M&A fever is back

10 Jul 2006

The torrent of M&A tells us that we're at the top of both the telecom and financial market cycles. Barely a day goes by without a new vendor or operator M&A.
As I write, Nokia and Siemens have just announced a merger that will create the world's third largest equipment supplier; two private equity groups are vying to acquire Hong Kong's biggest telco; BT and KDDI have formed a JV to serve Japanese corporates; KPN International has merged with wholesale voice specialist iBasis; cellco O2 has bought a broadband ISP.
Excepting the tilt at PCCW, these all have a common driver, namely about getting better leverage and scale in tough markets.
With its heady combination of high-level politics and a prominent tycoon, it's the PCCW story that's attracted attention.
The context is well-known. The firm is unique in being the only incumbent telco anywhere to have been taken over by a dot-com. Since being bought in 2000 by Richard Li, the share price has fallen some 90%.
Being a telco on Chinese territory, it is not going to fall into foreign hands. China Netcom, PCCW's 20% shareholder, a proxy for Beijing leadership sentiment, objects strongly to the sale. The deal will require surgery to win official approval.
But the most interesting aspect is that at least four banks or VCs think PCCW is a good buy. That follows the acquisition of Asia Netcom by an international investment group a month ago. Barely two years ago telecom was still in the tank as far as financiers were concerned.

What's changed is that a growth path has returned. Carriers with broadband and IPTV that can manage their costs can deliver solid if not spectacular results. Operators like PCCW with coverage in both IPTV and mobile are well-placed for the convergence battles ahead.
One of the bidders for PCCW, the hard-driving Macquarie Bank, specializes in taking infrastructure assets like toll roads and electricity generation and running them as an investment portfolio. Macquarie's idea is obviously to collect a brace of telco assets and organize them into a single fund.
Yet while mid-sized telcos like PCCW might have their attractions, not even the most ambitious fund manager would consider laying its hands on the new breed of super-vendor.
In the wake of the Alcatel-Lucent tie-up, the sector is rapidly reorganizing itself. The joining of the Nokia and Siemens' infrastructure businesses had the air of inevitability about it.
The problem is, it's a musical chairs-style game in which the number of viable partners is rapidly shrinking. Right now we have three large, broad-based vendors - Alcatel-Lucent, Nokia-Siemens and Ericsson - along with the large but IP-focused Cisco.
This latest merger leaves traditional suppliers Nortel and Motorola looking vulnerable, neither of which is first or second in any of the major infrastructure segments. Juniper Networks, with its small but leading-edge portfolio, might also be a promising target.
The scramble is a direct result of operator consolidation and the impact of the Chinese vendors. It's also because carriers themselves need end-to-end service as their networks merge into all-IP cores, blurring the line between fixed and mobile.

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