Friday, 21 November 2008
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| Friday, 04 January 2008 | |
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Credit squeeze? In the ICT sector it is likely to work in mysterious ways, with an impact on everything from M&A to R&D.
The banking sector is apparently in freefall and the equity markets have gone to hell in a handcart. How very distressing. People with large brains and Gucci loafers are puzzling over whether this is or is not what is technically referred to as a ‘recession’. Cara mio. Yet the current sub-prime lending crisis and its impact on stocks and shares is interesting. There’s some evidence that telco stocks, being relatively unleveraged, have come to be regarded as ‘safe havens’ since the banks began to bleed and investors took flight. Nobody really knows how bad it will get in the finance sector. Every time rock bottom is scraped, another hole of dubious lending gapes open. The diameters of these bloody orifices are measured in billions of dollars. By now you should have picked up on the irony. The last time a sector imploded in this way, sent tumbling on the back of rash misjudgement and an unhealthy dollop of near-fraudulent reporting, it was the telecom and technology sector that fell apart. More than five years on, the scars are still apparent in the industry. Yet now that it’s the turn of the banks to struggle manfully to keep out of the U-bend, the technology stocks are suddenly looking strong and safe. This time, the boot is on the other foot. As a species, our almost obsessive relationship with broadband and wireless technologies gives a clue: a firm customer base, tangible assets, myriad opportunities for growth, etc. Side effects The core telecom sector is relatively untouched by the credit scandal. It is not immune, however, for a number of reasons. A flashback to the beginning of the decade reminds us how poor the credit status of telecom and technology giants had become, even if took some time for this to be reflected in their ratings. All the lending to these companies in the run-up to the tech implosion was in essence ‘sub-prime’, albeit that the companies involved were complicit in concealing the true state of their financial affairs. This time around, while the telcos are not exactly debt-free, they are far less vulnerable to squeezes on borrowing and, as noted above, their shares have held up well in comparison to those in the finance and property sectors. Indeed, only across-the-board flights from equity markets have hurt them at all. Where the dynamics of the telecom sector have been hit by the global financial malaise is in the arena inhabited by private equity investors (PEIs). Ironically, these so-called ‘vulture capitalists’ first got their talons into the telecom sector in the aftermath of 2001’s catastrophic crash. The PEIs took advantage of the collapse in telco equity levels to acquire assets at bargain basement prices with a view to enhancing, selling on, or stripping out value. After initially feeding on near-bankrupt scraps of second-carrier network presence, the PEIs steadily climbed the value ladder. This culminated in the private equity acquisition of fully-fledged national telcos such as TDC of Denmark and even the building of stakes in telco giants such as Deutsche Telekom. As the stakes were raised, the PEIs were increasingly forced to rely upon access to cheap finance in order to fund their stake-building and takeover ambitions. It is precisely this sort of credit that is now in short supply on a global basis. NASDAQ-quoted UK quad-play company Virgin Media was one of the first to see it hopes of a PEI-led takeover crumble when the credit crunch took hold. Knock-on effects Any retreat of the PEIs, however temporary, has several consequences. These are likely to be dominant characteristics of the market’s moves in 2008. To begin with, as has already happened, a reduction in PEI activity wipes out the upsides in share prices that had developed in anticipation of PEI-led takeovers. For obvious reasons, the possibility of a takeover drives up the share price of the target company; as that possibility recedes, that premium evaporates. In the worst case scenario, the price will fall to levels that leave the company below what was once considered a realistic valuation. This often the case where a takeover was seen as the ‘last hope’ for the company in question. In today’s climate, with the PEIs in suspended animation, this opens the door for trade buyers to take advantage of exactly the same conditions that the private equity camp has so successfully exploited over the last five years. Their priorities are likely to be quite different, however. Acquisitive telcos are likely to concentrate on: • filling in gaps in their regional or global portfolios; • market share building, brand extension and consolidation in existing markets; • cross-technology convergence takeovers. Innovation innate? The other area where the credit crisis may have in an impact is at the start-up level of R&D and innovation. Small enterprises have been responsible for many of the most significant innovations in the wireless and new media fields over the last decade or more. They have also been heavily reliant on venture capital and other forms of investment funding or credit to get started. While it is true that established hardware and software players often hoover up these small businesses as a short-cut to developing their technology portfolios, it is arguable that such interventions would come too late were it not for the availability of initial seedcorn capital. Yet be its very nature such funding is risky – and aversion to risk is likely to one of the lasting effects of the current situation. It remains to be seen whether established players can develop a more paternalistic or mentoring approach to innovation. If they don’t, the much-needed development of new applications for the coming generations of broadband and wireless could be set back to a serious degree. In other words, there is no room for complacency. Maybe that’s a suitable mindset for us all to adopt in 2008. Jim Chalmers |
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