M&A may look tempting, but dangers lurk

First published on Mobile World Live, 4 November 2013

More M&A involving mobile operators looks on the cards. According to Ernst & Young’s recently-published H1 2013 report on the M&A sector, 35 per cent of company executives surveyed – from all industry sectors, not just telecoms – said they were likely to pursue acquisitions. That compares with just 25 per cent who thought the same a year ago.

The consulting firm further found that 65 per cent of executives expected the global economy to improve over the coming year, up from a miserly 22 per cent a year ago. Growing confidence in the economic outlook should make boardrooms less reticent about taking the M&A plunge.

Softening M&A attitudes will auger well for some mobile operators. It’s often said M&A is one of the few areas of human activity where it pays to be victim. Deep-pocketed predators (or at least ones that can get their hands on plenty of debt financing) invariably boost the share price of their intended target when word gets out.

Randall Stephenson, for one, is on the lookout for acquisitions. The boss of AT&T has repeatedly said he would buy mobile assets in Europe if they added value. Carlos Slim, billionaire and owner of America Movil, can’t be ruled out either from further European expansion. He may have walked away from the negotiating table to buy the rest of KPN, but Eelco Blok, the Dutch operator’s chief executive, says later discussions with the Mexican tycoon – to thrash out a price – are still a possibility.

The delay of tougher EU data protection laws, most likely until 2015, also makes cross-border M&A less risky.

A European parliamentary committee, no doubt reacting to allegations from whistle-blower Edward Snowden that the US National Security Agency snooped on EU citizen data, voted on 21 October for stricter controls on how personal information is shared or transferred to non-EU countries (plus heavier penalties for non-compliance).

Thanks to successful lobbying from the UK government, however, it looks as if Brussels will not decide on the tougher proposals until 2015 at the earliest. The EU parliament vote was originally pencilled in for 2014. It means due diligence on cross-border M&A involving EU citizen data – at least over the next 18 months or so – will not be as fraught as it might have been.

Vodafone, muscled up from the sale of its Verizon Wireless stake, is another M&A driver (assuming AT&T doesn’t make a move). Kabel Deutschland has already been acquired to beef up its broadband assets in Germany, while Vodafone has made no secret of its desire to shore up bundled fixed and mobile offers in other markets.

And faced with growing regulatory and competitive pressures, mobile operators of all hues will be tempted by consolidation and the prospect of greater cost efficiencies – particularly if it can remove a direct rival in the process. Hutchison’s acquisition of Orange Austria is a prime example of this type of thinking.

M&A, however, is hardly a walk in the park. Achieving economies of scale is one thing, but if the unlocking of so-called “synergies” relies heavily on awkward back-office tasks – such as unified customer databases or having billing systems identify every customer in the newly-merged entity – then M&A may well be much messier and more expensive than planned.

Analysts at Bernstein Research reckon it took two to three years for Telefonica, Portugal Telecom and Deutsche Telekom to put in place fully integrated IT systems for their fixed and mobile operations. And this was among people working for the same company. A clash of two company cultures can only make the task harder.

It partly explains why Robin Bienenstock, a London based analyst with Sanford C. Bernstein, believes Vodafone’s acquisition of Kabel Deuschland has all the makings of a disaster.

Pointing to what she sees as Vodafone’s poor track record of integrating fixed-line assets with mobile operations, Bienenstock said in a research note that Vodafone’s acquisition of the cable company is “likely to prove more disruptive and value destructive than the company hoped” and that “consumer experience will be inconsistent” and “execution expensive and complex”.

Careful due diligence in the M&A run-up, along with CIOs exchanging information on how customer and billing data might be structured and harmonised – to help smooth the path of IT integration – might be one way forward. Sadly, there’s no quick fix.

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