There are clear signs that mergers and acquisitions in the telecom industry could steadily pick up in 2011 and 2012 as several operators have announced large transactions, said a study by Booz and Company.

Prior to the global economic slowdown in 2008, the telecom industry was in the midst of a wave of M&A as operators pursued inorganic growth, the global management consulting firm said in its study.

In the ensuing two years, operators shelved all but a few small transactions, opting to focus on coping with the fallout of the economic turmoil, it added.

However, after a two-year lull, deal activity may be back as telecom operators have resumed their quest to pursue inorganic growth in the face of saturation and strong competition in their home markets.

According to the study, the next wave of merger and acquisitions in the telecom industry is likely to manifest through consolidation.

The telecom industry remains fragmented relative to other industries – the largest operators earn a smaller percentage of total industry revenue than peers in other industries do, suggesting that the sector is primed for further consolidation.

As it enters a new phase of inorganic growth, three types of consolidation activity are likely to reshape the telecom industry.

Large, cross-border megadeals are expected to dominate. In-market transactions and consolidation of ownership stakes also will resume, though at a slower pace. The operators that capitalise on this wave of consolidation could emerge as the global winners in the telecom industry.

However, according to Booz & Company, not all operators that pursue consolidation, specifically mega deals, will succeed.

Operators that are best positioned to succeed will have both ample financial firepower and strong organisational readiness, encompassing governance, operating structure, processes, and skilled management, the study noted.

Several GCC telecom operators fit the bill and may emerge as global consolidators.

GCC operators need to assess their current financial standing and organisational readiness, and then implement the changes that could position them to succeed as the industry’s consolidation resumes.

Before the global economic crisis emerged in late 2008, telecom operators were in the midst of a large scale M&A wave. Deal activity in the Mena region had been brisk for years, averaging in excess of $8 billion in annual transaction volume from 2006 through 2008.

Operators completed only a handful of small M&A deals in 2009 and 2010 as management yielded to shareholder demands to adopt a prudent and risk-averse approach to weather the storm of the economic downturn.
 
According to Karim Sabbagh, senior partner and global head of Communication, Media and technology practice at Booz & Co said, 'So far, 2011 already has indicated a strong M&A revival with several announced transactions pointing to the fact that operators are renewing their focus and willingness to allocate major resources to pursue growth outside of their markets”.

Sabbagh said many operators will again spark a new wave of inorganic growth. 'They will turn to consolidation to achieve their goals, recognising that that there will be limited opportunities to enter new markets, with just a handful of potential new licenses available and few viable single-market opportunities.'

'Accordingly, operators will compete fiercely to pre-empt rivals on attractive deals. “Going forward, all of these factors ombined will lead to a more aggressive yet targeted approach to M&A,' Sabbagh added.
 
The first form of consolidation, which likely will dominate the sector for the next several years, pertains to cross-market “mega deals” – transactions in which major telecom operator groups acquire controlling stakes in other groups that have a presence in multiple markets, the study said.

These transactions are attractive to acquiring operators for a number of reasons. Large transactions let operators complement their footprint in regions where they already have a presence, or augment it by entering promising new markets, it added.

The second form of consolidation will likely take place at the market level and will involve merging operations within the same market. Operators will seek to acquire current competitors and merge competitive organisations.

Although this will be less prevalent than cross market consolidation, it can still offer compelling advantages for operators.

In-market consolidation would enable operators to increase their subscriber base and garner higher market share, while eliminating a direct competitor.

The third form of consolidation will transpire at the individual operator level. In some cases, shareholders will seek to gain full control over a specific operation in which they have an existing stake, or shareholders might seek to exit their investment.

In both cases, ownership consolidation will provide greater control of operations, the study added.
 
In the near term, telecom operators will likely revive and accelerate their inorganic growth activity through all three types of consolidation – cross market, in-market, and gain of control.

However, cross-market merger and acquisition activity between group operators likely will dominate and reshape the industry, it stated.

Analysis shows that cross-market consolidation is on the rise, whereas opportunities for in-market consolidation will become increasingly scarce.

'It is absolutely critical for operators to define their strategies and the role that they will play in this consolidation game. Within this context, shareholders and management must achieve strong alignment on strategy and objectives from the onset,” explained Chady Smayra, Principal at Booz & Company.-TradeArabia News Service