Jamie Doward
The story so far. Deutsche Telekom wants to get into bed with Telecom Italia. Deutsche’s ardour for a Latin lover has hurt the sensibilities of France Tlcom which, via its membership of the Global One consortium, had been enjoying a threesome with the German telco and American company Sprint. However, British Telecom (BT), jilted by MCI in favour of WorldCom, has fancied France for ages and is looking for some kind of relationship.
Whether the promiscuous British telephone company will commit is another matter; BT has also been linked with Japan Telecom and is putting the finishing touches to a formal partnership with AT&T. On the other hand, AT&Twants cable operator MediaOne for its bride. MediaOne, of course, has a child called One2One with Cable & Wireless, which also has an Australian offspring called Optus, which is trying to get together with rival network AAPT.
Cable & Wireless, whose reputation has taken a bit of a bruising in recent weeks, is also trying to buy international Japanese phone company IDC, which is being eyed up by NTT.
Waiting in the wings of what is rapidly starting to resemble a French farce of epic proportions are a plethora of other partners all looking for trysts or even something a bit more stable. Old hands at the telecoms merger pantomime include the NTL and Telewest cable companies, Telefonica of Spain and Portugal Telecom. Meanwhile, back at the ranch …
Another week, another prospective telecommunications deal. The latest, AT&T’s audacious $58-billion unsolicited bid for MediaOne, highlights how large the stakes are becoming.
The move comes in the wake of Deutsche Telekom’s attempted 114-billion merger with Telecom Italia. “Telecommunications companies are currently mating like rabbits,” said one telecommunications analyst.
But what lies behind this mating frenzy? The current price of telecommunications companies is one factor. Having outpaced the European market by 41% during 1998, the telecommunications sector is in a strong position. Companies can use their inflated values to go on a buying spree. “The massive growth in the value of the market has meant the paper value of telecommunications companies is much higher. If you don’t leverage that now you lose it,” said Glenn Tookey, MD of Telewest’s business arm.
But after this there does not seem to be anything to link the United States and the European deals. The former is an attempt to link AT&T’s long-distance network with MediaOne’s local presence so that the combined company will be able to offer a wide range of end-to-end electronic services to nearly 30-million US homes.
What is the rationale behind the deal? “Fear and greed,” said Andy Bottomley, director of research at Durlacher. “Fear in the fact that AT&T is scared of missing out on the data revolution. Greed comes from a shrinking global market place and the need for economies of scale.”
The deal between Deutsche and Italia is at first glance less understandable: a merger for merger’s sake, some analysts argue. “Just a couple of years after deregulation was introduced across Europe and what do you get? Two old indigenous war horses coming together to form a mega merger,” Bottomley said.
But as with the AT&T/MediaOne deal, the Deutsche Telekom/Telecom Italia merger is driven by a need to find new ways forward.
Just as sharks need to keep moving to stay alive, so telecom companies need new ways of taking their business forward. “One way of looking at this deal is to look at what has happened in the US market,” said Alexander Gunz, telecommunications analyst with ABN Amro. “The original approach saw AT&T broken up in to baby bells [discrete networks]. Now they are getting back together again.”
Why? Because size matters. The bigger the company the greater the economies of scale and the greater its borrowing facilities to make more acquisitions. Most European telecommunications markets were opened up to competition only a year or so ago. With the cost of entry to these telecommunications markets falling, more and more upstarts are challenging the old guard.
Given this new dynamic level of competition, European telecommunications companies are looking outside their indigenous boundaries for new opportunities. Telia of Sweden and Telenor of Norway, the first national carriers to announce a cross-border merger, plan to get 50% of their revenues from outside their home market, for example.
BT and Cable & Wireless are rumoured to be romancing more partners than Robbie Williams. “As the United Kingdom market merges with the European market not all the UK players will survive,” said Parantha Narendran of IT consultancy Netcom. “You have to have market presence in order to ensure you have a profitable future. When your home base is eroding you’ve got to get into a market somewhere else.”
Already the larger telecommunications companies are taking this argument to its logical conclusion. One day, they know, there will be only one market in which around six to eight massive telecommunications companies exist.
Technological standardisation is helping to drive this realisation. The massive expansion in data traffic has created Internet protocols which mean networks can be linked together, smoothing the way for alliances.
Coupled with this, the rise in data traffic creates a need for networks which have fatter bandwidth than conventional fixed telephone lines so that they can carry faster and larger Internet traffic. These new services are placing a huge demand on networks. The explosion in free Internet service providers means this percentage is likely to rise. This strain creates pressures on networks which can be resolved only by investment in their infrastructure.
ABN Amro estimates that the European telecommunications industry needs to invest 70-billion euros to deal with the problem. Faced with these costs, they have to make savings elsewhere.
Whatever else the Deutsche Telekom/ Telecom Italia deal involves, it is estimated that up to 50 000 jobs will go. More redundancies can be expected because the Deutsche/Italia deal is unlikely to be the last major merger in the telecommunications industry this year. “Everyone’s talking to everyone else,” said Wallage. “Vodafone is saying that it’s looking to do other deals and it has only just bought AirTouch.”
Analysts might have gone shy about the prospects for telecom stocks, worried that their market has peaked, but the companies themselves show no signs of falling out of love with each other. Looks like being a bumper year for weddings.