You are on page 1of 6

The future of M&A in telecom

McKinsey & Companys analysis of past telecom mergers and acquisitions provides
new insights into where the industry is likely headed.
By Jean-Christophe Lebraud and Peter Karlstrmer
Mergers and acquisitions have been a mainstay of the telecom industry for many years. In
the past decade, the telecom industry has spent an astounding USD 1.5 trillion on M&A
activities, investments that have transformed the industry landscape into the competitive
playing field we see today. However, the motivations behind the transactions have
evolved over time, and we believe the industry is on the cusp of a new wave of M&A
activity driven by some of the disruptions now taking place. To better understand this
dynamic, McKinsey & Company has analyzed telecom deals over the past decade, and our
findings uncover previously hidden insights about the deals themselves and the
implications for the industry going forward. While these findings will likely make
intuitive sense to telco professionals, many have nonetheless been surprised by the
results.

LOOKING BACK TO SEE AHEAD


Telecom M&A activity over the past ten years reached a peak in the 2004-2007 period,
triggered by a reduction in industry valuations (Exhibit 1)
EXHIBIT 1

M&A activity the last 10 yers in telecom

PE ratio

Telco M&A1

Telco
market value

Value
USD billions

250

229

232

200

200

201
143

150
112
100

102
82

74
45

50
0
2001

02

03

04

05

06

07

08

09

5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0

10

1 Based on completed deals where acquirers are telecom service players and which have disclosed deal values greater than USD 25 Mn; year as per
announcement date
SOURCE: Dealogic

McKinsey & Company Telecom, Media & High Tech Extranet


http://telecoms mckinsey.com

In value terms, the bulk of the deals from 2001 to 2006 took place in Europe and North
American, with emerging markets generating less than a quarter of total activity in dollar
terms. From 2007 to 2010, however, a profound shift occurred, with emerging market
players pursuing deals much more aggressively. As a result, their share rose from the
historical under-25 percent level to roughly half of all deals in value terms.
We also discovered that over 80 percent of aggregate deal value has focused on core
telecom services and spectrum license market segments, with the remainder targeted
toward adjacent markets such as infrastructure, connectivity providers, multimedia and
financial services (Exhibit 2). As might be expected, core deals have overwhelmingly
focused on telecom services, which comprised 90 percent of the total.
EXHIBIT 2

The majority of deal value have been in core markets


M&A activity where acquirers are Telcos1
2006-2010 aggregate
xx

No. of Deals (number)


Deal Value ($ billion)

Core

All Deals

449
473.7

Others

Telecom
Services
License

843
568.2

Adjacent

Business of the target

328
72.3

76
22.3

394
426.8

45
46.9

InfraStructure3

66
17.6

Connectivity
Providers2

77
16.8

Multimedia

83
17.2

ICT

84
10.1

Financial
Services

Cable &
Broadcasting

39
8.6

Content &
Web Portal

27
4.9

Others4

17
3.7

18
10.6

1 Based on completed deals where acquirers are telecom service players and which have disclosed deal values>USD 5 mn
2 Independent ISPs and broadband service providers 3 Network equipment & services 4 Advertising, Directory services, Entertainment etc.,

SOURCE: Dealogic, McKinsey Analysis

However, by analyzing how deals have evolved in the past 5 years in terms of number and
type, we discovered significant changes in the nature of the transactions pursued in the
industry.
First, while relatively stable in value, cross-border M&A deals in the core business area
have steadily declined in number (Exhibit 3). Among several possible factors, slowing
subscriber growth across the world might explain the reduced appetite for the kind of
cross-border deal-making that allowed some of the larger European and Asian mobile
operators to buy into emerging market growth early in the past decade.
McKinsey & Company Telecom, Media & High Tech Extranet
http://telecoms mckinsey.com

EXHIBIT 3

There has been more in country


than cross border activity

PRELIMINARY
xx

M&A activity where acquirers are Telcos1


2006-2010 aggregate
72

82

58

Driven by AT&T
acquring BellSouth for
USD 101 Bn

45

34

54

46.5

25.6

24
11.2

25

No. of Deals (number)


Deal Value ($ billion)

65

45

33

17

29.0

24.8

25.2

16

16

11

0.3

3.0

0.1

09

2010

137.5
Core2

89.7

Business of the target

40.7

51
Adjacent 3

4.8

17
Unrelated4

46
5.9

10

24.8

28

27

4.8

8.2

12

21

47.5

18
11.7

3.0

2
Negligible activity5

3.1
2006

0.5

3.0

2.5

0.6

07

08

09

2010

Domestic
1 Based on completed deals where targets are telecom service players and
which have disclosed deal values> 5 Mn USD; year as per announcement date
2 Voice, Broadband, Internet, Network Equipment and Infrastructure
3 ICT, Multimedia and Financial Services
4 Retail, Real Estate, Holding companies, Paging/PCS services, Resellers etc.,

2006

07

08

Cross Border
Geographical coverage

SOURCE: Dealogic, Team analysis

Second, adjacent segment deals have steadily increased in value over the past 5 years,
today accounting for roughly half of the number of deals made by operators (they do,
however, on average remain smaller than core telecom deals). The blurring of formerly
distinct value chains in the media, Internet, device and telecom sectors is likely
compelling increasing numbers of telcos to explore growth outside of their core
operations.
Finally, in-country deals continue to surpass cross-border M&As both in number and
value. This preference highlights the value telecom players appear to place on their home
markets, and perhaps indicates the increased comfort levels managers have concerning
the capture of synergies in acquisitions that are close to home. The overall split between
domestic and cross-border deals, which from 2006 to 2010 averaged 65/35, respectively,
remained fairly stable during this period, even though fewer deals were struck during the
latter years. Also, among regions, cross-border M&As have been dominant in Europe/the
Middle East/Africa (EMEA) alone, while in the Americas and Asia/Pacific, these deals
made up considerably smaller percentages of the total in terms of value.

McKinsey & Company Telecom, Media & High Tech Extranet


http://telecoms mckinsey.com

FACTORS DRIVING THE FUTURE OF M&A


This rear-facing view can help leaders put telecom M&A trends into perspective and
provide insights into what the future might hold regarding such deals. Based on these
findings, we believe three fundamental drivers will determine the future of M&A in
telecom:
1) The extent to which operators can gain scale benefits, and whether they
can achieve these on a cross-border basis. A linked issue concerns whether large,
locally focused operatorsespecially those in the US and Chinawill decide to go
international.
Industry players are currently holding significant amounts of cash on the sidelines and
ability to further increase debt financing (primarily those in the US and China), making the
potential to engage in M&A deals substantial. Two groups of telecom players hold the
largest pools of cash: Large international players and large local operators. On the other
hand, historical analysis shows that improvements in capital productivity in the telecom
sector diminish after revenues exceed approximately EUR 70 billion. With a number of key
players already exceeding that threshold and others approaching it, the benefits of
additional acquisitions will likely become less attractive for these companies, so it is not
fully clear how the large operators will act during the next decade. We will likely see
individual large operators taking fundamentally different stances on this.
2) The amount of in-country consolidation that regulators will allow. Recent
industry actions suggest the in-country industry consolidation trend will accelerate, given
the number of deals that have taken place in the past two years. Our research indicates that
operators pursue in-country consolidation in order to improve their cost position through
scale, achieve synergies and gain access to critical assets such as spectrum.
3) Operator decisions to expand aggressively in non-core areas. Our research
shows that most telcos have already begun to move assertively into new areas in pursuit of
profitable growth, and to resist the threat of players in adjacent value chains, such as
Google, Apple and global IT service players. Some are adapting their core businesses to gain
medium-term advantages; buying up retailers, business-to-business (B2B) service
companies, and media players. Longer-term, they are moving into adjacent businesses,
purchasing digital media, IT services and software players and the like, with an eye toward
expanding into sectors that could, over time, become parts of their core business. In doing
so, operators are building a broader portfolio of potential growth options. This implies a
greater degree of risk as some of these options may not materialize, but the successful ones
could ideally position operators in the long term IT, communications and media value
chain.
Such moves bring their own challenges. Many of these sectors already feature a variety of
global players and their inclusion will thus transform the competitive set that operators are
used to battling now a finite number of in-country peersinto what could become a wideopen free-for-all.
Furthermore, experience among operators that have acquired assets in adjacent spaces,
whether B2B or B2C, highlights the difficulty of integrating players with starkly different
business and operating models. The odds of the traditional telco business stifling
acquired companies could be high if the integration and value creation plans have not been
thought through well in advance.
McKinsey & Company Telecom, Media & High Tech Extranet
http://telecoms mckinsey.com

Finally, expanding into new businesses will require leaders to change the traditional
performance metrics used by telcos and their boards. In fact, while these adjacent
companies perform less well on traditional telco metrics such as earnings before interest,
taxes, depreciation and amortization (EBITDA) margins, they exhibit far higher returns on
invested capital (ROIC) and growth, often making their total value creation capabilities
greater than those of telcos.
The direction each of these factors takes will drive the telecom industrys future M&A
intensity. A study of M&A deals in adjacent markets reveals that telcos currently acquire
only small portions (often less than 1 percent) of the total deals available in financial
services, IT services and media, and thus could be losing out to other players in positioning
themselves to benefit from participating in these markets.

IMPLICATIONS FOR OPERATORS


While typically not a strategy in itself, M&A activity can help operators implement their
corporate and country unit strategies more effectively. To align the M&A approach with
their overall strategy over the next decade, leaders need to consider three courses of
action.
First, they should develop answers to some fundamental strategic questions.

Is there still a case for cross-border telecom M&A? The maturation of mobile
markets in most geographies makes the traditional rationale of buying growth
through cross-border M&A increasingly less compelling. That said, is there a
rationale in benefiting from increased scale? And if so, when do scale benefits begin to
diminish?

Can we improve our position domestically through M&A? How extensively


can we merge networks with competitors while retaining enough differentiation in the
market? Can we possibly orchestrate full mergers in some countries? What steps
must we take to reassure regulators regarding the long-term implications of any deal?

How far must we extend outside the core? What are the future prospects and
economics of our core business? How convincing is our right to play in adjacent
markets given our assets and capabilities? Who big is our resulting need and
opportunity to develop new businesses outside the core? How should we use M&A to
succeed at scale in new areas?

Second, leaders should work to align their corporate strategy and M&A plans. We believe
this will be more important than ever now, since many operators today are making
significant shifts in their strategic direction and it will be important that their M&A goals
are aligned to support the new overall strategic direction in a good way. This likely means
that telco strategy and M&A functions need to have significant discussions and work
closely together during the next several years.

McKinsey & Company Telecom, Media & High Tech Extranet


http://telecoms mckinsey.com

Third, telecom players need to transform their M&A capabilities and ways of working to
proactively pursue a wide breadth of opportunities that align with their strategic
requirements. This could mean ensuring that the M&A team is set up correctly and has
the right capabilities and capacity. Leaders should clarify their M&A approach,
organization and the way they source deals globally, and work closely with investor
relations to ensure they have the right story to tell the capital marketsespecially if they
aggressively pursue new adjacent areas that have different value creation profiles.
* * *
The last two decades have been transformative for telecom players, moving the industry
from primarily local to international and from fixed to mobile. These changes have in
turn propelled the current multi-trillion dollar M&A flow, and we believe such deals will
continue to play a significant role in shaping the industry going forward. Operators
seeking to capture value from this activity need to think hard about any gaps in their
strategy, capabilities and M&A set up, and understand the past for a glimpse of the
future.

About the authors

Jean-Christophe Lebraud is an Associate Principal in the


Singapore office.

Peter Karlstrmer is a Principal in the Dubai office.

Copyright September, 2011.


McKinsey & Company, Inc
No parts of this report may be reproduced or transmitted by any process or
means without prior permission from McKinsey & Company.

McKinsey & Company Telecom, Media & High Tech Extranet


http://telecoms mckinsey.com

You might also like