Telecom Consolidation May Pick Up Again
Saturday December 22 3:31 PM ET
By Ben Klayman
CHICAGO (Reuters) - Big companies took a break from getting bigger this year as consolidation in the telecommunications industry slowed, but analysts and executives said a slowly improving economy could spark that trend again.
While this year was marked by the giant failure of telecom equipment makers Lucent Technologies Inc. (NYSE:LU - news) and Alcatel (CGEP.PA)(NYSE:ALA - news) to combine, next year could see a boost from the loosening of federal rules, companies' improving balance sheets and potential fire-sale deals.
In addition to mergers or purchases, however, the landscape also will likely include other approaches, including partnerships like the link-up of Ericsson (news - web sites)'s (ERICb.ST)(Nasdaq:ERICY - news) and Sony Corp (news - web sites).'s (6758.T) wireless telephone operations and business unit swaps or sales, industry officials said.
``There's no question that we're going to see more consolidation,'' Leif Soderberg, the No. 2 executive at Motorola Inc.'s (NYSE:MOT - news) mobile telephone unit, recently told Reuters.
``I don't think it's going to be people shutting the doors and saying 'OK I've had enough','' he added. ``It's going to be things like the Sony-Ericsson relationship or partnerships or venturing or merging of entities, more outsourcing.''
The number of worldwide deals exploded in the late 1990s as companies rushed to get bigger to create a global presence and reap economies of scale. The number rose more than eightfold from 1996 to 5,785 announced in 2000, according to Thomson Financial. Last year's deals were worth $692 billion.
With this year almost over, however, the pace has slowed drastically to 3,128 announced deals through Dec. 19, worth almost $244 billion, according to Thomson Financial. The economic slowdown that began last fall led carriers to slash spending, resulting in industry cost cutting, analysts said.
Companies this year were reluctant to make deals because of their low stock prices and a desire to protect cash during the slowdown, said Naima Hoque, telecom analyst with Fleet Asset Management in Boston.
While things may not bounce back quickly in the next 12 months, analysts said long term the number of deals will rise.
ALMOST BEATS BUYING MANHATTAN
If the weakness lingers, however, some firms could be bought at fire-sale prices.
Telecom company IDT Corp. (NYSE:IDT - news) on Thursday bought most of the operating assets of bankrupt WinStar Communications Inc. for $42.5 million. At its peak in March 2000, WinStar was valued at about $5.9 billion and still boasted assets of almost $5 billion at the time of the deal.
``This is an incredible deal. It might not top the Dutch settlers buying the island of Manhattan for $24, but it comes pretty close,'' IDT Chairman Howard Jonas said.
Companies also may look to sell or swap smaller assets to refine their focus on core products or geographic segments, as well as raise cash and cut debt, analysts said.
Long-distance telephone carrier AT&T Corp. (NYSE:T - news) on Wednesday agreed to sell its cable television unit to Comcast Corp. (Nasdaq:CMCSK - news)(Nasdaq:CMCSA - news) for about $47 billion in stock. Comcast also agreed to assume $20 billion of AT&T's debt, which stood at $38.5 billion at the end of September.
With buyers still not as numerous as in the past, however, some firms may resort to rights offerings, subsidiary listings or the unwinding of mergers, analysts said.
Another path to survival amid the increased competition will be partnerships, like Ericsson and Sony, analysts and investors said. Alcatel and Germany's Siemens AG (news - web sites) (SIEGn.DE) have talked with others about their handset units.
FEDS MAY LEND HELPING HAND
Federal regulators also may make things more tempting.
Once Baby Bell carriers gain permission to fully enter the long-distance industry, the major local and long-distance carriers can more easily merge, analysts said. The easing of federal limits on wireless-spectrum ownership also could trigger consolidation among the wireless companies.
``We're sort of waiting for the stars to align in terms of the regulatory environment,'' Fleet's Hoque said.
Prime acquisition candidates include Leap Wireless Inc. (Nasdaq:LWIN - news) and Sprint Corp.'s (NYSE:FON - news) wireless arm, Sprint PCS (NYSE:PCS - news), analysts said.
Another possibility is a merger between Voicestream, which is owned by Germany's Deutsche Telekom AG (DTEGn.DE), and Cingular Wireless, a joint venture between BellSouth Corp. (NYSE:BLS - news) and SBC Communications Inc. (NYSE:SBC - news)
Problems exist, however. A settlement to end a five-year fight over U.S. wireless licenses held by bankrupt NextWave Telecom Inc. (NXLC.PK) is in limbo after Congress neared leaving for the year without acting on a bill needed to authorize the deal, set to expire Dec. 31.
The carrier spending slowdown has not ended either. Capital expenditures are expected to drop next year anywhere from 10 percent to 25 percent from this year, analysts said.
Alcatel looked at acquiring Lucent before control issues killed the deal earlier this year, but the pressures that led to those talks remain. Ailing suppliers like Marconi Plc (MONI.L) could be targets, analysts said.
``Let's face it, Lucent, Motorola and Ericsson are struggling companies. I really think in that type of environment, anything could happen,'' said John Rutledge, portfolio manager of Evergreen Technology Fund.
(Additional reporting by Yukari Iwatani in Chicago) |
