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
! t "
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 !$" are broadly based on the type of diversification that could be achieved in the
transaction. " firm%s diversification strategy could be based on the core-functionalities of the
participating entities &firm diversification' or the markets in which they are operating in &cross-border
diversification' or both. "part from these firms can also diversify into related segments for high
opportunities or to protect against dynamic structural changes.
Figure 1 Telecom Deals by Business segments
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M&A
Objec
tives
Mar$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 !$" as follows*
+or diversification, ross-border deals are deemed to be more viable than organic growth in foreign
markets. #ome of the reasons*-
. ostly and time consuming to set up and operate in an unknown market.
. Use of e)isting brand name helps avoid costly marketing efforts/. #aturation in domestic markets0. +i)ed and !obile 1ntegration, 2undling of digital services3. +irst45arly mover advantages in emerging markets &in new business segments'
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Trends in Cross-border deals
!$" 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$et Deals Cross Border Deals
7espite the dominance of in-country deals, the first half of the last decade was influenced by
changing regulations in 5urope and consolidation in "merica. 8owever as the markets in those
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regions approached the final phase of consolidation, companies have turned to emerging economies in
the latter half for high growth.
The 5merging market deals have increased from 9 to 3:9 in the last decade.
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%merging Mar$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 ;;<.
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Ban$s
Airlines
(etail Clot"ing
Automobile
Com'uter .ard*are
!il & /as
P"arma
#ied Line Telco
#ood (etail
Mobile Telco
@52>93?
@53>63?
@22>:3?
@24>43?
@4;>23?
@47>23?
@42>83?
@44>43?
@;>:3?
@:>53?
#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.
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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.
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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.
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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'