In 1996 President Clinton signed the Telecommunications Act, which acted as a catalyst in the mergers and alliances (M&A) process. The goals of the act included promoting competition in telecommunications markets and protecting the public interest. 2006 marks 10 year anniversary of this revolution. So, what is the score card - before deregulation in 1996, consumers had one option, now thanks to wireless, cable companies and VoIP providers, there are multiple options in every market - global deregulation, converging technologies, and the Internet have created telecom scenery wholly different from the one that emerged from the divestiture of AT&T in 1984. In 1998, the top 10 telecom deals in the US amounted to over $200 billion. In 1999, U.S. telecom M&A activity was over $500 billion. 2005 was the strongest year for telecom M&A since 1999 with a total of around US$1bn worth of deals. Telecom M&A are one of the hottest arenas in the US economy. Some recent giant Telecom mergers have been:

Verizon Communications buying MCI Inc. for $6.75 billion.

SBC Communications buying former parent AT&T for $16 billion, creating one of the world's largest telecom companies.

Alltel, the sixth biggest U.S. cellular carrier, buying Western Wireless for $4.4 billion.

Sprint buying Nextel Communications for $35 billion, combining the nation's third and fifth largest cell phone carriers.

Cingular Wireless buying AT&T Wireless Services for $41 billion, forming nation's largest cell phone company.

And let us not forget the 1999 MCI WorldCom and Sprint merger of $129bn merger which was labeled as “the world's largest-ever corporate merger”.

As this article is compiled, AT&T's buying of Bell South for $67 Billion is making global headlines.

The urge to merge

The FCC holds meetings to assist the politicians at the capital hill in determining whether these mergers are consistent with the goals of the 1996 Telecommunications Act as some lawmakers question whether the deals will lead to less competition and higher prices. They think they are almost at this point where they have come full circle over the last two decades. They do not want to waste the two decades of intense competition and technological innovation which took placed due to the breakup of a very large monopoly (Ma Bell) which is now reforming into just a few big giants.

A Business Week report stated that of 150 recent M&A deals, about half destroyed stock value, while AT Kearney claims that 58 per cent of mergers failed to reach goals set by top management, not to mention all the job losses which made the immediate headlines. In the nineties many Telcos overbuilt capacity, and failed to achieve ROI, as a result they were forced to report losses some went bankrupt. While the other companies have turned into telephone providers, traditional telecom companies feel the pressure to enter the entertainment business, offering video and music, as well as what might be called "technology services," allowing consumers multiple functions for multiple devices. That's one of the reasons that the pending mergers make a lot of sense. The trick is to fine tune the approach to protect longer term investment and shareholder value since telecom industry, especially at carrier level, faces the problem of addressing complex technical as well as business integration issues.

Law makers and Consumers should not be concerned over the big mergers and their negative effects on competition in the consumer market. Most alliances are driven by converging technologies and/or economies of scale and lightening of regulatory restrictions. Large companies scramble to acquire new IP technology companies, ISP consolidation takes place, and carriers bulk up to head off or beat the competition and in the process expand their footprint. Regulatory authorities should make certain that they understand the incredible changes the communications industry is facing before they make any decisions. Digital communications firms have replaced the traditional phone companies. Technology is pushing the world towards more choice and efficiency, but the question remains whether policy makers will let that happen. Although these mergers might seem like a move towards fewer players in the telecom space, the competition they create in the larger communications industry (cable, wireless, and satellite) is good for consumers. The new companies will have more resources to innovate and serve their customers.

In Europe, the big national telephone monopolies are facing exceptional challenges as their home markets are opened to competition. In the United States, the boundary between local and long distance telephone systems - set up when the courts split up the Bell Telephone System in the 1980s - is disappearing. The deals are being driven by the need to create a few huge international telecoms groups, which will dominate the industry in the next century. AT&T has shaken the industry by planning to create a high-speed network capable of voice, Internet, and video transmission, spending $120bn to buy cable television companies TCI and Mediaone. It has also boosted its global business and wireless alliance with BT. AT&T is a company that decided to focus on VoIP services as well as advanced technology that it mostly sold to businesses. SBC is a company that focused more on the consumer side. According to David Dorman, chairman and CEO of AT&T, the combination of the two will "create a stronger global competitor".

Closer to Home

No one wants to be left standing alone without a chair when the music stops. On the local front we were entertained by the PTCL and Etisalat deal for the better half of 2005. Now Etisalat has announced its arrival into Afghanistan and India after establishing itself in Saudi Arabia and Sudan wise move, since it is about to face competition from its first competitor, Emirates Integrated Telecommunications Company (EITC), or 'du' as the operator is to be called. Du has set a target of acquiring 30 per cent of the UAE market within three Years. It will not be surprising if it starts to get regional and down the line - global. Another rising star from Middle East is Mobile Telecommunications Company (MTC) which began in 1983 in Kuwait as the region's first mobile operator, and using its “3x3x3” expansion strategy, it expanded rapidly. It operates in Kuwait and Bahrain as MTC-Vodafone, in Jordan as Fastlink, in Iraq as MTC Atheer, in Lebanon as MTC Touch, and in 14 sub-Saharan countries in Africa as Celtel: Burkina Faso, Chad, Democratic Republic of the Congo, Republic of the Congo, Gabon, Kenya, Malawi, Niger, Sierra Leone, Sudan, Tanzania, Uganda and Zambia and most recently Madagascar. Abu Dhabi based Warid Telecom which started in the booming telecom market of Pakistan, has now won a license ($50 million for 15 years) in Bangladesh where it will start its commercial operations offering value-added GSM/GPRS services. Qatar Telecom (QTel) is in talks to procure licenses to provide mobile and other services in certain countries of the Middle East and North Africa region.

Let's recap the mega-mergers, shall we? Starting from West and moving East; 2005 started with SBC and AT&T's merger of $16 billion. Alltel paid $6.2 billion for Western Wireless, CTC Communications Group acquired Connecticut Broadband and Level 3 acquired Oklahoma- based Wiltel Communications. The FCC approved SBC's $16 billion acquisition of AT&T and Verizon's $8.5 billion purchase of MCI. Sprint Nextel purchased Alamosa for $4.3 billion which also settled a legal dispute filed against Sprint by during the Nextel merger. Cisco jumped into the triple-play arena with its $6.9 billion acquisition of Scientific-Atlanta and toped this by signing a deal with China's number two telecoms equipment maker ZTE to jointly strike the local market.

In Europe, BT went on a shopping spree; purchasing Albacom, Infonet - provider of global managed voice and data services and Reuters' financial services network operator Radianz it did not stop there picking up former Cable & Wireless Spanish subsidiary CW Business Solutions. Telefonica bought Cesky Telecom. KPN picked up Telfort. France Telecom took Spanish mobile operator Amena for, EIrcom grabed mobile operator Meteor. NTL paid $6 billion for merging with Telewest to create the UK's second largest communications company with the triple-play capability. BSkyB picked up Easynet with cash. Telefonica went for UK mobile phone operator 02. Vodafone sold its Swedish operations to Norwegian operator Telenor. Ebay became the industry's first major internet communications company to get into the M&A arena, by purchasing Skype for $2.6 billion. Vodafone acquired Turkey's second largest mobile operator Telsim for $4.6 billion. Telefonica took 3% stake in China Netcom and China Netcom' took an intriguing 20% stake in Hong Kong's PCCW. Tata subsidiary VSNL acquired Teleglobe.

So who's next in this telecom mega-merger mania? It's certainly entertaining to watch and predict, and is this consolidation good for the VoIP industry? Is it good for consumers? It certainly can't be good for consumers if there is less competition. And the less choice VoIP vendors have when selecting a carrier backbone, the more expensive VoIP will be. Most of the new telecom players are looking for 'green field' venues where they can maximize their ROI by setting up new networks mostly 3G/GSM. Developing regions are a favorite since they offer one of the highest Average Revenue Per User (ARPU) to the Operator. And they are plenty Africa, Asia, and CIS are the top ones India adds 5 million wireless subscribers a month and this is making a lot of operators salivate. Expect buying and M&A activity to get in top gear.

Just like other sectors, survival has become difficult for the telecom sector service providers as well as vendors. Convergence is one factor; all want to provide dial tone, internet and video Geographic foot print is another. The key is 'economies of scale' and a regional (if not global) presence. The telecom infrastructure of a country is the stepping stone for its social and economic development and a major effort is required to reduce the digital divide. We will see Merger Mania carry its momentum well into 2006, but this time it will be more vendors than service providers taking the plunge. This will trigger a mergers and acquisition wave in the telecom equipment makers' world shrinking their sales volumes (a lot of operators would not like to overlap their networks) and profits (power of negotiation by a big operator). In terms of geography, M&A action will migrate from the Americas to Europe and Asia China and India will take the lead. There is a tremendous opportunity in Pakistan as far as the Telecom M&A scene is concerned. We have the luxury of starting in a market where there is not as much competition as there is in other regions of the world. It is not unreal to think that the next billionaire could be from this field we all know that the Harvard drop out who happens to be the richest man ($50 billion) in the world is in IT business, but did you know that the third richest man ($30 billion) in the world - Carlos Slim Helú - is in the Telecom business and has added $6 billion to his fortune in 2005 alone!

The writer is a BSc. (EE) from USA and is completing his MBA. Some of his certifications include MCSE, CCNA, NGDLC, ATM and NGN among others. He has worked in Telecommunications, and taught in various universities. Currently he is working as an Telecom/IT Consultant in UAE and running an online newsletter.

He can be reached at info@farooq.com.pk