), and SBC (SBC
) and generating millions of dollars in fees for bankers. While M&A won't go away, it won't be nearly as important during the next industry cycle because the economics have changed.
In the future, consolidation will occur along more subtle lines. Even Internet-equipment giant Cisco Systems (CSCO
), which roped in some 70 acquisitions during the the tech boom, says times have changed. "During the next decade, strategic parterships will be as important as acquisitions were during the last decade. And they will be harder to do than acquisitions. Most of them will fail," Cisco Chief Executive John Chambers said in a briefing at ITU Telecom World 2003. The event is a giant trade show held once every four years in Geneva under the auspices of the U.N.'s International Telecommunications Union, a global organization that coordinates telecom networks, services, and standards (see BW Special Report, 10/20/03, "The Wireless Challenge").
LESS CURRENCY. Cisco has already forged marketing partnerships with rivals such as telecom-equipment maker Lucent Technologies (LU
). Frank Dunn, chief executive of Nortel Networks (NT
), offered a similar assessment during a briefing: "All of a sudden, you can't do everything by yourself or with your customer. This industry will start to partner in a very significant way."
Why the change? During the boom, deals were typically paid for with stock. Today, the share price of serial acquirers such as Cisco and AT&T (T
) are well below their highs, which means they simply don't have the currency for dealmaking. The downturn has also put CEOs in a more cautious frame of mind, and they're less likely to bet their company's future on a deal that might not work out.
During the downturn, it appeared that some cash-strapped outfits would be forced to sell themselves. But that didn't happen. Confronted with a market in crisis, businesses such as Lucent and Nortel cut costs on a massive scale and restructured by pulling out of less promising businesses. Their balance sheets look better now, making it easier to remain independent. "The odds of consolidation have decreased because everyone has cash right now," says telecom analyst Susan Kalla of Friedman Billings Ramsey & Co.
CLASHING AGENDAS. The industry's growing complexity also makes M&A more difficult. The lines between various communications and media sectors are blurring. "You no longer have a tech industry and a communications industry. They're coming together -- faster than people think," Dunn says. In such an environment, acquisitions may make less strategic sense than parternships because M&As generally consume more time and money and are less flexible.
No one can guarantee that the new model will work any better than the old one. As Chambers warns, partnerships are difficult. Companies often enter them with different agendas, making it tough to set strategy or work toward a common goal. And just getting managers to put their egos aside and work together can be tough. No wonder international partnerships between AT&T and BT (BTY
), and among Sprint (FON
), France Télécom (FTE
), and Deutsche Telekom (DT
), fell apart, sometimes in bitter fashion.
None of this is to suggest that M&A will disappear. Some telecom sectors, such as U.S. wireless, still have too much capacity, a problem that could be solved by combining several carriers. And some believe that WorldCom is likely to be acquired soon after it emerges from bankruptcy, likely later this year. One deal could easily trigger several copycats, too. But even if a few deals are announced, they won't dominate the landscape the way they once did. By Steve Rosenbush at ITU Telecom World 2003. Follow BusinessWeek's exclusive telecom coverage, only on BusinessWeek Online