Telecoms M&A: navigating challenges and capitalising on opportunities

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Jonny Parkinson, managing partner at Marktlink, offers an overview of the current telecoms mergers and acquisitions scene.

Despite various challenges including recessions, geopolitical tension, supply chain disruption, and general macroeconomic volatility, communications technology M&A is here to stay.

With the world’s ongoing digitisation, the TMT sector accounted for one-quarter of global deal volume in 2022, and scope for telecoms deals looks promising in the second half of 2023. However, due to the unpredictable economic landscape, businesses must exercise caution. As the sector rapidly evolves, companies risk being left behind. However, they can manage this risk with the right response, and M&A may play a critical role in helping them to do so.

Despite the dip in global deal activity, CEOs remain undeterred, with three-fifths of global CEOs not planning to delay deals in 2023. We’re likely to see a rise in strategic dealmaking in the second half of 2023, which can help companies reposition businesses and bolster overall growth.

The need for innovation

Despite dealmaking dropping 41% from the previous quarter in 2022, activity suggests the industry is picking up and becoming more competitive. 5G has not disrupted the industry as much as anticipated, and operators wishing to have an edge over others will need to provide a superior customer experience, value-added services, and tailored solutions – all of which can be aided by artificial intelligence.

Swisscom for example, has began training technical and commercial employees to advise customers on their own cloud journey. Generally, cloud computing is becoming increasingly popular, as it enables operators to improve their innovation and flexibility while reducing costs.

Positioning within the competition

As larger companies seek to gain competitive advantages, they often invest in new technology, which can be costly. This can drive smaller, more innovative companies to seek acquisition or merge with larger players. The industry is also becoming increasingly globalised, leaving companies needing to reach more customers to succeed, further fueling their desire to be acquired.

In such situations, business leaders may run the deal process as an auction to secure better deal terms and increase the price. Telecoms companies should consider creative deal structures and financing options, such as asset and equity swaps, joint ventures, spin-offs, and alliances. With regulatory constraints and debt costs increasing, flexibility in dealmaking is essential. With the correct level of care taken, the current environment offers a wealth of opportunities for those that take it.

Prepare yourself for M&A

The telecoms industry has seen a surge in private investment and public-to-private transactions, with cash-rich companies and investors capitalizing on the opportunity presented by lower asset prices. Private equity investors have been involved in some of the largest telecoms deals in recent years, including KKR’s estimated $20bn offer for Telecoms Italia and CyrusOne’s $15 billion sale to KKR and GIP. Private investments have continued to dominate the telecoms sector in 2022, with CVC Capital Partners’ proposing to acquire 49% of Telecom Italia’s new enterprise services unit, and Carlyle Group’s partnering with Tillman Global Holdings for a $1 billion expansion of its independent cell tower company.

However, telecoms operators must approach potential targets with caution, ensuring they pay the right price and manage integration while anticipating potential regulatory barriers and disruptions. As a result, extensive due diligence is crucial to ensure that buyers are fully informed of what they are purchasing, the obligations they will assume, and associated risks. Sellers must be well-prepared, anticipating and rectifying any issues that may arise during the process as quickly as possible.

To meet the buyer’s due diligence requirements, sellers must ensure their financial statements are accurate, projections are defensible, and all necessary documents can be delivered promptly and efficiently. While this process can be time-consuming and resource-intensive, it’s crucial to strike a balance between upholding the company’s interests and responding to due diligence requests. Typically, an online data room is set up to house all the relevant information.

Share the same vision

With technology and innovation as a prized asset, M&A often involves companies converging into different sectors, acquiring or forming relationships with new technologies or business practices they have never encountered before.

In parallel to this, companies may face the challenge of transitioning into working with entrepreneurs with different mindsets or overall ideologies. For instance, with the current global push for more environmentally friendly operations, there is a higher likelihood of clashes in aims and ambitions. Companies may seek to expand into greener markets and take on assets that align with a shift in values and the direction of the industry – when undergoing changes such as these, you want to be sure that all parties involved are on the same page.

Similarly, this is also comparable to companies which are crossing borders. This is often seen when businesses snatch the opportunity to build and focus on mobile and broadband services in less strictly regulated markets of Africa, Asia, and Latin America. On a larger scale, cross-border expansion plans in Europe have played a huge part of recent M&A activity, with Vodafone notable acquiring Liberty Global’s operations in Germany and Central Europe.

As technology continues to evolve, so does the landscape of mergers and acquisitions in the telecoms industry. The market is in a state of flux, with larger players consolidating and absorbing smaller companies for their technology. However, this is not limited to domestic acquisitions – businesses are increasingly crossing borders to build and focus on specific niches in regions such as Latin America, Africa, and Asia.

When considering M&A activity, businesses must ensure that any acquisition aligns with their existing portfolio and long-term vision. Acquiring a business in a different sector or country can present integration challenges, such as cultural differences, operational complexities, and customer retention. Therefore, careful planning, monitoring, and review are essential to achieve a successful outcome.

To navigate the complex landscape of mergers and acquisitions in telecoms, it’s crucial to seek the guidance of a specialised M&A advisor. These advisors have extensive experience in the sector and can offer valuable insights into potential buyers and sellers, as well as expertise in navigating the intricacies of a telecoms deal. With the rapid changes taking place in the industry, enlisting the support of an advisor can be the key to achieving strategic goals and ensuring long-term success.

Jonny is a Managing Partner at Mergers & Acquisitions specialist Marktlink and has over 11 years’ experience providing business owners in the SME and mid-market with advice on all aspects of M&A. As part of his role at Marktlink, Jonny is passionate about exploring international opportunities for businesses in the North West and the UK and leveraging the business’s European network to capitalise on overseas interest in UK businesses.

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