Key Factors in the Consolidation of the Telecoms sector in Emerging Markets

Wednesday, 26 January 2011 12:36  |  Alec Barton

The availability and cost of finance is a key factor in the consolidation process now taking place amongst Communications Service Providers (CSPs) in emerging markets. Without access to finance deals cannot take place.

But when contemplating mergers, senior managers need to take account of much more than access to finance as Mohammad Amersi, CEO of Emergent Telecom Ventures explained at the recent ICT Finance Summit organised by the CTO. According to Amersi, non-finance factors having a significant bearing on the pace and extent of M&A activity include:

Successful M&As need to be based on realism on both sides of the transaction. While this may seem a statement of the obvious, many developments fail because one or both parties believes too much of the hype surrounding the operation or has an inadequate grasp of the business model.

The causes of this can vary from a genuine failure of understanding to outright greed. The situation is not helped where the projects have different industry backgrounds, which is a common feature of many deals. The business models that work in emerging markets are, as we have said many times at DT, very different from those of developed markets.

These are considered of particular relevance in emerging markets where regulatory regimes are often not as well established and mature as in developed markets. Governments are inclined to place a greater emphasis on national security concerns. Moreover, given that the main mobile network operators are invariably the largest taxpayers in emerging markets, governments can be expected to take an acute interest in M&A deals, particularly where the status of a major local partner, many of whom are well connected politically, may be affected by the deal.

Cross-border deals in particular can be affected by a lack of uniformity in regulation. Where regulation is enforced only erratically or to the favour of some and disfavour of other operators, change of ownership is sometimes viewed as an opportunity to strengthen rules and enforcement.

These can be very complex, spanning engineering and technical issues in hardware, software and services as well as management and Human Resources issues.

Where operators enjoy a strong connection to competing vendors, a range of licensing and commercial competitive issues can affect the willingness of a vendor to participate in and contribute to the integration process. This can be particularly acute where a vendor believes they will not play a part in the newly merged operation in the future. Without full vendor co-operation and participation the cost, technical ability and speed of the integration process can be affected.

Brand is a major consideration in the consolidation process. Many M&A deals resolve around a single brand versus multiple local brands. Given the loyalty customers can feel towards brands which have delivered services to them over a period of years, no buyer should underestimate the challenges or the potential costs this involves.

Market consolidation can have an impact on incumbents, whether or not they are a part of the process.

This is vital to the success of any deal. If good quality local managers feel overlooked or taken for granted, desertions can and do occur. If they migrate to direct competitors they are in a position to inflict considerable damage on newly merged companies.

Any deal will lead to competitors re-evaluating their position and attempting to jockey for position by implementing price wars and other aggressive market share buying tactics.

The process of consolidation in the CSP market in developing countries is growing and will become an increasing feature of the landscape in the coming years. However, mergers which fail to take account of factors such as we outline will have a more difficult transition and may reduce their chances of success.

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