The logic of telco M&As

April 27th, 2015 by · 2 Comments

This article was authored by Jouko Ahvenainen, and was originally posted on

Hutchison acquired O2. BT acquired EE. Years ago Hutchison sold  Orange that is a part of EE, and BT divested O2. Nokia acquires Alcatel-Lucent and becomes the second largest network vendor, i.e. a business it planned to divest for some years. These are just some examples, but what does it tell about telco business and its long term planning?

Let’s take a look at some history. The former incumbent BT had one of the first mobile networks in the UK, Cellnet. It was first a joint-venture and then a wholly-owned BT subsidiary.  In 2001 BT decided to spin it out and it became O2. And then in 2005 Telefónica acquired it.  Now Hutchison (that also has “3” in the UK) has acquired O2.

Hutchison acquired a local operator in the UK in 1994 and re-branded it as Orange. Then it came a part of Mannesmann (that was later acquired by Vodafone) until France Telecom acquired it in 2000.  In 2013 France Telecom was re-branded as Orange. Orange UK merged with T-Mobile in 2010 and it was branded as EE. Now we could say BT acquired a business that Hutchison started in the UK and Hutchison acquired a business that BT started in the UK.

Alcatel and Lucent have long roots in their home countries, France and the USA. Lucent’s roots are in AT&T and the legendary Bell Labs. They had an important role to build telephone networks in those countries. In 1980’s and 1990’s telecom competition opened, regulation changes and mobile networks emerged. It also meant many changes for these companies.

Alcatel and Lucent started to lose business after the de-regulation and competition, but Nokia’s significant network business only started from it. In early 1990’s Nokia was an unknown small player and it had to, for example, cooperate for GSM base stations with Alcatel to get some credibility, but in the end Nokia made its own base stations, and became more successful than Alcatel in that business. Then Alcatel and Lucent had to merge in 2006, but it has been very difficult to get its business to profitability. Even in late 1990’s incumbent operators (e.g. BT and France Telecom) hesitated to buy networks from a newcomer, Nokia.

In 2006 Nokia was the leading mobile phone company and it saw more future in mobile phones than networks. Nokia decided to move its network business to a new joint-venture with Siemens that also wanted to get rid of the network business. Then Nokia’s phone business collapsed and Siemens wanted to fully get rid of the network business, and Nokia bought the JV in 2013 and two months later sold its phone business to Microsoft. And who knows to whom Microsoft will sell it next.

Nokia will become the second largest network vendor after the Alcatel-Lucent acquisition.  It competes especially with Ericsson that has had a much more consistent strategy; the vendor has done networks for over 100 years. BT and Hutchison compete with Vodafone that has had much more consistent strategy in mobile services.

What can we conclude from this? Do these M&A’s have any logic to them? There have been several external factors for these decisions: 1) de-regulation and mobile networks changes the business in 1990’s, and it also meant fast growth in mobile business, 2) 3G license auctions became very expensive to some operators and they had to re-consider their resources in early 2000’s, 3) fixed-mobile has been a kind of long term opportunity but it hasn’t really been realized, 4) Apple changed the mobile phone business rules in 2007, 5) now companies look for synergies in mobile and fixed network investments, and IP technology also means many components of those networks are common.

We can see that companies have had good reasons for divestments, mergers and acquisitions. But at the same time we can say that they haven’t brought any significant difference compared to companies that have had much more consistent strategy. It would require much more analysis to make more exact conclusions from these different strategies, and maybe it is a good topic for academic and strategy consulting research.

But at least this history raises some questions over how much value short-term moves (often done for the finance market) actually create, compared to longer-term consistent strategies. Hopefully someone will publish more research on the strategies of these companies.

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Categories: Mergers and Acquisitions

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2 Comments So Far

  • Anonymous says:

    Hit the nail on the head with the last bit about being done for the finance market. Petulant, ignorant investors get into telecom thinking its high tech, and so it must be innovative and explosive. Yet they won’t allow the company to run in the direction of something genuinely new, because it might scrape off the razor thin margin that only a few are making.

    It’s not innovative. Its a deeply stagnant industry. The only way big jumps in growth happen is by moving pieces around the board.

  • Anonymous says:

    Regarding “razor thin” margins, who specifically are you referring to?
    When I look at some of the biggest players FS’s, I see pretty good margins – pretty good EBITDA numbers. Is your statement really specific-company directed? Granted, there are some really poorly managed companies out there…..

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