Telcos leverage M&A to pick up talent and bolster their digital assets

31 January 2017 Consultancy.uk

Telecommunications companies, seeking to reimagine themselves in the face of digital trends are, among others, leveraging mergers and acquisitions to pick up technological advantages and talent. Organic growth initiatives, however, remain on the cards for many – as good quality targets become harder to find.

The telecommunications industry finds itself in a period of upheaval as new technologies, new competitors and new expectations from consumers disrupt tried and tested ways of working. A recent report from A.D. Little for instance highlights that telcos struggle with innovation, and risk falling into, potentially unrecoverable, decline.

To better understand key trends in the telecommunications industry, EY recently surveyed, for its 'Telecommunications companies sharpen M&A focus in the drive towards digital business models' report, 1,700 executive level respondents from 46 countries, among which, telco leaders.

Telecommunication companies are looking at organic and inorganic opportunities to boost growth and earnings

According to the respondents, the effect of digital technology on their business model is the most important risk to their business – with companies increasingly facing tough investment decisions related to automation, technology bets and competing increasingly with technology-enabled cross boarder competition. 

Sector convergence was stated to be a risk by 22% of respondents, while 34% of respondents identified technology advances and digitalisation as the second most disruptive impact on their core business.

Deal intentions rebound, remaining above historical averages

In terms of telcos’ plans for acquisitions, a slight increase is noted to 48% of respondents for the most recent data point, up from 43% in April 2016 but slightly lower than the same time last year. The industry’s willingness to pursue an acquisitions remains lower than the global average for companies, which stood at 57% in October last year.

The survey also highlights that around 60% of telcos are planning to focus on organic growth efforts, in part due to a lack of quality targets for inorganic expansion. Around 41% are opting for a mix of acquisition and partnerships, although, the firm notes, the latter has resulted in less positive returns.

Deal pipelines surge, with a focus on innovative technologies and emerging assets

The research also found that more than a third of companies already have five or more deals in the pipeline, although well below the global average for five or more deals, which stood at 49%. In terms of deal value, around half of telcos are moving on deals worth $250 million or less, which is somewhat more than the global average of 42% of companies. Finally, telco respondents are upbeat about deal closure, with 40% of respondents looking to close three or more deals in the coming 12 months.

Talent tops the list of strategic drivers for acquiring outside the sector

In terms of telcos’ key reasons for leveraging inorganic expansion, the acquisition of talent was ranked either the most important or second most important by 71% of respondents, well above that of the global average of 52%. The need to acquire talent is, the research notes, positioned around companies looking to improve their efficiency around automation. Around a third of respondents noted that growing their market share was the primary strategic driver for entering into an acquisition agreement within their current sector.

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.