NEW YORK-In a record-breaking year for domestic mergers and acquisitions, telecommunications transactions accounted for four of the five largest deals announced or concluded in 1996. This year also promises a great deal of M&A activity by carriers and other companies in related industry sectors, analysts said.
Overall, proposed or completed mergers and acquisitions totaled nearly $493 billion, a 37 percent increase compared with the prior year, according to Mergerstat, a division of Houlihan, Lokey, Howard & Zukin, a Los Angeles investment bank.
The 123 communications industry mergers announced last year accounted for just under $75 billion and comprised 15 percent of the total value transacted for the year. In 1995, by contrast, the communications segment was the eighth most active, with $10.2 billion in deals announced.
The $21.6 billion bid by British Telecommunications plc for MCI Communications Corp. was the largest deal announced in 1996. If completed, it would become the second largest transaction in Mergerstat’s 30-year history of tracking publicly announced mergers and acquisitions, following the $24.6 billion acquisition of RJR Nabisco in 1988. The second and third largest transactions announced last year also involved communications companies: Bell Atlantic Corp.’s $19.5 billion offer for Nynex Corp., followed by SBC Communications Inc.’s $16.7 billion bid for Pacific Telesis Group.
However, the 123 communications mergers last year represented an increase of just 19 transactions compared with the 1995 total of 104. And that sum was dwarfed by the 637 mergers and acquisitions in the computer software, supplies and services sector last year, more than double the 336 in 1995.
Merger and acquisition activity also was brisk in two other sectors where at least some of the companies are involved in telecommunications related endeavors: electronics, 75 deals in 1996 vs. 36 in 1995, and electrical equipment, 127 last year compared with 66 in 1995.
The outlook for 1997 also looks robust, according to Daniels & Associates, Denver, and Broadview Associates L.L.C., Fort Lee, N.J.
“There are dynamic changes on the horizon in telecommunications,” said Brad Busse, chief operating officer of Daniels. “New technology and spectrum allocations are creating exciting business opportunities, while more mature sectors continue to develop rapidly and participate in the ongoing process of consolidation.”
Broadview recently surveyed 300 senior executives in strategic development positions at information technology companies in North America and Europe. Of those in the telecommunications services sector, 70 percent said they are likely to pursue mergers or acquisitions in 1997. Some 76 percent of those in the software products and services sector, 63 percent in hardware products companies and 59 percent in supporting products and services companies also indicated a proclivity toward mergers and acquisitions this year.
“If you strip out the four largest (telecommunications services) deals from 1996, that sector is still growing, although its growth may have slowed down somewhat,” said Robert McNamara, managing director of Broadview.
He noted that the growing base established in terms of numbers of deals in 1994 and then in 1995 has a decided impact on calculating the growth rate that the number of deals comprised last year.
“M&A activity already was going on before the four big mergers caused all the [carriers] to re-evaluate their positions,” McNamara said.
“Globalization of telecommunications markets is one critical part of what’s driving merger and acquisition activity. Economic rationalization is another, [i.e.] a lot of companies built up their shareholders’ expectation for rapid growth, improving margins and increasing market share. Mergers and acquisitions are a vital source of future growth and profitability.”
In the telecommunications services sector, the second half of this year is likely to be more active than the first half, said David Abraham, president of David Abraham & Co., an investment bank in Westport, Conn.
“There were a few tremendous telecom deals, a huge amount of volume in a very small number of deals,” Abraham said. “While there were a lot of middle-market deals early in 1996, the volume really diminished in the last six months [of the year]. When the elephants are dancing, the antelopes tend to get ignored.”
He and McNamara of Broadview said the preoccupation by big carriers involved in mega-deals precluded the behemoths from considering or undertaking acquisitions of smaller companies.
At the same time, Abraham said, smaller and medium-sized firms reviewed their competitive positions in light of merger announcements by large carriers. That examination can lead smaller carriers to decide to remain as they are, to acquire other companies or even to divest themselves of certain properties.
While there always is the question of how small is too small, it also is the case, “with valuations driven so high by the big deals,” that smaller companies may find it profitable to sell off parts of themselves, Abraham said.
The merger and acquisition market tends to be less fickle and impatient than the stock market, McNamara said. “Just look at the gestation period, especially when regulatory approval is required, it takes a year or more.”
Early last year, many companies began to “explore their strategic options,” a process that typically takes about 18 months, Abraham said. “In my shop, we are selling four middle-market, privately held paging companies. The buyers may or may not be public companies. I’m seeing a resurgence in interest, and expect to close these deals in the second half of the year.”
