Strategy 11P128 Aravind

7/23/2019 Strategy 11P128 Aravind

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T e l e c o m

M & A D e a l s

C o

r e

T e l e c o m

S e r v i c e s

L i c e n

s e s

A d j a c

e n t

I n f r a s t r u c

t u r e

C o n n e c t i v i t y

P r o v i d e r s

M u l t i m

e d i a

C a b l e &

B r o a d c a s t i n

C o n t e n t &

e b P o r t a l

! t "

e r s

I C

T

# i n a n c i a l

S e r v i c e s

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e r s

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-euipped to face the future.

!ergers and "cuisitions 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

#trategies in !$" are broadly based on the type of diversification that could be achieved in the

transaction. " firm%s 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. "part from these firms can also diversify into related segments for high

opportunities or to protect against dynamic structural changes.

Figure 1 Telecom Deals by Business segments



M&A

Objec

tives

Mar$et

%&'ansi

on

(eadyavailability of

S'ectrum

InfrastructureS"a ring )To*e rs

etc+

Brand ,alue-

Mar$eting

Costs

.ig" /ro*t"0

Pro1tability

)%BITDA-(!IC+

Rationale for Cross-border deals

The ob(ectives of any !$" must be able to realize these sources of Wealth ma)imization and scale

economies. These ob(ectives are addressed in !$" as follows*

+or diversification, ross-border deals are deemed to be more viable than organic growth in foreign

markets. #ome of the reasons*-

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

. Use of e)isting brand name helps avoid costly marketing efforts/. #aturation in domestic markets0. +i)ed and !obile 1ntegration, 2undling of digital services3. +irst45arly mover advantages in emerging markets &in new business segments'



Trends in Cross-border deals

!$" in telecom has seen booming businesses amounting to over 6.3 trillion worth of transactions in

the past decade, which has not only given arise to new global players but has changed the entire faceof the industry with heavy impact on the economy it is operating in.

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Telecom M&A deals1

Deal ,alue )<mm+ =o> of Deals

ross-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 factorslike information asymmetry, negotiation problems, post-merger integration issues in international

deals.

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In-Country vs Cross-order Deals1

Local Mar$et Deals Cross Border Deals

7espite the dominance of in-country deals, the first half of the last decade was influenced by

changing regulations in 5urope and consolidation in "merica. 8owever 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 5merging market deals have increased from 9 to 3:9 in the last decade.

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%merging Mar$et Deals )*it" ? of global deals+

/lobal Deals

Im!act of "inancial crisis on Telecom M&As

5ven as the financial markets took a steep downturn, the telecom sector fared better than the broader

market. 1n 5urope the sector was leading the broad inde) by ;9 at ;;. This reaffirmed the sector%sstatus as defensive and resistant to recession. Telecom also outperformed most sectors during the

recession at ;;<.



Ban$s

Airlines

(etail Clot"ing

Automobile

Com'uter .ard*are

!il & /as

P"arma

#ied Line Telco

#ood (etail

Mobile Telco

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#ector $erformances durin% te economic do'nturn in ())*(

8owever the credit-crunch has had an impact in the !$" activity in the sector as it posed problems

for financial investors. =ack of debt financing created a significant barrier for >rivate 5uity players

in ;< and ;: as deals by these players reduced drastically.

This provided more opportunity for orporate 1nvestors who were able to e)ecute their deals via

available cash flows and bond financing. !ost companies had strong balance sheets, with ?et

debt4521T7" value at around half its peak value in ;;;. 8owever the amount of senior debt falling

due has increased which is e)pected to make refinancing tougher and e)pensive for these corporate

investors. !ost of these deals were from Western 5uropean companies, who have sought out for

higher growth in emerging nations.

Callen%es in +aluin% Cross-border deals

@aluation in ross border deals pose special challenges as dynamic industry and regional trends areredefining the traditional metrics in telecom. @aluation uncertainty is considered one of the ma(or

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 cost4investment related advantages in valuations. When

valuing new businesses in ad(acent segments, metrics such as AO1 e)hibit a more accurate return

than 521T7" 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-order M&As

onvergence

"s the industry migrates its business model from Bminutes% revenue to Bbytes%, Telcos now

acknowledge the importance of media content for growth beyond pure data provision.



The future of the T!T sector is e)pected to be strongly driven by the Technology brands. 2rands like

Coogle, "pple and !icrosoft are redefining the very nature of the industry. Aecent e)ample of

Coogle%s acuisition of !otorola !obility implies an aggressive stance to protect its "ndroid future

from other platforms.

onvergence is gaining momentum in Western Europe as consolidation is in final phase.

5merging !arket +ocus

5merging !arkets have already been the active focus for !$"s for the past few years. 8igh growth

rates, rural penetration, demographics etc are some of the common factors.

7eal +inancing apabilities

"s already seen, >rivate 5uity players are finding it hard for financing in this poor economic climate.

Therefore only big private players are e)pected to make an impact in !$" in near future. Ae-

financing issues for orporates could also push companies to divest not so successful ventures e.g.

#+A and >olkomtel divestiture by @odafone.



Conclusion

7espite the economic situation, Telecom !$" deals are here to stay and the future of the same will

be significantly driven by ross-border deals. #uch deals not only blur the geographic boundaries, but

are also e)pected to bring together the distinct value chains in !edia, 1nternet, device and Telecom

sectors.

References,#ources

. Thompson #7 >latinum. 2loomberg, 7ow Dones 1ndices/. T!T 1ndustry 1nsight &5$E' and !erger activity &7ealogic'

Strategy 11P128 Aravind

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