The past two decades have witnessed a wave of mergers and acquisitions (M&A) in the telecommunications industry. While some mega M&A cases, such as the AT&T/Time Warner, T-Mobile/Sprint, and AT&T/DIRECTV mergers, have caught much attention from both the popular press and scholarly research, a closer examination reveals that those billion dollar mega deals only constitute 6% of the M&A activities in the telecommunications industry. The “small” mergers and acquisitions (defined as deals with values lower than USD 1 billion), though not a game-changer individually, are the vast majority of the telecommunications M&A and together as a whole, could have profound impact on the industry.
My co-authors and I focused on the “small” M&A cases in the telecommunications industry over the last 20 years and examined the drivers of small M&A activity. Among the 1,712 cases, small mergers constituted over 80%. In terms of the types of deals, acquisition is the most frequent form among both large and small M&A activities. Small M&As tend to use cash, while large ones lean on a combination of financing methods. This is expected since acquirers may need to tap a greater variety of financing sources as the deal valuation increases; small mergers on the other hand, might rely exclusively on the acquirer’s free cash flow.
As for the types of expansion, 80.5% of the small M&A activities involved horizontal integration and concentric diversification, while the distribution is relatively more equal for large ones. The difference in the prevalence of horizontal integration and concentric diversification cases in small and large M&As might reflect the stricter scrutiny regulatory bodies impose on situations where large companies expand in their own business areas or into similar areas, and the cautiousness of small businesses to tap into unfamiliar business areas.
This analysis also provides support for the “financial market-driven” model of merger activity. Bull markets provide companies an appreciated currency in the form of share prices with which to acquire other companies. Rising markets could also generate optimism among businesses, which encourage expansion as well. Our findings indicate that rising stock markets two quarters prior to the deal date was most strongly linked to deal valuations. A higher federal funds rate two quarters prior to the due date had a significant negative impact on deal valuations. A plausible explanation is that the federal funds rate increases the cost of business loans, which some firms rely on as the financing source for M&A activities, and thus leads to a decline in the incentives for corporate expansion. A significant interaction effect was detected between the federal funds rate one year prior and the small M&A cases with a negative coefficient. Thus, the federal funds rate one year prior tended to increase deal valuations for small mergers significantly less than they did for large mergers. We surmise that the federal funds rate four quarters prior to the deal date could affect the deal valuation indirectly through stock market performance. Increasing interest rates and rising stock markets are both associated with strong economic growth.
Our analysis indicates that a conglomeration diversification case where companies enter into unrelated business areas tends to have the highest valuation. Due to the inherent risk of entering into completely new business sectors and the difficulty of synergy creation, conglomeration as a business strategy is usually undertaken by mature businesses that have established their positions within their own fields and seek opportunities further afield. If such companies decide to initiate conglomerate expansion at all, it is a signal that the potential gain is deemed to outweigh the risk. Given the established positions of the buying companies, they are more likely to possess greater financial resources and engage in mega M&A deals.
Finally, we investigated the differentiated effect of foreign companies’ involvement between large and small M&A cases. While a positive effect is detected between the involvement of foreign companies for both acquirer and target companies for large mergers, the involvement of foreign companies, no matter as acquiring or target companies, was found associated with lower deal valuation for small mergers. Considering the complexities of doing business in a foreign country with different regulatory requirements and business practices, entering foreign markets is risky for all firms, but especially for the smaller ones. The differentiated effects may reflect differences between small and large companies in their risk management capabilities.
Rachel Peng is a Ph.D. student in the College of Communications at Penn State University, and a 2020 PTC Young Scholar Program recipient. Her previous work investigates media economy and the interactive relationship between ICTs and smart communities. Her recent work focuses on people’s information consumption on contentious health and science, especially how people navigate disagreement about these issues and misinformation on a range of health topics on social media. Read Drivers of Mergers and Acquisitions in the Telecommunication Industry: The Differences between Blockbuster and Small M&As.
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