Review of the Year: Deal Breakers

AT&T pulls the plug on its $39 billion merger plan, but the TMT sector will continue to account for a hefty portion of global M&A activity going forward. Global mergers and acquisitions in the year to Q3 2011 were valued at €1.7 trillion and the technology, media and telecoms sector accounted for a significant 14% of that, according to M&A research firm Mergermarket.

Despite the troubled global economic climate, the 150 European deal makers interviewed by the firm during the third quarter predict the total deal value to swell by 14.5% next year, and 30% of respondents named the TMT sector as one of the areas that will see the most M&A activity next year.

According to one unnamed corporate deal maker from a U.K.-listed technology group, M&A activity will accelerate next year as companies increasingly sell up or merge with rivals. “The macroeconomic environment is deteriorating and in this type of business climate you get troubled companies that need to consolidate to survive,” she is quoted as saying. Indeed, 45% of survey respondents expect consolidation to be one of the largest deal drivers in 2012.

The desire to consolidate assets–mobile spectrum in particular–was a key driver for what was almost the biggest deal in the telecoms space in 2011. But as the year drew to a close it emerged that, lacking regulatory support, the deal would not go ahead.

In late December AT&T pulled the plug on its planned US$39 billion tie-up with T-Mobile USA, some nine months and much legal wrangling after it first announced the deal. There was much opposition from the start, and ultimately the companies’ failure to gain the support of the Department of Justice (DoJ) and Federal Communications Commission (FCC) led to the breakdown of the deal. Deutsche Telekom will receive the US$4 billion break-up fee due to it from AT&T–a quarter of which will come in the form of $1 billion worth of mobile spectrum–and the pair will work together via a seven-year roaming agreement.

“The actions by the FCC and the DoJ to block this transaction do not change the realities of the US wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately, “

AT&T said as it announced the death of the deal.

Thomas Wehmeier, principal analyst at Informa Telecoms & Media, also commented on the wider implications of the news on the US mobile market. “Much has been made of the need for in-market consolidation within the intensely competitive mobile industry, having to potentially navigate around seemingly insurmountable regulatory hurdles is likely to shake the confidence of would-be investors to the core,” he warns.

AT&T insisted from the start that a merged AT&T/T-Mobile USA would be beneficial for US consumers and the country as a whole, not least because it would have enabled the telco to accelerate its LTE rollout. It stands by that assertion, describing the merger as an “interim solution” to the spectrum shortage, without which “customers will be harmed and needed investment will be stifled.” However, the fact remains that the merged company would have regained the lead from Verizon Wireless in terms of subscribers and the deal would have reduced the number of main players in the market from four to three.

But while that proved unacceptable to US regulators, the situation is different in Europe, where Vodafone has the support of rival players for its bid to reduce the Greek mobile market from three players to just two. However, the drivers behind its plan are not dissimilar from those of AT&T and T-Mobile USA.

Vodafone has been holding talks with Wind Hellas about merging their Greek mobile operations since August; together they would hold around half of the market, with current leader Cosmote claiming the other half.

“We believe that there is a good case to go there, Vodafone Europe CEO Michel Combes told Total Telecom recently. The economic situation in Greece is very specific, he said. In addition, the country requires investment to support the migration to 4G, which is made more complex by its geography. “It makes sense to have two rather than three networks in order to focus investments on coverage,” Combes said.

“A two-player market would be more competitive, would provide better service and more choice to the customers,” he added. And incumbent operator OTE, parent of Cosmote,agrees; in November the telco said it believes regulators will approve the deal, describing it as a healthy move for the market.

Big deals in 2011

But aside from what almost happened and what looks set to happen in the near future, 2011 was a year in which multi-billion-dollar transactions in the industry were signed on the dotted line, and Vodafone was right in the thick of it.

In June the operator finalised the sale of its 44% stake in French mobile operator SFR to its partner Vivendi for €7.95 billion. And that same month it offloaded its 24.39% stake in Polkomtel; the Polish mobile operator’s shareholders together raised 15.1 billion zlotys ($4.76 billion) in cash from the sale of their shares to businessman Zygmunt Solorz-Zak.

In addition, Vodafone agreed to pay $5.46 billion to buy India’s Essar Group out of Indian mobile operator Vodafone Essar. And Vodafone’s 45% stake in Verizon Wireless finally paid dividends; it is due to receive £2.8 billion from the US operator in January.

More surprising was the announcement in May that Microsoft had agreed to pay $8.5 billion for Skype. While Skype had been tipped as a takeover target for some time, Microsoft was not thought to be in the frame. In addition, the price tag raised some eyebrows, given Skype’s struggles to monetise its business: in 2010 the Internet telephony specialist posted a net loss of $7 million on revenues of $860 million and its paying customer base stood at just 8.8 million.

Google’s move to take over Motorola Mobility was also unexpected; it agreed to pay around $12.5 billion in cash in August. It immediately became apparent that the big draw was Motorola’s 17,000-strong patents portfolio, which Google said would allow it to “protect” its Android operating system from future patent litigation, another topic that dominated the telecoms space in 2011.

Google insists that owning one of its customers for the Android platform will not hurt its position with rival handset makers and went to great lengths to demonstrate that its various hardware partners support the deal. Nonetheless, it seems unlikely that Google wil want to make phones in the long run; we could see a divestment in the not-too-distant future. In the meantime, the deal is facing regulatory scrutiny; the DoJ and European Commission have both requested more information as part of their respective antitrust reviews.

Returning to patents, the intellectual property wars intensified this year, in the mobile space in particular, where Apple, Samsung, Nokia, Motorola and others did battle over various handset designs and features. Furthermore, the value that telecoms companies now place on owning patents was exemplified by the sizeable sum Nortel Networks netted for its patent portfolio in July. A group comprising Apple, Microsoft, RIM, EMC, Ericsson and Sony agreed to pay a whopping $4.5 billion for the 6,000 patents, significantly more than the $900 million stalking horse offer submitted by Google in April.

Vendor consolidation

There were no multi-billion-dollar valuations in what was arguably the year’s biggest M&A-related story though. In November Nokia Siemens Networks revealed it plans to focus solely on the mobile broadband space and will pull out of all businesses not considered core to that. The change in strategy will bring with it 17,000 job losses as the vendor aims for €1 billion in cost-savings in the next two years.

So far, Nokia Siemens has been reluctant to disclose exactly which businesses are on the block. It had already agreed to sell its microwave transport business to DragonWave at the time the announcement was made, and news that NewNet Communication Technologies would buy its WiMAX business, and Adtran would buy its fixed-line broadband access operations quickly followed; NSN did not disclose the value of any of those deals.

Nokia Siemens’ retrenchment was not the only big news on the vendor side. In June Ericsson detailed its $1.15 billion acquisition of Telcordia. The Swedish vendor pointed out that in addition to driving forward its OSS/BSS business, the integration of the US company would help it to fill gaps in its portfolio. 2,600 Telcordia staff will transfer to Ericsson under the deal, including CEO Mark Greenquist.

$1.9 billion in an all-stock deal to acquire Global Crossing. The two international network operators closed the deal in October, at which point the Global Crossing name disappeared from the global telecoms landscape. In September mobile chip maker Broadcom agreed to acquire rival NetLogic Microsystems in a $3.7 billion deal; Alcatel-Lucent received a $1.5 billion offer for its Genesys call centre services unit from private-equity firm Permira in October; and in November South Korea’s SK Telecom said it would pay over US$3 billion for Hynix Semiconductor.