More than twenty years after the transaction closed, the merger between telecom giants Vodafone and Mannesmann still ranks as the largest M&A deal of all time.
In the interim, a host of other mega deals in this space have cemented the telecoms industry as one of the major drivers of global M&A activity.
And yet, it’s quite remarkable how many deals in this industry end up destroying value.
DealRoom helped dozens of companies organize diligence process during M&A and in this article, look at the importance of due diligence in telecoms and how to get your telecoms due diligence right first time.
Why is telecoms due diligence important?
As with M&A transactions in any sector, the due diligence process in telecoms is where much of the deal’s value is added.
Telecoms due diligence is a particularly technical form of due diligence both owing to the nature of telecoms, telecom digital transformation and the fast changing pace of the industry.
As such, the analysis conducted during due diligence takes on more importance than in many other forms of due diligence.
Typical challenges encountered in telecoms due diligence
The biggest challenge in telecoms due diligence is unquestionably finding the right value for the acquisition.
The pace of change in telecoms means that today’s telecom innovations quickly become regarded as legacy solutions.
Aside from the challenge presented by accurate valuations, the following are some of the typical challenges encountered by those conducting telecoms due diligence in M&A.
- Capital expenditure: How much has been invested in the target company’s capital? Telecom companies have enormous upfront capital investments (e.g. by the end of 2020, investments in 5G infrastructure alone were set to cost nearly $3 trillion), and thus need to be maintained and depreciated accordingly.
- Regulatory issues: Telecom industries tend to be closely guarded by telecoms regulators. See, for example, how the United States banned Chinese companies from its 5G bidding process. This doesn’t just affect megadeals, and is something that even smaller companies need to take into account.
- Client/operational due diligence: The telecoms industry is one where the 80:20 rule tends to apply quite rigidly; in many cases, 80% of a company’s revenue will come from 20% of its clients. One of the issues in operational due diligence for telecoms firms is to establish how safe the cash flows from these 20% of customers are.
- Market dynamics: As mentioned at the outset, this is an industry that moves faster than most. Just when you think you’ve created an industry leader, as was the case with the merger between Alcatel and Lucent to create Alcatel-Lucent, you can find you’ve fallen behind the competition (as happened a few years after the merger) and have to sell of the business for parts.
- Intellectual property: Perhaps only the healthcare industry places more of an emphasis on IP than the telecoms industry. In fact, many of the transitions occurring in telecoms are conducted on the basis of the IP that a company holds. If the company you’re acquiring has IP, it’s important to establish how much it is worth, and what use it will be to your company’s future prospects.
Telecoms due diligence checklist
DealRoom offers its members a specialized telecoms due diligence checklist which can be found here.
This has been developed in conjunction with several previous participants in telecoms transactions.
At a minimum, a well constructed telecoms due diligence checklist should include:
- Audit of existing network & IT infrastructure, including architecture and suppliers
- Network and IT utilization/capacity report
- Review data security capabilities of target firm
- Security audit report with gap analysis, vulnerabilities and recommendations
- Seller’s FCC and state licenses, certifications and registrations
- Analysis (economic and operational) of franchises and foreign operations
- Existing interconnection, right-of-way, and commercial agreements
- Capital stock analysis
- Compliance such as FCC ‘red light status,’ USF, E-rates, privacy, complaints, enforcements and investigations
- Review RAN Network and Access Network and Architecture
- Review all of the target company’s current and planned contracts, and its network valuation parameters
- Conduct an overall assessment of the company, its management, team, and capabilities for dealing with changes in the industry
A note on telecoms M&A integration
If valuation is the issue which dogs most telecoms deals that fail, integration may be the second biggest problem.
The history of telecom deals – most of which have been seen since the turn of the century – suggests that integration is remarkably hard in this sector.
As soon as targets are identified, M&A practitioners should begin putting together plans about how the integration process should play out.
This kind of detailed project management is exactly what DealRoom has been designed to deliver to M&A participants.
The telecoms industry – and the technology, media, and telecommunications (TMT) in general – is one which benefits greatly from scale, making M&A particularly relevant.
However, the lure of scale shouldn’t obscure the fact that acquisitions in telecoms are difficult to execute.
A series of issues ranging from industry evolution to regulatory challenges make due diligence an extremely important part of value generation in M&A.
Talk to DealRoom today about how we can help you achieve scale through superior due diligence practice.