SINGAPORE-If there’s one good thing that has come out of the current economic crisis in Southeast Asia, it’s the added push it has given to the long-talked-about and much-needed shakeout in the regional telecommunications market.
Already, there have been rumblings of cash-strapped companies in Indonesia, Malaysia and the Philippines scouting around for potential buyers.
In Indonesia, several operators have been forced to look for the help of financial white knights, given the worsening economic conditions. In the last few months alone, the market has been rife with talk of potential buy-outs in companies such as Komselindo, Satelindo and Mobisel, although none of these rumors can be confirmed.
Malaysian operators Binariang and Time Telecom have openly invited buy-out proposals.
In the Philippines, a slew of merger permutations has been proposed, including Bayan Telecommunications Holdings Corp.-Globe Mackay Cable and Radio Corp.; Bayantel-Express Telecommunications Corp.; Globe-Isla Communications; and Smart Communications-Eastern Telecommunications.
Faced with rising costs, falling demand and shrinking liquidity, many service providers have been forced to take stock of their operations. More than anything else, they have begun to realize they’ve been operating in a highly inefficient and overcrowded environment and that the only solution is to consolidate-creating a leaner, meaner industry.
“Suffice it to say that consolidation is an eventuality over the long-term in any industry, even promising ones, as competition eventually leads to a zero economic profit,” said James Kim, Asia cellular analyst at Jardine Fleming’s Hong Kong office. “The cellular industry, being a high fixed-cost industry, is particularly unforgiving for smaller players who have yet to achieve critical mass.”
Kim foresees consolidation in markets deemed to be saturated, such as Hong Kong, or in countries with long-term growth potential. In the case of the latter, he expects to see some foreign investors “pick through the rubble.
“Eventually, these countries should face consolidation as economies of scale gains become too attractive to ignore in slowing markets,” he noted.
Consolidation extent
While the general agreement is that a consolidation is imminent in the Southeast Asian telecom market, many are unsure as to how extensive it will be. Some say any shakeout in the industry would happen in limited occurrences rather than regionwide.
According to a recent report from Pyramid Research in Singapore, there are several compelling reasons consolidation is unlikely to sweep across the region.
First, the firm cited the oft-understated, but very real issue of power-yielding corporate personalities in regional telecommunications operations.
“Somewhat peculiar to this region, but almost always understated, is the influence of the corporate and individual personalities behind the provision of telecoms services in the region,” said the report. “Essential to understanding the intricacies of why consolidation talks could run into stalemates is the concept of `face,’ which has a direct bearing on the dignity and self-esteem of the personalities involved.”
In the Philippines, for example, Globe Telecom recently was named as being interested in either acquiring or merging with Islacom, especially since Islacom’s controlling family, the Delgados, had indicated a willingness to divest its telecom stakes.
“It is important to consider that these operators hail from influential families with proud and long-standing traditions,” said Pyramid. “For some of them, the thought of having a core family business come under control of a rival family may be too much of a face-loss to bear. A good business fit for a merger could be completely jeopardized by the inability to rationalize this most subjective of factors, despite the financial pains that forging ahead might entail.”
White knights
Other analysts noted that even if the “face” issue was overcome, there is always the problem of finding the right fit at the right price.
Here the twin factors at work are sellers insisting on stubbornly high prices, and buyers-particularly foreign suitors-hesitating to jump in.
Potential white knights from Europe and the United States have been scarce these days given the uncertainty in the Asian region. Many have been spooked by the social and economic unrest in Indonesia and South Korea, opting to steer clear from regional ventures until the dust settles. In addition, many of these operators face rapid changes in their domestic markets, so their resources are being tied up there.
What this means is that the only suitors out there are cash-rich telephone companies within the region, which in the current economic slowdown are few and far between. So far, financially secure companies such as Singapore Telecommunications Ltd. and Hong Kong Telecommunications Ltd. have indicated their interests in acquiring the “weaker” companies in the region.
Mergers of a different type
With all eyes on Asia in recent months, the telecom industry is certainly keeping tabs on the movement toward consolidation in the region. But consolidation is not just an Asian phenomenon; it seems obvious that mergers and acquisitions have been taking place not just in Asia but all over the world. However, there is a noticeable distinction in the types of mergers happening.
In the United States, the merger attempt making the most international news is WorldCom Inc.’s proposed acquisition of MCI Communications Corp. The WorldCom bid for MCI represents a paradigm that is characterized by “aggressive-aggressive” consolidation, in which each of the two companies, eager to assimilate the other into its business and operations model to build size and market share, proceeds to aggressively merge into the other entity.
In contrast, much of what is happening and going to happen in Asia, is a consolidation of the “aggressive-passive” nature, where a predominantly stronger player buys into a weaker player.
Alternatives
But is consolidation the only way to go for these companies? According to Pyramid Research, there are other measures available to operators.
“Operators could, for instance, resort to sharing agreements or alliances and joint operations to reduce costs,” Pyramid said in its report.
Shared resources and joint operations may be increasingly attractive alternatives where there is resistance to the idea of a merger, but where cost savings remain crucial to surviving the economic storm. Already, this is taking place in some places like Malaysia where Telekom Malaysia and Mutiara agreed to share space and install network equipment on the same tower in an agreement to share resources.
Operators can also opt to change their business plans to deal with their financial difficulties-for example, halting expansion plans till the storm rides out.
Whatever the decision, one thing seems certain, the regional telecom market looks set to undergo a period of great change, which will hopefully enable it to take full advantage of the small window of opportunity that opens up when the region finally recovers.
