Preparing for the next wave of telecom mergers and acquisitions
Middle East telecom operators need to prepare for a new wave of mergers and acquisitions (M&A). In the near future, operators will more actively go after regional or global firms in the expanding information and communications technologies (ICT) sector.
These digital acquisitions will give telecom operators access to new revenue sources and build needed capability sets to complement their ability to succeed within new verticals.
Global telecom M&A is robust but is changing in its composition. There were roughly 500 deals a year since 2010, worth around $100 billion (Dh367 billion) per year on average.
Telecom operators are seeking value in adjacencies in the rapidly growing ICT sector. Such deals constituted 44 per cent of total telecom deals value in 2016, up from 4 per cent in 2012.
Moreover, 76 per cent of the acquired ICT targets were business-to-business (B2B) propositions compared to 12 per cent for business-to-consumer (B2C) and 13 per cent for B2B and B2C combined. The Middle East, however, accounted for $10.3 billion from 2010 to 2016, out of which 99 per cent was telecom-to-telecom and less than 1 per cent targeted ICT players.
Middle East telecom operators will need a different approach to value creation. In the recent past, telecom M&A was about building scale. A specialised team was in charge of M&A, collaborating with corporate leadership and the board. These deals had existing business.
By contrast, moving into ICT and digital services means closely involving business and functional units in the specifics of the new M&A agenda because these deals will affect the future value proposition and capabilities of these units. To succeed with digital M&A, Middle East telecom operators need an inorganic growth agenda based on four foundations.
First, operators must define precisely the strategic purpose of their deals with respect to the digital domains they want to enter, how they will enhance their digital ecosystem, and their investment approach. The value proposition in B2B ICT will derive probably from the internet of Things (connected devices and sensors) and analytics, managed IT, system integration, and cybersecurity.
There are also opportunities in ICT services for consumers. Operators must understand the requirements for success in different digital segments and verticals so that they can assess which capabilities they need to build, whether alone or through partnerships, and which capabilities they must acquire.
Second, operators should reconsider how they source deals. This is particularly important in the Middle East where viable targets seem scarce and company information is hard to obtain.
Operators should signal to the market their interest in acquisitions and expand their search to include international targets little effect on with strong financial performance and/or strong capabilities, whether for talent or product.
For example, telecom operators can acquire an ICT company operating outside the Middle East and bring its technological capabilities to the region. Alternatively, telecom operators could consider a minority stake in an international target and then establish a reverse JV to serve the Middle East where the telecom operator controls the majority share.
Operating models
Third, operators must ensure that their operating models evolve in tandem to ensure aspired value and synergy capture. The model usually consists of six main elements: supervisory governance of the target company, executive appointments, business plans and agreement on budgets, service level agreements and definition of performance indicators, alignment on reporting, and agreement on decision rights and processes.
The model will depend upon how much integration is intended between the operator’s business units and those of the target. Ultimately, this demands more flexibility and agility from the operator as the model needs to accommodate potentially a series of acquisitions across multiple digital domains.
Fourth, operators must use different performance measurement metrics as traditional telecom indicators do not apply to ICT acquisitions. For example, earnings before interest, tax, depreciation, and amortisation margins (EBITDA) are usually above 35 per cent for healthy operators while in ICT these tend to be around 15 per cent. Similarly, while operators have an investment to total revenues ratio of around 15 per cent, in technology firms it is some 7 per cent.
When measuring operational performance, operators typically monitor subscriber numbers and turnover, average revenue per user, and yield per usage type. However, as they start working with new business models and industries, operators should tailor their key performance indicators and consider metrics that measure digital value creation.
These include, for example, hours of usage, number of views, data centre utilisation, frequency of access to application programming interfaces, the number of connected devices managed, the billability of the professional services team, R&D spending, and intellectual property generation per year.
Digital services, the target of future telecom M&A, will challenge the division between industries. This will provide telecom operators with opportunities for growth in new business and consumer areas. Those operators which move first will steal a march on their competitors.
The writer is partner with Strategy& Middle East (formerly Booz & Company), part of the PwC network.