How will rising M&A impact digital transformation?

Late December and early January saw a spate of mergers, acquisitions and divestments in Asia, Europe and Africa, closing out what PWC describes as a strong year of M&A activity in the media and telecoms sector. PWC expects M&A activity to continue through this year – regulation permitting. For CIOs and CTOs, that will mean looking carefully at how deals impact ongoing digital transformation plans, even if it means mothballing projects.

Several trends are fueling M&A, including the rollout of 5G and strong interest from private equity buyers as the sector becomes increasingly digital, according to PWC. Despite the potential benefits, when it comes to achieving economies of scale deals can hamper digital transformation. “Any M&A activity tends to grab the focus of everyone,” says Lars R. Andersen, freelance CTO/CIO and formerly a CTO/CIO of Telenor Denmark. During mergers, for example, the focus on IT/process integration “can challenge any on-going development efforts, including digital transformation,” he says. Resource constraints, management focus, incompatibility issues and turf wars between systems and people can all pose challenges. “If it is unclear who decides, the turf war stuff may consume focus,” says Andersen. A transaction where the company is kept materially intact, meanwhile, can lead to “a decision vacuum”. “Mergers and acquisitions are just a normal part of business, [but] they definitely can cause great disruption to the plans and workstream underway within both parties,” says the CTO of Intrado, Adan Pope, who has been involved in multiple M&As throughout his career. Among the dangers Pope identifies are ongoing technology duplication and the retention of legacy technology. “We have seen many examples where one company is split from another or acquired by another, and the tech estate looks like the sum of the parts or the difference of the parts,” he says. The inherent complexity of digital transformation when it comes to decision making, architecture and sourcing also means “it has the additional vulnerability of ‘unperceived disruption’, whereby an unintended disruption emerges as problems in programs as much as 1-2 years later,” says Andersen. Given the potential for problems, it is important to carefully review the impact on all larger programs and even consider whether “if it is better to close/suspend [programs and ] revisit after the organization has settled,” says Andersen. “In particular for digital transformation, if there is no clear view of the target IT architecture, [it]…should be established as a new foundation for any digital transformation journey.” Dean Ramsay, principal analyst at TM Forum, points out that using a digital maturity model helps CSPs identify what to keep or lose.

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CSPs undergoing a merger should

evaluate each party against a digital maturity model to decide which systems and processes should be saved and which should be canned or federated underneath," says Ramsay. "It’s wildly complicated but it’s better than the old way of doing things which was just to keep the whole legacy from both companies."

Pope also stresses the importance of establishing a destination architecture, as well as clearly linking business systems transformations to the product portfolio they serve. “This is extremely important when making priority decisions about the turn down of a system based on the elimination of a redundant service. This is many times the missing link,” explains Pope. “We tend to believe that the service is pure profit once it is mature as we may have fully deployed and depreciated all the assets that constitute it…Unfortunately this is not the full story.” Instead, companies should consider the expense of operating services when calculating their overall profitability. “The product mix should drive the tech debt reduction priorities as well as the enterprise objectives of the CIO/CTO,” says Pope.

Recent M&A activity in the telecoms sector

• 5G was behind Taiwan Mobile’s decision to acquire T Star, which it described as “setting a new milestone for Taiwan’s telecoms sector at a critical time for 5G development.” The merger will lead to the integration of the two companies’ 60MHz and 40MHz blocks on the 3.5GHz spectrum.
• In Indonesia, getting ready for 5G was also part of the rationale for Indosat Ooredoo’s and 3 Indonesia’s US$6 billion merger to create a new number two mobile telco called PT Indosat Ooredoo Hutchison, which in early January received regulatory go-ahead. The merger sets out to “deliver cost efficiencies and facilitate deeper innovation and network enhancements, including the rollout of 5G in Indonesia.”
• And in Italy, an eye on the burgeoning 5G market informed Tiscali’s decision to acquire the retail arm of Linkem. Tiscali says the deal will make it a leader in ultra broadband access in FWA+FTTH technologies, with overall market share of 19.4%. As a result of the deal, Tiscali believes it will be “strategically positioned to take full advantage of the potential of FTTH and 5G FWA technologies”. Separately, the Italian telecoms market is also waiting to see how Telecom Italia will manage its takeover offer from investment company KKR.
• Orange meanwhile took advantage of the Christmas break to consolidate its position in the Belgian market with the acquisition of 75 minus one shares of VOO, a quad-play provider that owns the cable network in the Walloon region and part of the Brussels region.
• Telia decided to disinvest its shares in B2B service provider Telia Latvia to Tet SIA. However, it is not a complete divorce -- Tet is owned by the Republic of Latvia (51%), and Tilts Communications A/S (49%), which is a wholly owned Telia company.
• Towers continue to feature in divestments and acquisitions. In January, investment company Cordiant Digital purchased Emitel in Poland, which operates more than 500 mobile towers, as well as the national broadcast network, five digital terrestrial networks, a nationwide network of wireless "smart city" sensors serving utilities, and a nationwide fiber network.
• One of the bigger deals globally was Digital Reality’s acquisition of Teraco, the African data center and co-location provider, which valued Teraco at approximately $3.5 billion, reflecting the relatively fast growth of the African market.
• As we head into 2022, Europe’s CSPs appear to want to be able to strike more deals. In November, the CEOs of 13 CSPs signed a statement to European policy makers published by ETNO, which said: “Building scale in the telecoms sector remains a priority, inside markets as well as across markets.” And Reuters has reported that both Orange and Vodafone would like to ‘play an active role in consolidation’ in Spain.