Editor’s Note: Posted on Quantum Group, Inc.’s Web site, www.mergeusa.com, is an outspoken and somewhat controversial article on consolidating industries. It is an article that predicts general doom and misery for consolidators in any industry – including the tower industry. While the prophecy of consolidation fallout uses historical fact, the question remains, will the tower industry succumb to the same fate as other consolidations?
Many RCR Wireless News readers have never heard of the dreaded phenomena of the consolidation curve, or at least they have not considered it in the context that I will describe.
Without dwelling on it too much, “the curve “represents a “product lifecycle” hyped on volumes of steroids that would make bodybuilders blush.
Yes, most everyone in business understands and is likely to accept the product lifecycle model. A product, industry, technology, or whatever goes through innovation, development, rapid growth, maturity, decline and death. The difference is “the curve” is specific to a consolidating industry because of the extremely short duration of the lifecycle. Investment bankers drive the timeliness of the curve while they collect fees on capital raised for consolidators. The height of the curve is exacerbated by the greed of private and institutional investors in search of “the next big thing.”
OK, enough with the conjecture. The curve is a standard product lifestyle that is much, much shorter in duration, and is much higher with respect to value gained and lost.
The tower industry-Is it really that different?
I have explained our perception of the phenomena of the curve to clients, customers, prospective employees, and a few semi-interested airline seat partners. With the exception of the weary business travelers I’ve met on airplanes, almost everyone I’ve spoken to is receptive to the concept. However, almost everyone involved in the tower industry has multiple reasons why the industry will not befall the same fate as consolidations in the past.
While we have heard the same thing from business people in other industries undergoing consolidation, I am willing to give the tower experts their due respect. I think we should explore the common arguments why this consolidation is different, and then we can compare them to industries past.
Here is a summarized list of reasons of what people have told me as to why this industry is different and will not be a victim of the curve:
The industry has and always will have at least a constant level of demand.
There is so much capital available that it cannot possibly crash-per the curve
New wireless technology means more business (read: revenue) for each tower site.
Each tower is a mini-monopoly due to zoning restrictions.
The industry is infrastructure for the wireless movement.
Yes, it is a short list, but a compelling one nonetheless. There have been other reasons given to us; however, these are the ones that surface in almost Tower industry faces consolidation curve every discussion about the curve vs. the tower industry.
Demand for product (The curve 1: Tower industry 0)
While a few people I’ve spoken to regarding demand are bold enough to say that demand will constantly grow, most have at least accepted that they can expect, at a minimum, a relatively constant level of demand. I tend to agree. Technology is an issue, but I’ll discuss that later. I am, however, willing to accept that demand will be prevalent for the foreseeable future.
That withstanding, I can counter the argument by pointing to the funeral industry. I think we can all agree that that is an industry with constant demand. Technological advances and personal desires have changed the complexion of that industry, and if you look at the stock charts in that industry, you’ll see the curve.
Available capital is precarious (The curve 2: Tower industry 0)
Technical people give me this argument all the time. Financial people do not, because they understand that growth capital is a fleeting thing.
At any given time in consolidation, there may be literally billions of dollars available for growth and acquisition. Those funds can dry up in less than a day, and they often do.
As a student of consolidation, I have reviewed the stock charts of many consolidators in multiple industries. In every industry that I studied, the capital was absolutely available. That was true until one of the consolidators did not hit their expected financial numbers. In almost each case the capital dried up almost immediately-often in just one day. Yes, the capital can come back, but generally years pass before the investment community is willing to take the risk.
By and large, investors, especially institutional investors, in consolidators’ stocks know of the momentum wave they are riding. They also know that negative momentum will spell the end.
New revenue from new technology (The curve 3: Tower industry 0)
So what’s the big deal? New revenue will always be generated from new and better technology. Unfortunately, all new technology revenue does is replace the revenue lost from older technology. Sure, there is some overlap, but you cannot convince me that that will ultimately add to the top line. One of the biggest concerns I have for the outcome of the consolidation is in the technology argument I am convinced that the cellular, PCS, and wireless Internet carriers will take advantage of developing technology to eliminate the need for many, many multi-tenant towers.
Mini-monopolies come and go (The curve 4: Tower industry 0)
Apparently those who argue that the tower is a monopoly have not fully considered the advances in camouflage tower technology and alternative-use facilities. Also, the multi-tenant tower is more in jeopardy than ever due to technological change and the public’s “not in my backyard” mentality. Though I have no crystal ball, I think we’ll see a time in the next few years when communities will demand that the large multi-tenant tower be dismantled.
I have no doubt that there will be extensive demand for various types of structures to house RF transmitting and receiving devices. However, that means little as it relates to the multi-tenant tower and the coming of the curve. What it does mean is that the consolidator who is a full service provider and can take advantage of zoning releases for hidden RF facilities will be in the proverbial cat-bird’s seat!
Wireless Infrastructure (The curve 4: Tower industry 1)
While the tower industry is behind in the score, the one point they have is a big one! None of the other consolidating industries that I have studied nor those in which Quantum’s principals have been involved have the characteristic of being the infrastructure in a growth industry-wireless data communications. Normally, consolidation occurs in the mature phase of that industry’s full lifecycle. The consolidation, and hence the curve, is a way to generate short-term momentum in an industry well past its rapid growth phase.
Towers may be different
This industry is different because of its stature as the infrastructure for a growth industry, and it may just have the gusto to overcome the odds of consolidation. While the industry has an opportunity to beat the curve, the odds seem to be stacked against those not positioned to take advantage of the developing growth industry. I, for one, hope the curve does not occur in this industry. For our clients’ sake, we hope that the consolidating companies buck the trend that will send valuations screaming down from their current levels.
With the right strategy, I believe the consolidators can buck the curve. They will need the right strategy, the right technology, the right business mix, and the discipline to overcome the odds of a valuation crash associated with the curve. Time will tell.
Mitch Steidl is vice president of client development for Quantum Group Inc., a leading mergers and acquisitions firm speciali
zing in consolidating industries and primarily operating in the communication tower industry. He has an MBA in Finance from Chaminade University of Honolulu and is a graduate of the U.S. Military Academy at West Point, New York.