Growing demand for digital content is forcing telecommunication operators to look at M&A in an attempt to bolster plans
Faced with increasing consumer demand for digital content, communications companies are under pressure to expand their capabilities. They need to build and enhance their digital platforms to remain relevant to consumers and survive in an increasingly competitive marketplace. And they’re turning to mergers and acquisitions to do it.
Consider this – the combined market cap of today’s digital platform leaders Amazon.com, Apple, Facebook and Google exceeds $1.6 trillion, which is double the market cap of 15 of the largest traditional U.S. telecom, mobile and cable companies combined.
According to Accenture research, 40% of communications executives believe adopting a platform-based business model and engaging in ecosystems of digital partners are very critical to their business success. However, most traditional communications companies can’t build these capabilities organically – they just don’t have the time, resources or money.
M&A to the rescue
M&A is one of the most desirable options for these companies to acquire the right digital platform capabilities and stay ahead of competitors. In fact, Accenture Strategy research shows that more than 80% of communications businesses expect the number of M&A transactions to increase in the next two years.
Some estimates, including one from IGR Research, put total “5G” network upgrade costs at $104 billion over 10 years. Many communications companies – especially smaller and midsize ones – will struggle to execute existing plans, let alone develop differentiated strategies and offerings that will require this level of investment without an acquisition strategy.
For example, AT&T’s recent acquisition of Canada-based QuickPlay Media, a provider of internet-video streaming services for $184 million, supports three new over-the-top services AT&T plans to launch via DirecTV. AT&T sees QuickPlay’s content-delivery platform as a critical complement to its network and content, saying the technology serves as the missing piece of a complete video distribution capability.
How not to destroy value
We’ve seen from history that the track record for deals in this industry is spotty. Accenture research found that four in 10 deals not only fail to deliver the benefits on which they were originally based, they actually destroy value. So, how can communications companies enhance their chances for success?
Factor M&A into the broader growth strategy
Management teams should develop the “long list” of what they need to support the shift to digital and whittle that down to the “short list” of those they absolutely must have. With those goals identified, executives can then begin to source potential deals with growth companies that will help expand their digital platforms and deliver the experience that customers demand.
Devise an acquisition strategy to close capability gaps
Acquire the missing capabilities that are critical to delivering the seamless, complete and glitch-free innovative experience customers want. As part of this strategy, teams need to use the right criteria to ensure they consider all deal sizes, not just mega-deals. In the case of digital platforms, smaller, more strategic deals are often what’s needed to close certain capability gaps.
Some companies have developed “venture” arms to help them do a better job sourcing such deals. These companies – which include Comcast, Verizon and Telefonica as well as GE, Ford and General Motors – can directly engage with key technology developers, directly participate in the technology “ecosystem,” and more quickly identify and capitalize on key strategic deal opportunities.
Make the customer experience core to the M&A strategy
Many companies fail to maintain a consistent focus on the customer experience throughout the M&A lifecycle. This can lead to inconsistent execution by functional teams, delayed achievement of synergy targets and unhappy customers on day one and beyond. That’s why the customer experience should underpin all aspects of the M&A lifecycle: from initial portfolio analysis, deal screening and approval, to integration planning and post-closing execution.
With M&A playing a major role in keeping communications companies competitive and augmenting their digital capabilities, we’re likely to see sustained M&A activity across the sector in the next two years. Where communications companies place their bets and how successfully they execute these deals could ultimately determine their long-term survival.
Editor’s Note: The RCR Wireless News Reality Check section is where C-level executives and advisory firms from across the mobile industry share unique insights and experiences.
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