Marry in haste and repent at leisure? - telecom mergers - Industry Trend or Event

CommunicationsWeek International, Nov 15, 1999 by Audrey Mandela

The urge to merge--and fast--may be compelling, but carriers should make sure each deal makes sound strategic sense

MCI Worldcom Inc. may not have exhibited at the Telecom 99 show in Geneva, but the announcement of its $129 billion merger with Sprint just a week before the show had more of an impact on the proceedings than the most lavish booth or cocktail party. Like a cocktail party it seems to have sparked a feeding frenzy. The question is whether in their haste to swallow and digest the tastiest morsels, the revellers will end up with indigestion.

News of the latest, largest merger among telecoms carriers seemed to propel other players into action: each day of the show brought more news of carriers buying, or considering buying, each other:

Sunday: Rumors that Deutsche Telekom would buy Global crossing, NTT would take a stake in Telekom Malaysia, and someone would buy GTS before the show ended.

Monday: Global Crossing announced it would buy Racal Telecom, thwarting Energis's acquisition plans.

Tuesday: SBC and Deutsche Telekom wouldn't comment on rumors of merger discussions; Teledesic declined to comment on speculation that it would buy Iridium.

Wednesday: The European Union approved the Telia-Telenor merger. GTE and Bell Atlantic vowed to expand in Europe as soon as their own merger receives U.S. approval.

Thursday: Concert denied rumors it would invest in Bezeq; SingTel announced it was in discussions with Deutsche Telekom to pool the two companies' Asian wireless assets; and Mannesmann announced plans to become a global player, although it wouldn't explain how.

Friday: Rumors circulated that Mannesmann would bid for Orange, and that France Telecom would buy a majority stake in Germany's E-Plus.

In the weeks since the show concluded, Teledesic has indeed invested in ICO; Bezeq became the lead investor in Project Oxygen; Microsoft took a stake in another cable company; and the FCC approved the AT&T/BT venture, Concert. As I write, rumors abound that Japan's KDD, DDI and IDO will merge, BT will take full ownership of Viag Interkom, Vodafone will bid for Mannesmann, and COLT, GTS, Viatel, and Equant will all be bought before year end.

Four years ago this type of consolidation would have been unthinkable: regulatory barriers, state ownership of carriers, and comparatively low market capitalizations limited the possibilities for mergers, and spawned alliances as the next-best thing. Today, with barriers removed and market caps through the roof, bigger is better, global is good, and speed is of the essence.

Why so fast? Because of the perception that with every passing day the value of attractive carrier assets increases, while the threat of takeover for carriers that haven't yet bulked up grows ever more menacing.

It's this last point that sets some of the recent deals apart from earlier M&As, and that may set the tone for future activity: Global Crossing chief executive Robert Annunziata claimed its deal with Racal was put together in just three weeks. Even more remarkable, Mannesmann's Klaus Esser said the takeover of Orange was completed in only 10 days.

Although the Global Crossing/Racal, Mannesmann/Orange and even MCI WorldCom-Sprint deals make strategic sense, in their own ways, I anticipate that in the next few months we'll see a few rapidly completed transactions that don't. While the urge to merge may be compelling, carriers need to ensure that each deal is part of a clear, considered strategy. Otherwise, they'll be no more valuable--and much more expensive--than the alliances they're replacing.

Audrey Mandela is an independent consultant, and editorial consultant for CommunicationsWeek International.