Models for future growth
The telecom industry in the Middle East and North Africa (MENA) region is on the verge of a new wave of M&A. Telecom companies are likely to pursue regional, or even global, targets within the growing information and communications technologies (ICT) sector.
These acquisitions will allow telecom companies to capture growth from adjacent industries, as well as to forge a new strategic identity. The arrival of cutting-edge talent, technologies, and research and development capabilities will facilitate the ultimate intention of many companies to become digital conglomerates.
Previous telecom M&A activity was principally intended to increase scale. It was usually handled by a dedicated unit that worked with the corporate leaders and the board, with minimal impact on existing operations. However, a move into ICT and other digital services affects the future value proposition and capabilities of business and functional units. These units therefore need to be closely involved as stakeholders in the finer details of telecom operators’ new-style inorganic growth strategy.
Stakeholders must agree on the overall strategic intention of M&A activity, adopting a clear direction on the sectors to target, and deciding whether the necessary capabilities should be built from within or sourced from outside. Such clarity of purpose allows companies to assemble profiles of potential targets, anticipate synergies more accurately, and compose a coherent post-merger integration plan to create a comprehensive ecosystem in their new digital domains. Although the scarcity of potential targets in the region does make the acquisition process more challenging, companies must look harder, signal their intentions to the market, and even pursue global opportunities.
Companies must also develop an operating model that allows more flexibility in the way acquisitions are managed and then overseen. In assessing the success of this new breed of transactions, operators should embrace new performance management thresholds and indicators.
To take advantage of these opportunities, MENA telecom operators must urgently fill their capability gaps in advanced ICT and digital services. Inorganic growth, through M&A and joint ventures (JVs), is the most promising avenue. Such inorganic activity can also strengthen an operator’s market positioning by ensuring alignment of the target with the operator’s wider corporate strategy. By contrast, in-house development tends to be slow, has limited potential for scalability, and has been successful for only a few adjacencies that tend to be similar to the core telecom business. Similarly, the transactional partnership model has been used frequently in the MENA region with limited success. The results have been patchy demand for products that are below customer expectations, weak revenues, and no development of capabilities to improve the operators’ position in the longer term.
Choosing inorganic growth alone will not suffice. Operators have to pay close attention to post-merger governance and integration models. Telecom operators should ensure that the typically nimble and innovative nature of target technology companies is preserved, and that it does not get diluted by the culture and problems of the acquirer.
The next theme of telecom M&A is gaining momentum globally, with the aim of redefining industry boundaries through digital services. Cash-rich MENA operators must follow suit. Early movers can gain a significant competitive advantage. However, to succeed they must stop regarding deals as a stand-alone activity. Instead, they must understand that transactions in the digital domain are deeply intertwined with the corporate strategy of existing operations and require careful planning in terms of strategic intention, deal sourcing, type of operating model, and performance management.