Monday, May 29, 2006

Ovum: Yin and yang: Vodafone, BT and the logic behind a mega-merger

Mike Cansfield at Ovum points out BT's "enthusiasm for fixed-mobile convergence (FMC)" while "noting that it had little to converge with its fixed operations." As he looks forward to Vodafone's (VOD) strategic announcements due next week, he thinks the "symmetry with BT's position is striking. Vodafone is a completely mobile company that has also identified FMC as an opportunity. Vodafone's UK operator is starting to look like the 'yin' to BT's 'yang', and so a merger would be an obvious way to solve both operators' biggest strategic problems at a stroke."

Cansfield presents arguments for and against for both companies. Here are the arguments in favor of BT merging with Vodafone:

  • mobility. Mobile and broadband are the two main growth markets in consumer telecoms, and BT's inability to benefit from the former has been a disadvantage for several years
  • geography. Vodafone is concentrating more on Europe following the sale of its interests in Japan, with an exit from the US a strong possibility. Whilst the fit is not perfect, this maps well onto BT's European business
  • technology and networks. BT's 21st Century Network will be an IP core with IP multimedia subsystem (IMS) at the service control layer. IMS is widely recognised in the industry as the standard that will drive the convergence of mobile and fixed networks. As separate networks disappear, so will the rationale for separate companies.
For Vodafone, the arguments in favour of a mega-merger are:
  • strategy. A deal would move the focus away from problems in Japan and the US onto Europe, where political and economic consolidation are established trends. As a result, it would be swimming with the tide and not fighting it
  • customers. Enterprise customers, particularly corporates (although not exclusively so), are trying to bring mobile into the managed communications environment that has existed for their fixed services for many years. In short, a merger would be popular with enterprises as it would make this easier
  • services. This deal would open up new markets for FMC services, in both telecoms and media. The opportunities to cross-sell are obvious, as are the possibilities for boosting customer retention through service bundling.he arguments against are:
Cansfield arguments against BT and Vodafone merging are:
  • complexity. BT divested itself of its mobile business in 2001 to simplify its business, and since then the company's performance has gone from strength to strength, as last week's results show. A return to complexity would distract BT from its successful path. Vodafone has no fixed experience outside of its German subsidiary Arcor, and it has been trying to offload this unwanted part of the Mannesmann takeover since 2001
  • scale. Any such deal would create a gigantic business that would attract the attentions of regulators and governmental bodies. Even if the parties agreed, there is no certainty that approval for such a deal could ever be secured
  • past experience. The poor record of mega-mergers in general, and past failures by both parties, would dilute any enthusiasm for such a transaction.
Cnasfield concludes that "the arguments in favour of a merger are strong at the business level, but logic does not always win out in business. It seems to us that the practical barriers to such a deal may cancel out the logical arguments."