As the end of the millennium approaches, it is worth pondering whether the recent bout of mergers
and acquisitions are precedents to some colossal event of biblical proportions or merely defensive strategies of
companies safeguarding themselves against falling commodity prices, uncertain technological change, increased global
competition or shifting patterns in consumption. One could easily reflect on the last year and conclude that we have
reverted back to the 1890s with John D. Rockefeller, Standard Oil and the robber barons. The sheer number and value
of these mergers is quite dizzying to be sure, and what is interesting is how many industries have been caught up in this
merger mania.
In the past year, for example, consolidation has been experienced across a wide spectrum of
industries such as oil ($80 billion merger of Exxon-Mobil), automotive (Daimler-Benz and Chrysler, $37 billion) and
financial services (Travelers-Citicorp, $140 billion). However, some of the most interesting courtships and weddings
have occurred in the telecommunications industry, particularly among wireless operators. Within the last three weeks
alone, there have been two significant announcements, namely from Britain’s mobile phone operator, Vodafone Group
plc, acquiring AirTouch Communications Inc. for more than $62 billion, and SBC Communications Inc. tendering an
offer for Comcast Cellular Corp. for $1.7 billion. If these deals are consummated, they will lay the groundwork for
further merger-and-acquisition activity in the U.S. wireless market. This trend toward consolidation raises some
concerns, particularly among smaller carriers that may not have the resources to compete as effectively. Therefore, it
begs the question, are these small or mid-sized carriers vulnerable to these wireless behemoths and will they inevitably
become absorbed or be forced to merge with players of equal size?
Subscriber growth and market
rationalization
Based on the flurry of merger activity in 1998, one can conclude the seeds for a more oligopolistic
structure is taking shape among the wireless industry. When the wireless market began to open up to competition in
1994, with the licensing of personal communications services spectrum, conventional wisdom held this competition
would benefit the marketplace by lowering prices and bringing forth a myriad of new wireless services and
technologies. To a large extent, this already has happened. Wireless per-minute pricing has fallen, in some cases as low
as 65 percent, according to The Strategis Group.
Digital deployment has been spurred by the competitive pressures
of PCS, and a whole new suite of value-added services have been introduced to the consumer, such as caller ID, voice
mail, text messaging, wireless e-mail, news and information services and dispatch, to name a few. In fact, many of
these services have become standard bundled features to the consumer’s calling plan. Without competition in the
marketplace, the incentive to offer these enhanced features to the customer may not have been as strong.
Wireless
competition has had a two-pronged effect: an expanding market, creating a more diverse base of subscribers and
declining revenue per subscriber. Today there are as many as seven carriers in some of the largest U.S. cities,
consisting of two cellular networks, four PCS networks and Nextel Communications Inc. Other markets have at least
four and some have as many as five wireless networks. Of course, this does not include the C-block carriers and the
also-rans planning to bid on spectrum in the upcoming auction. Even without this added layer of competition, there are
an abundance of wireless carriers all offering, for the most part, the same type of service to the customer.
What was
just a simple duopolistic environment three years ago is turning into an intensely competitive hotbed with a multitude
of players jockeying for market share. Consequently, more carriers are chasing fewer dollars, and not every carrier is
equipped to compete on a level playing field. As a defensive strategy, many carriers have seen fit to merge with or be
acquired by another carrier.
Wireless merger mania: What’s in it for you?
In some of last year’s mergers
between companies with wireless properties, wireless may not have been the catalyst behind the merger. For instance,
mergers such as Bell Atlantic Corp./GTE Corp. and SBC/Ameritech Corp. were driven mainly by the carriers’ ability to
combine their wireline and fiber-optic networks. Nevertheless, with the combination of companies such as Bell Atlantic
and GTE, the deal provides the merged company considerable leverage and creates the largest U.S. wireless operator,
with more than 10 million subscribers (more than 18 million had Bell Atlantic been able to outbid Vodafone for
AirTouch). In just about all of these transactions, the trend toward consolidation affecting the wireless industry
primarily is being fueled by extending geographic reach, realizing economies of scope and scale, and convergence of
wireline and wireless services. What seems apparent is that in the future, the larger, concentrated carriers will have
distinct leverage in the competitive marketplace and smaller carriers will find it extremely challenging to withstand the
pressures of shrinking market share and operating margins. Ultimately, they may succumb to the merger-and-
acquisition trend.
Geographic reach and the importance of roaming
In the wireless industry, geographic reach-
i.e., footprint-is one of the key motivators behind mergers and acquisitions. Some of the transactions among the small
and mid-sized carriers such as Dobson-Sygnet, and Public Service Cellular-Intercel are examples of carriers being able
to leverage large footprints and offer subscribers a wider area coverage. By offering an enlarged home calling area,
carriers are able to shore up the base of the most lucrative subscribers (i.e. business customers who place a high value
in roaming) and provide customers simplified pricing plans. In effect, roaming becomes less relevant and customers
can have the comfort of knowing that if they migrate outside their home area, they will not be surprised with exorbitant
roaming fees. Nextel and AT&T Wireless Services Inc. realized how much customers valued single rate plans and
almost every wireless carrier in the United States has introduced this scheme in one form or another. Not every carrier
has to offer a nationwide pricing strategy, but over time, wireless customers, particularly in large urban markets, will
find it increasingly tempting to select a carrier that can offer simplified one-rate pricing for both local and long-distance
services. Carriers with a regional or nationwide focus clearly can exploit this advantage.
Economies of
scale
Despite the decline in revenues, cash flow margins among cellular carriers have remained fairly stable and in
some cases have risen (e.g. AirTouch reported an operating cash flow margin of 48.6 percent at end of the year for its
cellular markets, up from 48 percent in 1997). Nevertheless, carriers recognize the need for cost containment, and
through mergers, carriers can recognize economies of scale and acquisition synergies that will allow them to compete
effectively. Examples of these are as follows:
Inter-carrier roaming charges: With the merger of the two
carriers, roaming fees they charge one another would be eliminated.
Equipment discounts: Carriers can
negotiate volume discounts from handset and infrastructure vendors.
Billing costs: Billing costs can range from
$1-$1.75 per customer. W
ith a larger subscriber base, these fixed expenses are expected to be spread out and
decline.
Sales and marketing expenses: The merged company can realize cost savings by consolidating s
ales
channels, personnel and spreading advertising and promotion expenses over a wider target population.
Convergence
and bundling
The U.S. telecommunications market as a whole is undergoing convergence, and this trend is fueling
interest in the bundling of telecommunications services. In 1995, the number of communications subscriptions per
household rose to approximately 2, up from 1.3 per household five years earlier. The number is rising as the penetration
of Internet, additional phone lines and wireless services increase. The number is projected to rise to 3.2
communications subscriptions per household by the year 2001. The structural change in the telecom industry has
increased competition and the possibility for convergence of different telecom services. In this environment, bundling
can offer providers a means of:
Differentiation through unique service bundles.
Lessening churn as end
users are less likely to churn if they obtain several services from one source.
Bolstering revenue.
Opportunities
for economies of scope-carriers may be able to leverage shared back-office systems and pieces of their network, and
achieve cross marketing synergies.
The merger of Alltel and 360
