The Role of Efficiencies in Telecommunications Merger Review

Article excerpt


A. The Rise and Fall of the Telecom Industry

In the last decade, the telecommunications industry has experienced significant growth and consolidation in response to such external factors as deregulation and liberalization, technological change, and global market forces. (1) In addition, industry consolidation has occurred to achieve greater economies of scale and scope through more efficient deployment of network infrastructure.

Moreover, the desire of large, multinational customers to obtain fully integrated, end-to-end global telecommunications services from a single source (a "one-stop" telecom shopping experience, if you will) has created the impetus for telecom firms to offer multiservice broadband and seamless worldwide telecommunications networks. However, a major barrier to achieving this goal is the significant capital required to construct and deploy a global network and to develop innovations necessary to provide advanced services. In order to overcome this barrier, telecom companies typically adopt cooperative approaches to network building--such as mergers and acquisitions, joint ventures, legal partnerships, and strategic alliances (collectively referred to as "M&A")--that combine complementary skills, technologies, and geographic reach, and achieve greater economies of scale and scope. As a telecom company expands its network and customer reach, its attractiveness as a potential global partner is also enhanced. A broader capacity and customer reach creates internal efficiencies that can result in lower costs for subscribers.

The telecom industry consisted traditionally of legally mandated monopolies that were regulated by governmental authorities. Technological advances, including the development of alternative infrastructures and new services, have dramatically altered the economics of telecom services and have made possible the potential for competition to replace regulation in at least part of the services provided. The deregulation of the industry during the last decade has allowed telecom firms to achieve economies of scale and scope by (1) expanding into new product or geographic markets or gaining market entry across traditional industry lines and (2) integrating network infrastructure and content. In a deregulated environment, telecom firms may seek to provide a "bundle" of products and services, particularly with the technological convergence of the telecom and cable industries.

New technologies also stimulate M&A activity. For example, the provision of broadband access services in the homes of consumers and the ability to combine content with transmission were key factors behind many telecommunications mergers. Further, the erosion of trade restrictions and other international regulatory barriers facilitated increased cross-border telecommunications activity as well as the number of mergers and joint ventures among international firms.

While rapid growth contributed to industry consolidation during the last decade, the recent downturn in the telecom industry may also result in further industry consolidation during the next several years. For example, in anticipation of a huge global demand for high-speed broadband transmission capacity, network owners and operators invested considerable capital in global fiber-optic networks only to discover that actual demand levels remained a fraction of built capacity. As a result, a glut of transmission capacity exists globally, leaving network owners and operators struggling to "fill their pipes." These network assets are now prime for acquisition by the larger and more stable carriers seeking to expand their networks. Further, while deregulation efforts in the North American telecommunications industry were aimed at promoting and facilitating competition in all areas, the state of real competition in some sectors remains questionable with many participants, including long-distance providers, competitive local exchange carriers ("CLECs"), and wireless providers, experiencing financial difficulties. …