Over the last few decades, many mobile service providers have grown their revenues by making horizontal acquisitions of similar firms in different geographies. In recent years about $119 billion worth of transactions have happened in the telecom industry.
There is a simple reason for merger and acquisition activity: for many firms, organic growth pales in comparison to acquisitions as a way of building revenue volume.
That might be especially true if the global telecom industry continues to see slim revenue growth, overall. But something important also might happen: Horizontal acquisitions might offer some opportunity for synergies, but if the acquired assets also have low growth, the acquirer winds up a bigger company, with greater revenue volume, but profit margins that are not changed much.
Earlier waves of acquisitions had a different set of assumptions, including the ability to buy growth. If growth is negligible, then horizontal acquisitions will lift gross revenue, but perhaps not growth.
The signs that horizontal acquisitions are not paying off so well is the present trend where firms divest portions of their businesses that were bought not so long ago. The same might be said for vertical acquisitions that did not supply sufficient revenue growth.
That suggests a different path: acquisitions that are vertical, adding new types of assets. Another option is a move into new segments of the value chain beyond connectivity, for example, that offer higher growth rates.
What might become more difficult are horizontal acquisitions that add heft, and possibly cash flow, but not growth. In many cases, that will mean moving out of territory or out of country, if regulators will not allow particular companies to gain more market share in the domestic market.
The point is that though acquisitions will likely continue to be important, it is not so clear that horizontal strategies are going to work as well as they did a couple of decades ago.
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