By Mohammad Ali, Vice President Telecom Consulting at Excelacom
Telecom revenues in Europe fell by 11 percent from 2009 to 2015, according to European Telecom Network Operators’ Association.
As revenues drop, most operators argue they face higher costs to deal with the rise in data usage and subsequent investment in network upgrades.
The result: operators in the region have been in an M&A frenzy for the past two years.
The deal volume in the European telecoms sector stands at nearly $70 billion (€61 billion) this year, according to Dealogic.
The recent wave of M&As in the European region indicates that the market is still fragmented.
While much of the consolidation is centered on reducing the number of operators per country, there are some underlying factors fuelling the need to consolidate.
Achieving a market-leading position in digital communications with a strong customer and revenue base with scale benefits is one of the primary goals.
Telefonica Germany’s acquisition of E-Plus was one of the largest mergers in the EU, with Telefonica gaining a 32 percent combined market share.
A second key driver is unlocking potential synergies.
Buyers will typically pay a 20-30 percent premium over market capitalisation.
The recent transactions show that there is an increasing expectation that a significant amount of the purchase price could be earned through these synergies.
For example, the synergy expectation was above 40 percent of the purchasing price for the T-Mobile/Orange merger and above 50 percent for the Telefonica/E-Plus merger, according to the investor presentations.
However, value creation through materialising synergies is not an easy task.
In addition, creating a superior customer experience with an ability to provide quadruple play services, offer best-in-class mobile and fixed access, while delivering outstanding customer service through a comprehensive distribution network promises a sustainable advantage in the market after the merger.
This is centred on leveraging resources, competencies and innovation capabilities of the merging entities.
Vodafone Germany’s acquisition of Kabel Deutschland has been driven by the intent to create a leading integrated player in Vodafone’s largest European market.
M&A process, challenges and solutions
To achieve these goals, an operator needs to tackle multiple challenges throughout the M&A process, from the initial strategic plan to due diligence, financial modelling, negotiations, regulatory approvals, closing and integration.
First, the strategic plan needs to clearly identify the underlying goals for the merger and these should be at the heart of the pre- and post-merger efforts.
The due diligence process should not focus on the financial analysis alone.
Organisational dynamics, cultural aspects and potential integration challenges should also be considered at a very early stage.
Clear communication is critical to the success of the overall process.
Operators must communicate clear plans while setting out goals, executing the acquisition and planning integration.
Customers, staff and shareholders need the relevant level of information during this process regarding potential value and possible hurdles of the merger.
Network and IT integration typically account for more than 50 percent of the synergies.
But merging the legacy and IP networks is a complex process.
Identifying the network overlaps and coming up with a network integration plan targeting enhanced coverage and capacity, while guaranteeing stable and consistent service throughout the process, is needed.
Full network integration can take up to three years.
IT integration is one of the most challenging tasks in the post-merger activities.
The existing state of IT plays a key role in this integration.
Disparate legacy systems with fragmented architecture could pose major obstacles while planning and consolidating the IT landscape.
These legacy systems are typically customised and organically grown to incorporate non-standard processes and proprietary requirements.
Coming up with a transformation strategy, planning an effective roadmap, and identifying key metrics to measure the results should be part of the overall strategic plan.
Marketing, distribution and customer care areas account for 25 percent of the expected synergies.
These customer-facing domains need careful planning and may need an innovative approach to minimise customer impact and achieve quick wins.
Disruption in the customer-facing processes and the product offerings may result in churn, which cuts into both cost and revenue synergies.
While cost synergies could be realised with careful planning, revenue synergies are uncertain and difficult to track.
In summary, for a merger to be accretive and unlock potential synergies, the above points are the specific areas that an operator must focus on.