NEW YORK-The new federal telecommunications law unleashed a flurry of mergers and acquisitions, but the true test of success will be profitability, not size.
“The trend began three years ago, but as predicted by many, the Telecommunications Act of 1996 turned the torrent into a flood,” said David Abraham, president of David Abraham & Co., Westport, Conn. “We all read about this activity, same as we all read you have to be bigger to be better. I respectfully disagree-more profitable is better.”
Abraham recently chaired a conference on “Mergers & Acquisitions in Media and Communications,” sponsored by Management Circle, New York.
Since the law went into effect in February, more than $65 billion in media and telecommunications merger proposals have been announced, said Richard M. Rindler, partner in Swidler & Berlin chartered accountants, Washington, D.C. However, he noted a huge chunk of the dollar volume of these planned transactions is attributable to just two mergers: Pacific Telesis Group with SBC Communications Inc., and Nynex Corp. with Bell Atlantic Corp.
“What the act did for M&A is to open up a vast opportunity for companies that planned for it and moved in to take advantage of it,” Rindler said. “One thing the act did not do was to exempt any of these transactions from antitrust laws.”
While giant companies are, without question, going to seize up giant opportunities, “small, nimble companies have a good chance to deliver because they can be more profitable without layers of management and overhead,” Abraham said. “I usually see better profit margins at small- and medium-size companies.”
Abraham, whose company specializes in communications and media finance, said he sees several trends at work in the current economic and regulatory environment.
First, “this is a good time for incumbent (company owners) to cash in, and large companies that are poorly positioned also are heading for the exits.”
Second, he said the “private equity market is robust and banks are making sound loans at good multiples, so the exit price is attractive to sellers.”
Third, Abraham predicted the large companies that already have made strategic acquisitions will sit back awhile to digest, whereas “companies that haven’t made a large strategic acquisition will feel pressure to make one.”
