Thursday, May 12, 2016

EU, US Merger Barriers Will Change Growth Strategies

Though not every region necessarily will follow the pattern, big mergers--in either the European Community or United States--have come unstuck in a way that suggests regulators are going to resist them.
Most recently, the EC blocked a proposed merger of Telefonica’s O2 and Hutchison Whampoa’s Three in the United Kingdom. No further thinking about big mergers in the U.S. mobile market has been thought about since the blocked Sprint merger with T-Mobile US.
In 2011 an AT&T acquisition of T-Mobile US was blocked. In 2002 a merger of DirecTV and EchoStar has prevented.
The proposed Comcast acquisition of Time Warner Cable likewise was nixed in 2014.
Nor has big merger opposition been confined to telecommunications. Since 1997, Staples and Office Depot have tried to merge twice, and been rejected twice. In 2016, Pfizer Inc.’s takeover of Allergan and Halliburton Co.’s purchase of Baker Hughes also have been prevented.
To be sure, some deals--such as the AT&T purchase of DirecTV, or the Charter Communications buy of Time Warner Cable--have been approved. In the former case, assets acquired did not alter the market structure in either fixed line or mobile businesses, and shuffled, but did not measurably restrict competition in the video entertainment market.
In the latter case, the combination did not trigger foundation of a new firm with more than 30 percent access of U.S. homes, the traditional trigger for antitrust action in the consumer video or telecommunications business.
At least for the moment, the pattern of behavior suggests that one avenue of growth that has been crucial for big telecom providers over the last decade--growth by acquisition--is closed, at least within the ranks of leading providers in the U.S. and European Union markets.
That is going to be a problem. Unable to grow by acquisition, and facing negative growth in their core markets, the leading service providers are going to suffer a possibly-prolonged period of stringent revenue growth in their domestic businesses.
Sure, one can argue, new emphasis will have to be placed on growth by acquisition outside the home markets. And the already-intense search for brand new markets (Internet of Things, connected cars and so forth) will continue.
But nobody expects those new sources to have the bulk to displace eroding legacy revenue sources.
Hutchison is likely to fail in its bid to acquire Wind in Italy, as well.
But those are “within the silo” deals. It appears regulators are approving “outside the silo” deals.
In other words, AT&T could acquire the satellite video business of DirecTV because it was out of domain. BT could acquire EE for similar reasons (fixed line operator acquiring a mobile firm).
That suggests, at least for the time being, that leading telecom providers will not seek to acquire “in-silo” assets, but complementary out-of-silo assets. That might mean more fixed-mobile or mobile-video entertainment deals, across silos.
Alternatively, more acquisitions by access providers of content or app entities, non-facilities-based segment specialists (enterprise IT, non-consumer-facing assets, over the top apps and services) or growth internationally will happen.
But that path tends not to add much gross revenue, compared to what might be possible when an in-silo acquisition happens.
So firms might be forced to consider international acquisitions to increase revenue bulk, but avoid regulator opposition to a reduction of competition.
Within domestic markets, we are likely to see more acquisitions outside the legacy core.

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