Digitization is driving M&A agenda for telecommunications companies

Telecom companies are looking to M&A to help drive transformation road maps as they combat rising competition.

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ccording to the EY Global Capital Confidence Barometer, positive dealmaking intentions remain intact among telecoms companies: 50% are preparing to actively pursue acquisitions in the next 12 months, above the long-term average of 46%. The need to transform portfolios is pressing — 31% of telecoms executives see competition from existing competitors and new market entrants as the most significant challenge to their company’s growth prospects.

Digital principles inform the telecom M&A mindset

Fifty-one percent of telecoms are utilizing M&A to navigate digital transformation and help future-proof their businesses, and 88% of respondents believe their CEO has a clear vision of how acquisitions and divestments can accelerate their transformation plans. Looking ahead to planned M&A, the acquisition of transitional capabilities — including digital — and bolt-on acquisitions rank ahead of transformative megadeals.

Unlocking the value of non-core assets is also top of mind, with 55% of executives planning to outsource or divest some of their current operations. This reflects ongoing interest in tower carve-outs and data center disposals, alongside network sharing and outsourcing initiatives.

New technologies are in focus as digital strategies evolve

New technologies are a critical focus for operators as they look to take advantage of digital growth scenarios. AI, 5G and the Internet of Things (IoT) are all seen as important catalysts, cited by 23%, 22% and 20% of respondents, respectively, as having the biggest impact on their business in the next 12 months. Using new technologies to improve customer experience and to create new services is seen as unlocking the most opportunities for value creation.

These attitudes are reflected in deal rationales, with access to new technology leading as a strategic driver for pursuing acquisitions and adjacent market entry ranking second. However, the importance of digital skills as a complement to changing technology needs is also apparent, with 29% of executives highlighting appropriate expertise as the key element of a successful digital strategy, which was the leading answer.

Sector confidence intact but external challenges persist

Telecoms are confident about sector growth prospects, with 55% of respondents highlighting that their view has improved over the last six months compared with just 4% citing a worsening outlook. This contrasts with 14% who see global economic prospects in decline.

Nevertheless, concerns around external pressures are never far from the surface. Thirty-one percent of respondents see competition from existing competitors and new market entrants as the most significant challenge to their companies’ growth plans, while 21% view regulatory uncertainty as the greatest external risk facing their business, which was the leading answer.

Meanwhile, 71% of operators believe that competition for assets will rise in the year ahead. Private equity acquirers have accounted for three of the five largest deals in telecoms in 2019 so far, and 80% of telecoms executives expect them to be a major acquirer of assets in the next 12 months.