| Kippreport.com

In dial need, Part II

April 20, 2009 7:16 by Ehtesham Shahid

Click here to read Part I.

Taking stock. The downturn has pushed Gulf telcos into a new strategic phase. Having completed their expansions and acquisitions, they’re taking a step back to review their assets, resources and capabilities to maximize their revenue-making potential. This is backed up by empirical evidence from across the industry that overseas expansion isn’t an automatic key to success, and growth for growth’s sake is no longer the name of the game. “Only 29 percent of telecommunication groups realize an increase in aggregate profitability when integrating acquisitions, raising urgency to focus on extracting value and synergies from acquisitions,” says Karl Deutsch, head of Middle East telecom practice at AT Kearney, the strategic-management consulting firm.

Of course, size matters. And on a worldwide scale, the region’s telcos are starting to make their mark. Etisalat and STC are now among the first MENA-based companies approaching the global top 10 in terms of market capitalization. Nevertheless, their home markets are still their largest sources of revenue. According to AT Kearney, more than 70 percent of EBITDA (earnings before interest, taxes, depreciation and amortization) of these companies still stem from their home markets. EBITDA is a widely accepted value-performance indicator in industries with standardized high-volume technology investments. According to AT Kearney’s study, some firms even lost half their shareholder value as a result of expansion.

Having realized this lesson, leading operators in the region – which include Zain (which operates in 22 countries), Etisalat (18 countries), Qtel (17 countries), Orascom (11 countries) and STC (7 countries) – are now reviewing their considerable assets.

As far as extracting value from acquisitions and mergers is concerned, history may offer some guidance. Around 10 years ago, KPN, the incumbent network in the Netherlands, acquired mobile operations in Belgium and Germany. For some time, the group incurred significant IT costs while managing varying product portfolios across the three operators – Base (Belgium), e-plus (Germany) and KPN (Netherlands). But after a couple of years, the focus shifted towards harnessing synergies and streamlining three similar product- and service-related IT operations across countries and operators.

KPN sought a balance between centralizing certain functions to improve the efficiency of their operations, while keeping others local to maintain flexibility. Consolidation allowed for coordinated launches of services across KPN’s markets, resulting not only in significant cost improvements but also in additional revenues and strategic benefits. Benchmarks from AT Kearney international show that significant cost savings are achievable through consolidation across international operations, and may bring operators savings in the range of 20 to 35 percent.

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Tags: customers, Ericsson, Etisalat, expansion, Financial Crisis, Gulf, investments, mobile phones, operators, telecom, Zain