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Detecon Spotlight

5G Will Become the Driver for M&A Transactions in the Telco Industry

  • Total volume of transactions will fall while the number of high-value deals will rise
  • Consolidation in multiplay and converged services
  • Investments in adjacent industries will rise

A current Detecon study shows that the total number of mergers and acquisitions (M&A) in the telecommunications industry declined in 2018 in comparison with previous years. Nevertheless, it was a record year for high-value M&A deals as revealed by a comparison between Q3 2017 and 2018.

Spotlight
Chart: Average Deal Value ($bn), Q3 17 v. Q3 2018 (Source: Ovum: “Communications Provider M&A: Q3 2108 Review & Outlook”)

“This is the result of a consolidation of smaller telecommunications providers in previous years. Looking back, we see that there are currently three dominant trends that can explain this phenomenon: the coming of 5G technology, the consolidation in multiplay and converged services, and increasing investments in adjacent industries,” noted Björn Menden, Managing Partner and head of the Global Practice Core Functions and Optimization at Detecon.

The new issue of Spotlight focuses on these three M&A trends, currently the most important in the telecommunications industry, and describes exemplary transactions for each trend.

1. 5G technology could become the strongest driver for M&A deals

The most striking element is the coming of 5G wireless technology, which promises faster connection speeds, lower latency times, precise localization within centimeters, and the opportunities presented by network slicing, all of which are needed as the foundation of the latest technological developments such as the internet of things (IoT), autonomous driving, or complex automation controls. Network operators are attempting to acquire the necessary industry know-how and the required infrastructure so that they can secure a better position for themselves in the race for the 5G rollout and the related services. The consolidation in this sector will most likely concentrate on optical fiber and cable companies because they own most of the network infrastructure that will play a decisive role during the first step of the 5G technology implementation. The next phase will require the adaptation of the core networks. Today’s infrastructure will have to develop further in the direction of software-managed relaying, and this will mean a major re-orientation in terms of content. We may see even larger M&A transactions in future because of this type of infrastructure-driven mergers.

2. Consolidation in multiplay and converged services

A consolidation in multiplay and converged services – i.e., bundled offers comprising television, telecommunications, and broadband internet – was another trend that was observed last year. This means a vertical integration as well of network operators with complementary capabilities such as landline and mobile services. They must respond to increasing demands from customers for seamless interconnectivity between their homes and their mobile devices. If we extend this to industries, there will be an expansion of the portfolio with an eye on the requirements on the industrial market – starting with campus network offerings with massive content.

3. Investments in adjacent industries

The year 2018 was noted for increased investments in adjacent industries. The efforts of telco companies to diversify their product portfolios and concomitantly to increase the size of the customer base were the motivating forces behind many of the acquisitions in the sectors internet of things (IoT), software and applications, advertising platforms, analytics, cyber-security, and even health care. This shows that telecommunications companies are making active use of M&A transactions as a lever to counter the risk of the increase in market uncertainty and to improve their position in the worldwide battle for market shares, growth, and sustained profitability.

Outlook: global M&A activities will continue to decline

The Detecon experts expect the deceleration of worldwide M&A activities in the telco industry to continue in the next few years for three major reasons:

  1. Lower investments are expected because of the increasing financial and political uncertainties. General economic conditions, above all in the USA (the country that traditionally has the largest number and the highest transaction volume), have worsened and a significant weakening of the economy is becoming increasingly more likely. Moreover, there will be a presidential election next year while in Europe the imminent Brexit is cause for concern that limits planning security.
  2. In the past, the volume of M&A transactions rose before the general market conditions worsened. The year 2018 was a year in which transaction figures were already in decline in comparison with 2017 (which was a record year for the conclusion of transactions), which would also confirm the imminent decline in M&A activities.
  3. The large M&A transactions that have been carried out in recent months and years must first be digested before new transactions can be concluded. There are possibly potential mergers on new markets that will result in entities appropriate to the size of the market.

“Certain focused M&A activities within the telecommunications industry appear likely, however, because of the introduction of the next generation of 5G technology. This is already becoming apparent from the announced, large-scale mergers driven by 5G and the supporting attitude of regulatory authorities in this respect,” stated Menden in conclusion.

 

The complete M&A Spotlight and all of the charts are available for downloading at this link.

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