M&A in the driver’s seat as the telco sector transforms

Positive M&A drivers are in place as telecommunications operators reshape their organizations to take advantage of a new growth agenda.

The latest EY Global Capital Confidence Barometer underlines the critical role M&A is playing as companies realign their technology portfolios and human capital to pave the way toward growth. Fifty-eight percent of telecommunications executives see their M&A pipelines growing and deal completions rising over the next 12 months. Access to new talent and technology, coupled with convergence opportunities, are the leading rationales for acquisitions, although integration and regulatory risks continue to loom large.

Telco M&A indicators are improving year-on-year

Executives’ bullish stance toward M&A is apparent in improving sector indicators. Eighty-two percent see the telco M&A market improving in the next 12 months, up from 65% in April 2018. Meanwhile, 58% see their organizations’ M&A pipelines expanding in the year ahead, with the remainder forecasting no change.

Deal completions are also the scene of rising confidence: 66% expect a year-on-year increase with none predicting a downtick. All told, 55% of executives expect to actively pursue acquisitions in the next 12 months, above the long-term average for the sector of 45%.

There is also a strong sense among executives that adjacent market deals and top-line synergies will require the most focus as value creation imperatives going forward, cited by more than a quarter of respondents. While in-market consolidation remains an important theme, optimizing more diverse service portfolios is now critical. Upselling and business model overhaul are thus front and center of inorganic growth plans.

The underlying transformation imperative is clear

Digital infrastructure investment is trending up worldwide. 5G commercial launches are nearing in many markets, while growth opportunities from pay TV to the internet of things offer telcos a range of convergence plays. Accordingly, expansion into adjacent sectors ranks highest as a strategic growth priority for telcos, cited by 27% of respondents.

Yet capitalizing on these new growth opportunities requires more than repositioning products and services to cater to new addressable markets. People and processes require fundamental overhaul, a reality that makes itself felt in executives’ key strategic drivers for pursuing acquisitions. Twenty-five percent cite access to technology, talent and innovative start-ups — the leading answer — underlining the importance of boosting organizational agility and efficiency while securing access to fresh thinking and new capabilities.

The operating model refinement is also apparent when it comes to capital allocation issues, with traditional investment in existing operations and new technology demanding the most attention from executives. Going forward, a delicate balance is needed as telcos look to both acquire new talent and reskill their existing workforce.

More frequent portfolio reviews are the order of the day

Frequency of portfolio reviews is increasing. Forty-one percent of telcos now undertake a review every quarter, compared with 24% in October 2018. This more regular cadence is creating transformation opportunities of its own. Thirty-one percent of telcos reshaped capital allocation across the whole portfolio as a result of their most recent portfolio review, while 26% differentially invested capital in a particular business unit. This comes at a time when activist shareholders are exerting more pressure than ever before. Eighty-two percent of executives say that activism is compelling them to take specific actions to reshape their portfolios.

Integration, regulation and competition: three pain points that won’t go away

Despite the growth opportunities at hand, there is palpable anxiety surrounding tactical and strategic pain points. The integration of operations and people is the leading risk when executing a transaction, cited by 26% of respondents. Meanwhile,72% of executives say that the regulatory environment is fundamental or very influential as an external factor informing deal strategy – while regulatory approval ranks second as a transaction risk. Finally, rising competition is an ongoing concern. New market entrants rank second as a challenge to growth plans after access to new talent, while slowing demand is also seen as a threat to growth plans.