Telecoms need to refocus to grow, says A.T. Kearney

In the face of the current global financial crisis, growth for growth's sake is no longer the 'name of the game'.

Dr. Karl Deutsch, head of A.T. Kearney's Middle East Telecom Practice, said:

"During the past three to four years a number of leading regional telecommunications operators have exercised a strategy of intense expansion, mainly in the form of acquisitions. Most of these operators have enjoyed the growth in revenues so far, but have yet to reap the full potential for group synergies and operational excellence that these acquisitions pose."

Over the past few years leading operators, including Zain, (22 countries), Etisalat (18 countries), Qtel (17 countries), Orascom, (11 countries), and STC (7 countries), have expanded aggressively, primarily via acquisitions, successfully expanding their international footprint. On a worldwide scale, Etisalat and STC are amongst the first MENA based companies approaching the global top 10 in terms of market capitalization, yet more than 70% of their EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization - a widely accepted value performance indicator in industries with standardized high volume technology investments) still stem from their home markets.

According to a recent A.T. Kearney study only 29% of telecommunications groups realize an increase in aggregate profitability when acquiring or merging entities. Some even lost more than 47% in shareholder value as a result of expansion, so the challenge faced in terms of extracting value from acquisitions and mergers is general and not only specific to the GCC. There are however important lessons to be learned from international telecom operators' efforts to extract value from their acquisitions and mergers.

KPN, a leading telecommunications provider in the Netherlands, acquired mobile operations in Belgium and Germany some 10 years ago. For some time the KPN group incurred significant IT costs while managing varying product portfolios across the three operators - Base (Belgium), e-plus (Germany) and KPN (Netherlands). However after a couple of years focus was shifted towards the synergy potential of carefully streamlining three similar product and service related IT operations, across countries and operators. A balance was sought between centralizing certain functions for scale, while keeping other areas local for flexibility benefits. The consolidation allowed for coordinated market launches of services across the mobile group, resulting not only in significant cost improvements but also in additional revenues and strategic benefits. A.T. Kearney international benchmarks show that significant cost savings are achievable through consolidation across international operations and may bring operators savings in the range of 20 to 35%.

Like KPN and other international telecommunications groups in the past, the Middle East telecommunications groups have recently expanded and are facing challenges in determining the right level of group control and management in order to reach best possible results. Options range from pure financial control on key performance indicators, such as pure financial investors, via a lean group structure with selected centralized activities like network procurement, and commercial strategy - such as Orascom - to a strong group management divided into several regions with multiple centralized functions - Vodafone, Orange and France Telecom, for example.

"Each group has different ownership control, aspirations and skills and hence need to determine a tailored approach to group management," Tim Peters, principal, A.T. Kearney, Middle East, said. "At a minimum, the performance goals should be carefully set and regularly monitored by the group owners. An internal rate of return (IRR) is often calculated before stepping into a new acquisition. In theory, the market performance and synergy levels assumed when calculating the IRR should directly become the long-term objectives of the newly acquired entity. Reality shows, however, that performance is hardly ever monitored against the initial IRR.

"The right team, effective planning, rigorous integration management and a focus on realistic synergies is mission critical to tackle the challenge of integration and building sustainable value in synergies across a group," Peters said.

He added, "Top priority for CEOs and board members of telecommunications groups from the Middle East should be on how to extract maximum value and synergies from acquisitions in order to become a global top player in value terms. Particularly during times of an economic crisis it is now even more urgent to shift from a pure growth focus to extracting maximum value, while expansion opportunities can still be eyed opportunistically."