H ig h G ro w th ,
P ro fi t a b ilit y
(E B IT D A /R O IC )

B ra n d Va lu e /
M a rke tin g
C o s ts

M a rke t
Expansi
on

In fr a s t ru c tu re
S h a rin g (To w e rs
e tc )

Re a dy
a v a ila b ility o f
S p e c tru m

For diversification, Cross-border deals are deemed to be more viable than organic growth in foreign
markets. Some of the reasons:1.
2.
3.
4.
5.

Costly and time consuming to set up and operate in an unknown market.

Use of existing brand name helps avoid costly marketing efforts
Saturation in domestic markets
Fixed and Mobile Integration, Bundling of digital services
First/Early mover advantages in emerging markets (in new business segments)

Trends in Cross-border deals

M&A in telecom has seen booming businesses amounting to over $1.5 trillion worth of transactions in
the past decade, which has not only given arise to new global players but has changed the entire face
of the industry with heavy impact on the economy it is operating in.

Telecom M&A deals1

480,000
440,000
400,000
360,000
320,000
280,000
240,000
200,000
160,000
120,000
80,000
40,000
0

1600
1400
1200
1000
800
600
400
200
2001 2002 2003 2004 2004 2005 2006 2007 2008 2009 2010
Deal Value ($mm)

No. of Deals

Cross-border deals have been constantly beaten by in-country deals both in number and value due to
the increased preference given by the operators to home markets. This can be attributed to the factors
like information asymmetry, negotiation problems, post-merger integration issues in international
deals.

In-Country vs Cross-Border Deals1

450000
400000
350000
300000
250000
200000
150000
100000
50000
0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Local Market Deals

Cros s Border Deals

Despite the dominance of in-country deals, the first half of the last decade was influenced by
changing regulations in Europe and consolidation in America. However as the markets in those

regions approached the final phase of consolidation, companies have turned to emerging economies in
the latter half for high growth.
The Emerging market deals have increased from 21% to 59% in the last decade.
500000
450000
400000
350000
300000
250000
200000
150000
92400
82600
100000
54600 62560 62100 48000 51250
34000
23800
22000 22500
50000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Emerging Market Deals (with % of global deals)
Global Deals

Impact of Financial crisis on Telecom M&As

Even as the financial markets took a steep downturn, the telecom sector fared better than the broader
market. In Europe the sector was leading the broad index by 10% at 2010. This reaffirmed the sectors
status as defensive and resistant to recession. Telecom also outperformed most sectors during the
recession at 2008.

Sector Performances during the economic downturn in 20082

Mobile Telco

-8.30%

Food Retail

-9.80%

Fixed Line Telco

-11.10%

Pharma

-12.60%

Oil & Gas

-15.20%

Computer Hardware

-19.20%

Automobile

-21.10%

Retail Clothing
Airlines

-22.80%
-30.40%

Banks
-32.70%

However the credit-crunch has had an impact in the M&A activity in the sector as it posed problems
for financial investors. Lack of debt financing created a significant barrier for Private Equity players
in 08 and 09 as deals by these players reduced drastically.
This provided more opportunity for Corporate Investors who were able to execute their deals via
available cash flows and bond financing. Most companies had strong balance sheets, with Net
debt/EBITDA value at around half its peak value in 2000. However the amount of senior debt falling
due has increased which is expected to make refinancing tougher and expensive for these corporate
investors. Most of these deals were from Western European companies, who have sought out for
higher growth in emerging nations.

Challenges in Valuing Cross-border deals

Valuation in Cross border deals pose special challenges as dynamic industry and regional trends are
redefining the traditional metrics in telecom. Valuation uncertainty is considered one of the major
factors that could make or break a deal and therefore proper understanding of metrics is of essential
nature.

These metrics however do not point out the cost/investment related advantages in valuations. When
valuing new businesses in adjacent segments, metrics such as ROIC exhibit a more accurate return
than EBITDA margins.

The following table defines the evolution of new metrics with the progression of new products and
services from voice to data.

Drivers of Cross-Border M&As

Convergence
As the industry migrates its business model from minutes revenue to bytes, Telcos now
acknowledge the importance of media content for growth beyond pure data provision.

The future of the TMT sector is expected to be strongly driven by the Technology brands. Brands like
Google, Apple and Microsoft are redefining the very nature of the industry. Recent example of
Googles acquisition of Motorola Mobility implies an aggressive stance to protect its Android future
from other platforms.
Convergence is gaining momentum in Western Europe as consolidation is in final phase.
Emerging Market Focus
Emerging Markets have already been the active focus for M&As for the past few years. High growth
rates, rural penetration, demographics etc are some of the common factors.

Deal Financing Capabilities

As already seen, Private Equity players are finding it hard for financing in this poor economic climate.
Therefore only big private players are expected to make an impact in M&A in near future. Refinancing issues for Corporates could also push companies to divest not so successful ventures e.g.
SFR and Polkomtel divestiture by Vodafone.

Conclusion
Despite the economic situation, Telecom M&A deals are here to stay and the future of the same will
be significantly driven by Cross-border deals. Such deals not only blur the geographic boundaries, but
are also expected to bring together the distinct value chains in Media, Internet, device and Telecom
sectors.

References/Sources
1. Thompson SDC Platinum
2. Bloomberg, Dow Jones Indices
3. TMT Industry Insight (E&Y) and Merger activity (Dealogic)