Report predicts further industry consolidation

Almost half of telecoms firms are still facing financial risks associated with past and ongoing economic uncertainties, leading to a further spate of M&A industry consolidation activity, according to a report from the business advisory firm Alix Partners.   

The firm said that despite steady growth in the high-tech sector, a large number of companies were still facing the prospect of default or bankruptcy in within the next two years unless action was taken.

Within the telecoms sector, which accounts for 43% of earnings across all high-tech industries, almost three quarters of companies were threatened, it said.

Despite steady growth opportunities in the high-tech industry overall, the study said that a sizeable gap between “winners and losers” in the industry, coupled with intense competition, a diminished appetite for investing new equity capital and heavy debt loads, will likely lead to robust M&A activity through 2012. 

It suggested that this could shed light on the rationale behind a number of recently announced deals, including Google’s bid to acquire Motorola Mobility Holdings, AT&T’s offer to acquire T-Mobile USA, and Hewlett-Packard’s potential divestiture of its personal-computer business. 

“More than just about any other industry, much of high-tech faces a vicious cycle of the constant need to invest capital to drive product innovation and differentiation, and to keep up with the pace of new technology,” said Karl Roberts, managing director at AlixPartners. 

“It takes a lot of capital to ‘turn the technology crank’ – especially in telecom, consumer electronics and computer hardware – and, as a result, even many strong performers are strapped with high debt loads.  This reality, combined with the continued sluggish economic outlook globally, will likely motivate aggressive consolidation.”

According to the study, top-quartile companies in the industry generated 4.5 times higher EBITDA margins than lower-quartile companies.  The top-performing companies also invested four times more in capital expenditures as a percentage of revenue, indicating that the gaps between winners and losers could continue to widen.

Clear geographic issues emerged from the report, likely to affect strategic decisions and performance of companies in over the next two years, it said.

“EBITDA margins for companies based in Asia are averaging just over half what they are for companies based elsewhere,” said Roberts.  “It appears that Asian companies are willing to accept lower margins in the hopes of achieving market-share growth, which could put North American and European companies, among others, at a distinct disadvantage.”

Meanwhile, the report revealed that companies in Europe had reduced levels of investment (capital expenditures as a percentage of revenue) from 10.2% in 2006 to 9.4% in 2010.

This reality, combined with the continued sluggish economic outlook globally, was likely to motivate continued aggressive consolidation in Europe, it said.

 

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