december 4 2012 deals& dealmakers -...

Deals &DealmakersPart 12: M&A in technology, media and telecommunications

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December 4 2012

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CONTENTS

OVERVIEWTechnology, media and telecoms companiescannot afford to ignore the march of progressCHINAHow a US investigation poured cold water onTMT dealmaking in the Chinese marketCONSOLIDATIONTelecoms chiefs say regulators are stoppingdeals needed to fund investment in networksPROFILEEU commissioner “Steely Neelie” Kroes hasto balance consolidation with competitionMEDIACompanies must build strength if they arenot to be pushed around by distributorsPROFILEHow former basketball player Tim Andreescored a winner for ad giant DentsuCONVERGENCESynergy is the key to successful convergencein media and telecommunicationsOPINIONIan Livingston, chief executive, BT

CONTRIBUTORSROBERT BUDDEN is the FT’s chief mediacorrespondentJAMES FONTANELLA-KHAN is the FT’sBrussels correspondentKATHRIN HILLE is the FT’s BeijingcorrespondentIAN LIVINGSTON is chief executive of BTANOUSHA SAKOUI is the FT’s mergers andacquisitions correspondentDAN THOMAS is the FT’s telecomscorrespondent

ILLUSTRATIONSNick Lowndes

Special reports editor Michael SkapinkerEditor Hugo GreenhalghLead editor Jerry AndrewsProduction editor George KyriakosSub editor Jearelle WolhuterArt director Derek WestwoodPicture editor Michael CrabtreeGraphics Russell BirkettResearcher Hesham ZakaiHead of strategic sales Patrick CollinsSenior campaign manager Rachel HarrisHead of professional services Robert Grange

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More onlineA podcast featuringleading figures fromthe world of technology,media and telecomsdealmaking, plus aninteractive graphicmapping the latesttrends in mergersand acquisitions andThe Dealmaker columnwww.ft.com/dealmakers

DEALS & DEALMAKERS | OVERVIEW DEALS & DEALMAKERS | OVERVIEW

THEY’RE SCARED OF ME PAL,and they’re gonna be scared ofyou . . . This is our time.” Thisfictional exchange betweenMark Zuckerberg, chief execu-tive of Facebook, and SeanParker, the co-founder of Nap-ster, in the film The Social

Network, sums up neatly why, despite the slumpin dealmaking in recent years, technology, mediaand telecommunications (TMT) companies arestill active in mergers and acquisitions.

In the world of technology, remaining static isnot an option. Several years since the financialcrisis roiled global markets, many of thesecompanies are back doing M&A again. Telecomsand technology firms have provided some of thebiggest deals of 2012.

Facebook, the social networking site, has domi-nated dealmaking headlines after filing for thebiggest initial public offering on record, only tosee the value of its stock plunge. That was afterit cut a $1bn deal to buy Instagram, a fast-grow-ing online photo-sharing site.

With mounting cash piles, technology compa-nies have the firepower to do deals. Indeed, tech-nology companies have had a busy year whilemany other parts of the business world havehunkered down and focused on core businessesrather than taking on transformational M&A.

Valuations in technology M&A nearly doubledlast year and have continued to rise throughout2012, even as dealmaking has waned in otherareas. Across the sector, worldwide TMT deal-making is up 2.5 per cent for the year to Novem-ber 22, compared with the same period in 2011,bolstered by double-digit gains in cross-borderand emerging markets deals, according to Thom-son Reuters, the data provider.

The biggest proportion of dealmaking is in wire-less, telecoms services and internet software andservices, which have accounted for 40 per cent ofTMT activity so far this year. This subsector wasboosted when Deutsche Telekom launched areverse takeover of MetroPCS by its T-MobileUSA subsidiary, in a deal that would make theGerman telecoms group the majority shareholderof a combined US mobile phone operator with42.5m subscribers. Recently this deal was followedby a move by SoftBank of Japan to invest $20bnin 70 per cent of Sprint Nextel, the third-largestUS mobile carrier. That ranked as the largest out-bound cross-border Japan deal on record.

Telecoms M&A in particular has seen a jumpsince last year, with worldwide announced M&Ain the sector rising from $89.5bn in the year toNovember 22 2011, versus $129.9bn in the sameperiod this year. Intense competition and ongoingregulatory pressure on telecom operators, along-side weak balance sheets, means in-market con-solidation and disposals of non-core assetsremain a focus. “Telecom CEOs have a lot tothink about right now,” says Gavin Deane, headof TMT M&A for Europe, the Middle East andAfrica at Deutsche Bank. “Declining revenue hasbecome the norm, which means cost-cutting isconstantly needed to maintain earnings. Thistakes time and it takes attention to detail. Butsimultaneously they also have to deal with somereally pressing and fundamental issues that go tothe profitability of the whole industry.”

Markus Boser, co-head of TMT for Europe, theMiddle East and Africa (Emea) at JPMorgan says,“Many incumbent telecom operators are underpressure financially with big capital expenditurerequirements and so we would expect some ofthem to look for financing through divestments.”

Telefónica has been one of the most high-profile examples of a big incumbent operatorshedding assets. Spain’s largest telecoms groupsaid recently that it aims to cut its net debt to€50bn by the end of the year as part of anaggressive strategy to bolster its balance sheet.

This includes a potential sale or flotation of itsLatin American operations. It has already floateda minority stake in its German business thisyear and sold Atento, its call-centre operations.

In particular, telecom operators need to weighhow much and when they will invest in new 4Gnetworks. “Some markets are ready for 4G, somenot. It’s not homogenous,” says Mr Deane.“There is also how to deal with the pressuresthat come from low capital intensity fourthentrants and mobile virtual network operatorsthat enter markets with lower cost bases andundercut on pricing. It is not just Free [themobile broadband company] in France. There are

plenty of other examples in places like Polandand Spain. The good news is that cheaper smart-phones and tablets should drive data growthstrongly in the next few years so there’s reasonto be optimistic about the industry in themedium term, but for the next couple of yearstelco CEOs are going to have their hands full.”

Further consolidation in Europe is uncertain,however. The proposed takeover of France Tele-com’s Orange Austria unit by Hutchison Wham-poa faced opposition from European regulators,for example (see p6).

But elsewhere bankers see opportunities.“We expect to see a lot more consolidation in

the emerging markets, in Africa especially,” saysHervé Malausséna, a managing director atinvestment bank Moelis & Co. “The situation inAfrica for the fourth or fifth mobile operators isnot tenable as market growth slows down andArpus [average revenues per user] stay underpressure. This should provide opportunities forregional champions such as MTN, Vodacom, FT[France Telecom] and Bharti to complement theirfootprints and gain further scale.”

How change drives M&A in a restless sector

‘There is likely to befurther consolidationacross traditionalmedia sectors’

Thomas Koehrer, managing director in TMT atUBS, says fixed-mobile integration will continueto be a big theme in the sector. “We could alsosee more activity involving mobile operatorssecuring fixed [line] capacity or even betweencable operators and mobile operators.”

The media sector is also expected to be active.The year has already seen significant transaction

World view

Dan Bailey, head of TMT banking, Emea, Citi

“Intense, unrelenting competitive and regulatory pressure onlarge, incumbent telcos, combined with weak balance sheetswill mean even tougher decisions as to what are coreoperations. This will likely lead to further single-countrymobile disposals, in-country mobile consolidation... andfixed-mobile consolidation, potentially also involving cableand mobile operators. The flipside... is cash-rich, emergingmarket players with a much longer-term investment horizon,willing to take advantage of low multiples.”

confirmation by News Corp of plans to split itsentertainment and publishing business. RecentlyPenguin – owned by Pearson, which also ownsthe FT – and fellow publisher Random Houseannounced they were pursuing a merger (see p8).

“There is also likely to be further consolidationacross traditional media sectors such as publish-ing and broadcasting as companies react tosecular online threats by taking out costs,” saysDavid Lomer, co-head with Mr Boser of TMT forEmea at JPMorgan. “Ownership of the consumeris key – as media, cable and telecoms companiesmove from triple play to quad play services,they increasingly need to respond to consumerdesire for integrated software and hardwaresolutions offered by the likes of Apple, Googleand Microsoft.”

Despite such drivers for continued dealmaking,conditions remain tough.

“The price gaps between buyers and sellers arestill huge and no one wants to be seen over-paying for assets,” says Mark Lewisohn, globalhead of TMT at UBS. “Those trends are stillstalling M&A in the sector.”

Whether companies need to get bigger or smaller, standing still is not an option in technology, media and telecoms. By Anousha Sakoui

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DEALS & DEALMAKERS | CHINA

IT IS EASY TO FIND BANKERSsighing about Chinese technology,media and telecoms deals these days.Since July, when the US Securities andExchange Commission began an inves-tigation into New Oriental Educationand Technology Group, a New York-listed company that runs language

schools in China, investors have been reluctantto touch Chinese TMT initial public offerings – atraditional driver of deals in the sector.

The US regulator looked into whether the com-pany should be allowed to include profits earnedby the variable interest entity, or VIE, that oper-ates the English schools. Far from being a singlecompany’s problem, the probe poisoned an entiresector since most of China’s internet companiesuse VIEs. These include large, established playersthat have been listed in the US for many yearssuch as Sina, the web portal company that alsoruns China’s largest Twitter equivalent.

Since Beijing does not allow foreign investorsto control ownership in the industry, these com-panies are organised around VIEs – firms thatuse contracts to grant an offshore holding com-pany the right to control their business but donot give the offshore investors an actual stake.

Last month, New Oriental shares recoveredsome ground after the company announced thatthe SEC had approved various accountingchanges it made in response to the investigation.

However, the scare has almost completelyhalted the flow of new Chinese IPOs. China-related equity capital market deal value wasdown to $4.173bn as of November 19 from$9.726bn for the same period last year, accordingto Dealogic.

Only three firms from China have gone publicin the US this year. Vipshop, the ecommerce busi-ness, and Acquity, a digital marketing company,rose above their IPO prices but little has followedsince April. YY, a social media platform companythat raised $81.9m in November – the first Chi-nese US IPO in seven months – prompted somecautious optimism. YY priced on the low end ofits range but the shares closed 7.7 per cent up onthe first day of trading. However, bankers saymore is needed to restore confidence.

“The pendulum has swung too far, butalthough... shock over the New Oriental case hassubsided, it will take much more to get IPOs –the traditional main driver of deals in the TMTsector – going again,” says one Hong Kongbanker. “First, the scepticism over governanceand regulatory issues needs to wash off. Then weneed to see advertising recover, which has been abit sluggish... And eventually, we need to startseeing deals that work – most deals of the pasttwo years are now trading below their IPO price.”

Observers believe that the next meaningfulChinese technology IPO could well come fromAlibaba Group, the company that runs China’slargest ecommerce empire and was responsiblefor a big chunk of deal volume this year with the

taking-private of Alibaba.com, the originally HongKong-listed subsidiary that operates the com-pany’s business-to-business online marketplace.

“I would expect the Alibaba Group IPO to hap-pen in mid-2013,” says the head of technologybanking for Greater China at a US bank. China’slargest online retailer, 360buy, plans a US listing,but is unlikely to beat Alibaba to its move.

And yet, the ecommerce sector has alreadykept deals flowing. Alibaba raised $7.6bn in debtand equity in September in what the companysaid was the largest-yet private financing for aChinese pre-IPO company from a group of Chi-nese and international investors. The funds arebeing used to help the group unwind its compli-cated relationship with Yahoo, the US internetcompany that was once one of its largest share-holders. Meanwhile 360buy is also in the middleof another round of fundraising.

“The intense competition among Chinese ecom-merce companies for market share, whichrequires a lot of cash, is another trend drivingChina TMT deals,” says Brian Gu, head of Chinacorporate finance and M&A at JPMorgan.

ON THE MERGERS ANDacquisitions front, domestic dealvalue has surged to $28.57bn this yearto date, from $14.2bn for the sameperiod in 2011, according to Dealogic,

as consolidation in sectors such as software serv-ices and outsourcing is under way. But outbounddeals have slowed to $1.52bn from $1.96bn lastyear in a sign that Chinese companies “goingout” is still focused mainly on industries such asenergy and resources.

Some bankers believe leading Chinese internetfirms such as Tencent, which owns the world’slargest instant-messaging service by users, andBaidu, which runs China’s largest online searchengine, will start making bigger acquisitionsabroad as they try to penetrate foreign markets.

“You already have major companies that havedominated their market in China and find it diffi-cult to further increase their market share,” saysone technology banker.

“We are going to see acquisitions of knowhowin developed countries, and of market share in

developing countries with large populations.”But none of these potential deals is likely to

reach the size of several billions of dollars. “TheTMT sector is unlikely to be the source of a hugeamount of outbound M&A,” says Mr Gu.

China’s Lenovo, the world’s second-largest PCcompany, which acquired a stake in Japanesecompany NEC’s PC business last year andannounced a deal for Brazilian electronics makerDigibras in September, is expected to producemore deals – most likely a bid for a commercialPC target to boost its market share in Europe.

Another potential source of big outbound dealscould be telecoms and telecoms equipment, butthis has become more complicated since a USCongressional panel called for the exclusion ofChinese networking gear companies from the USmarket. “All these assets in the industry, likeMotorola, BlackBerry or 3Com, may becomeavailable to other bidders but they will remainoff limits for Huawei,” says one banker.

A public listing allowing Huawei Technologiesto lay its shareholder structure out in the open,thus countering suspicions that it might be con-trolled by the Chinese government or military, isnot seen as an option. “Huawei has no plans togo public,” says Scott Sykes, company spokes-man, trying to lay to rest persistent rumours.

Bankers who have looked at the company sayits complex shareholding history and manage-ment’s unwillingness to unravel it in detailmakes an IPO practically impossible.

“In addition, the strong political suspicions thecompany faces in a market as vital as the USmean this would be a very hard sell to inves-tors,” says a technology head of a western bank.

The one area that is full of promise, however,is taking-private TMT deals. Jason Jiang, chair-man of outdoor advertiser Focus Media, offered inAugust together with Carlyle and a number ofother private equity firms to buy out the com-pany’s US-listed holding in what is set to becomeChina’s largest-yet leveraged buyout deal.

“There are more such take-private deals tocome,” says Mr Gu. “The easy pickings may beover, but you can still draw up a decent list ofcandidates for such deals, including billion-plusmarket cap companies.”

A probe by US regulators has damped TMT dealmaking – but what will happen next? By Kathrin Hille

After the storm

Joaquin Rodriguez Torres, managing director andhead of technology, media and telecom investmentbanking, Asia, Deutsche Bank, Hong Kong

“IPOs, which have traditionally been the maindriver of China TMT deals, have been lacking thisyear. Instead, we have seen major taking-privatedeals due to low valuations and the cheapavailability of debt. As you have a lot ofcompanies trading at single-digit Ebitda [earningsbefore interest, taxes, depreciation, andamortisation] and many of those are still majority-owned by pre-IPO founders and investors, that isgoing to continue to be a trend.”

World view


DEALS & DEALMAKERS | CONSOLIDATION

A heavyweight contestDEALS & DEALMAKERS | PROFILE

Telecoms chiefs and regulators are clashing over the need for consolidation amid tough times and technological change. By Dan Thomas

AT AN FT CONFERENCE INBrussels in October, chiefexecutives of the big Europeantelecoms groups were unusu-ally vocal in their criticism ofregulatory policy on mergers inthe region.

The industry’s top executivestook the stage to express dismay about the atti-tude towards consolidation in the market, withparticular vitriol from France Telecom's chiefexecutive, Stéphane Richard.

“The main problem we have today in the Euro-pean environment is competition policy,” said MrRichard. “In-market and cross-border market con-solidation is very difficult. We self-prevent thiskind of operation because we know that if we hadthe crazy idea to implement in-market consolida-tion we would be prevented by Europe.”

His anger is born out of a frustration that con-solidation would normally be the inevitable out-come in recession-hit markets where revenuesare dropping sharply even as the need increasesto invest billions of euros in next-generation fibreand 4G networks. This, say executives in theindustry, is putting the region at a competitivedisadvantage to the US and Asia, where high-speed networks are becoming the standard.

Jean Abergel, global co-head of media & com-munications at Morgan Stanley, says: “Telecomsis a capital-intensive industry, in particular dueto the necessary investments to fund next-genera-tion infrastructure. In that context, profitabilityand returns are closely linked to scale and capi-tal efficiency, which we see as key drivers offuture M&A in the sector.”

But European competition regulators have sofar favoured arguments that lower prices throughhaving at least three, and mostly four, operatorsare better for the consumer. In particular, regula-tors have tried to protect what has becomeknown as the “maverick” in the market – nor-mally the smallest and cheapest of the operatorsthat competes mainly on price.

One executive at a European telecoms groupwarns that the regulator is favouring market the-ory over market reality. The arguments havefound some sympathy in Brussels, according tothose close to the EU, in particular within thedigital agenda commission headed by NeelieKroes that is tasked with pushing superfastbroadband access across the region, an ambitionthat has already missed crucial milestones alongthe way to a 2020 target.

Ms Kroes wants the private sector to invest inthe networks to help make this happen, and hasalready indicated flexibility over pricing in futureto allow some inflation back into the market.

In France the decision to grant a fourth mobilelicence to Iliad is under scrutiny given warningsthat this has led to job losses in rival groups,with the government recently asking the competi-tion tribunal to look at whether the conditionshave been fairly agreed.

The costs of competition against job losses isbeing scrutinised publicly for the first time inany large European market. But against a soften-ing backdrop, Bill Kennish, head of TMT for

Profile How the EU’s ‘Steely Neelie’ Kroes got her nickname

‘She will listen toeveryone... you needto have a goodargument, though’

Telekom Austria is the biggest player, followedby Deutsche Telekom’s T-Mobile. Although thecombined Hutchison Whampoa-owned groupwould still have an Austrian market share of lessthan 25 per cent – seen as a cut-off for competi-tion complaints – the very fact that it is a movefrom four operators to three in a relatively devel-oped telecoms market is seen as significant.

Joaquín Almunia, the EU competition commis-sioner, has said that Hutchison, which is control-led by Hong Kong billionaire Li Ka-shing, wouldneed to offer sufficient concessions to ease regu-latory concerns and allow clearance of its bid forOrange Austria.

There are remedies on the table, such as open-ing the networks at a cheaper rate for wholesaleaccess to competitors, as well as the sale ofsome spectrum.

One person with knowledge of the situationsays: “It is moving towards allowing consolida-tion but with clear guidelines about the process.If Austria happens, then the industry wouldsee it as a good signal for other countries.This is totemic – and the commission knows it,which is why it hasn’t referred it back to thenational regulator.”

If blocked, it would be a warning signal formany of the long-mooted deals of consolidationin Europe. As Mr Richard told the FT conference:“We can do many things and bring a very impor-tant contribution to the development of the Euro-pean economy but we need... a deep, deep changein competition policy.”

instead list a stake in its business suggests thatthis deal will be off the table for some time. Evenso, there are still candidates for consolidation, notleast Yoigo, the Spanish group, that has attractedinterest from France Telecom and Vodafone.Indeed, those with knowledge of the business saythat they could be the only realistic buyers.

Vittorio Colao, chief executive of Vodafone,refused to comment on Yoigo at a recent confer-ence, but added that, in general, the company“always looks at in-market consolidation deals”as well as expansion in emerging markets.

MEANWHILE IN AUSTRIA, THEmerger of two small mobile opera-tors has become a test case aboutwhether market consolidationwill be allowed in the European

telecoms sector. The €1.3bn takeover of OrangeAustria, France Telecom’s business in Austria,by Hutchison Whampoa has taken on an unlikely– and, for the companies, unwelcome – signifi-cance given the struggle that the two groupshave had in pushing the deal for approval by theEuropean competition watchdog.

The case is being scrutinised by the industryfor signals of any softening in the stance fromthe European regulators, which have preventedin-market consolidation of businesses that thegroups claim to be necessary to buttress fallingprofits in recession-hit Europe.

The Austrian case is unusual in that the “mav-erick” is pursuing the consolidation, given that

Europe, the Middle East and Africa (Emea) atMacquarie Capital, says many attractive mobiletargets would be ruled out on competitiongrounds. “Everyone likes in-market consolidationas there is a significant free-rider effect resultingfrom the lower level of competition for all. Andoften it is the disrupter that gets taken out insuch deals. Unfortunately, this has largely playedout in European markets.”

Dan Bailey, head of Emea TMT at Citi, says:“Everyone has gone through every country tolook how to do this. It is not just about marketrepair – there are real cost synergies so compa-nies can justify paying control premia and there-fore higher multiples. It is a double benefit butgetting it done has become much more difficultdue to more aggressive regulators.” He insteadpredicts more active network sharing – a quasi-merger of infrastructure that allows the regulatorto be content with competition at the retail level.

Angel Vilá, finance director of Telefónica, con-firmed recently that it was looking at networksharing in other countries following a successfularrangement with Vodafone in the UK. “Itdoesn’t make sense to have so many networks inso many countries,” he says. “It is moving to amarket in the UK where there are four [mobilenetwork operators] but two networks.”

The list of potential mergers that could havehappened is long, with the most recent being thelong running “will they/won’t they” talks overthe respective German businesses owned by Tele-fónica and KPN. The decision by Telefónica to

networks gradually being built across theregion. Earlier she had threatened to force theincumbents to lower their prices.

The compromise was one that satisfied bothlarge and small telecoms operators and reflectedher liberal values and efforts to find a middleground that would be fair for consumers as wellas for companies.

The next big challenge for Ms Kroes will befostering consolidation in the telecoms sectorthroughout Europe. “It’s one of Ms Kroes’s topgoals,” says a senior aide of the commissioner.

Consolidation is the top goal for many Euro-pean telecom groups too, given that many areunder financial pressure from competition ina sector that has hundreds of players – com-pared with the US, where there are a handfulof operators.

However, Ms Kroes might find herself at log-gerheads with many executives over what kindof consolidation she wants to promote.

“Neelie is definitely in favour of consolidationbut she is also in favour of competition,” a per-son close to her says. “She will back companiesbuying other groups in countries where theyare not present but she will not be supportive

of those trying to expand in marketswhere they are already present as that

would harm competition.”Finding a balanced approach

to facilitating mergers andacquisitions in the overcrowdedtelecoms sector will be the lastbig challenge before Ms Kroes’stenure ends in 2014. Whether

the outcome will be the onecompanies desire will dependon how good their argu-ments are vis-à-vis “SteelyNeelie’s” vision for thesector.James Fontanella-Khan

W HEN NEELIE KROES WASappointed as the EU’s top anti-trust official in 2004, criticswarned that the EU commis-sioner’s strong ties to business

would make her a weak defender of competitionprinciples in the region.

But the fiery Dutch politician quickly provedher detractors wrong. Ms Kroes showed steel intackling Microsoft, then the world’s largest tech-nology group, forcing it to respect the bloc’s“level playing field” to do business in Europe.

Ms Kroes’ tough stance with Microsoft aswell as large banks earned her the nickname of“Steely Neelie” – a title she retains since tak-ing over the role of leading the EU’s digitalagenda in 2010.

A European telecom executive, who has had anumber of tiffs with Ms Kroes, admits that the71-year-old commissioner is an arduous but fairnegotiator. “She’s a tough cookie, but one that Irespect,” says the executive.

Ms Kroes has never shied away from a fightwith Europe’s largest telecom groups over howto regulate the sector. But while her enemiesmay disagree on policy, they appreciate heropenness and willingness to hear all sides ofthe argument.

“We’ve often had divergent views on keyregulatory matters but Neelie is one of thosecommissioners who will listen to everyoneand, if convinced, she’s not scared of changingher mind… you need to have a good argumentthough, she won’t take b*******,” says anotherexecutive.

For example, Ms Kroes backed down earlierthis year on a threat to cut pricing of largeEuropean telecom groups’ networks toencourage investment in the conti-nent’s ageing infrastructure.Under the new proposals, MsKroes said the pricing ofaccess to the old copper-based networks wouldnot be forced lower forsmaller rival groups,while incumbenttelecoms groupswould have free-dom to setcharges on newerhigh-speed fibre

Tough talker:Neelie Kroes is tryingto strike a balancebetween consolidationand competition AFP/Getty

Tony Worthington,Global head of TMT, Standard Chartered, London

“In Asia, the Middle East and Africa, market consolidationhas never really taken hold as there are normally onlythree or four operators, which is where the regulatorsnormally draw the line. There are some clear exceptions,and here we expect to see consolidation. The mostobvious is India, where there are 13 operators. This needsto shrink to five or six in our view, and there are at leasttwo major transactions that we anticipate next year.”

World view


DEALS & DEALMAKERS | MEDIA

Media companies need to strengthen their positions so they can successfully negotiate with powerful distributors. By Robert Budden

Dealing with digital Darwinism

The big marketing services operators areacquiring skills across the digital spectrum,from online marketing and social media to datameasurement.

“Now there are so many ways to reach thecustomer, so internet advertisers want moreaccountability and measurability,” says MrAnselm. “They want to know who saw it,how many people saw it, what type of demo-graphic they were and what impact it had ontheir sales.”

These developments are set to run and run.Big advertising groups such as Publicis and WPPnow receive about a third of their revenues fromdigital advertising and services. But as advertis-ing becomes increasingly online and mobile, sowill this share of revenues.

What remains to be seen is whether there willbe more transformational M&A between the “bigsix” marketing services groups.

Such significant deals have already emerged inthe music and book worlds. Some senior execu-tives in the big global ad groups think it is onlya matter of time before they emerge in themarketing services world too.

DEALS & DEALMAKERS | PROFILE

Digital sales have ledto a dramatic shift inpower from contentowners to distributors

Over the past six years, Dentsu has made 16acquisitions, many of them in the US. MrAndree describes the company’s M&A strategyas “fifth-mover advantage”, saying that it hassought to avoid the pitfalls found by manyof its rivals.

UNDER MR ANDREE’S GUIDANCE, THEfirm acquired US branding and designagency Attik in 2007, independent shop

Mcgarrybowen in 2008 and renowned digitalagency 360i in 2010.

This has also given Dentsu – Japan’s largestadvertising group, which dominates the localadvertising scene – much greater sway over theUS marketplace. Six years ago, Dentsu’s top 15clients were all Japanese companies. Today, 13of the group’s top 15 clients are US-based,including Verizon, the mobile operator, KraftFoods and JPMorgan Chase, the bank.

Some rivals have been sceptical of Dentsu’soverseas expansion, citing difficulties inmerging the different corporate cultures of theUS and Japan. But Mr Andree appears to beone of those few executives as comfortable inboth. As Dentsu’s first non-Japanese executiveofficer, he would have to be.Robert Budden

Profile Tim Andree delivers a slam dunk for an ad agency

T IM ANDREE TOWERS OVER THEadvertising industry in more waysthan one. “Tim-san”, as he is knownby his colleagues, stands out for hissheer size: at almost 7ft tall, the sen-

ior vice-president at Dentsu is hard to miss inthe Japanese ad giant’s offices.

But this year he also made his mark on theM&A scene in one of the largest advertisingdeals ever struck. In July he oversaw the bold-est overseas foray in the 111-year history of thefirm: Dentsu agreed to buy Aegis, the UK-listedad agency, for £3.2bn in cash.

The acquisition was a brave one by thisformer professional basketball player. The com-bined group will create the largest ad agency inAsia and the second largest in western Europe.It will also become the fifth largest in theworld, challenging the market lead held byOmnicom, WPP, Publicis and Interpublic. And itwill give Dentsu deeper digital strengths, asAegis has built up expertise in this rapidlygrowing market segment.

The deal confirms a change in strategy forthe Japanese firm. Its past record in interna-tional expansion has been patchy at best. In2000, it acquired the renowned London-basedadvertising agency Collett Dickenson Pearce,which dated back to the 1960s and whosealumni included Sir Alan Parker, the film direc-tor, and Lord Puttnam, the film producer, onlyto ditch the name in 2009.

A spate of alliances in the US also failed togain traction. And in February, a near decade-long partnership with Publicis, the world’s third-largest marketing services group by revenues,came to an end. Dentsu was disappointed overits influence in the tie-up and resolved insteadto take full control of its overseas interests.

Mr Andree, an American, was selected tooversee the group’s expansion. This formersenior vice-president of marketing at theNational Basketball Association joined Dentsusix years ago with initial responsibility formanaging one of Dentsu’s US ad agencies.

A Japanese speaker, Mr Andree’s first job wasworking with Toyota as a corporate manager inexternal affairs before – after more than a dec-ade at the car giant – taking a marketing posi-tion with Canon, the consumer electronicsgroup. Both companies are clients of Dentsu.

The company’s M&Astrategy has soughtto avoid the pitfallsfound by its rivals

IF THERE IS ONE WORD THATsummarises the changes taking placein media today, then it is “digital”.From music to books and TV to adver-tising, consumer habits are changingfast. Companies failing to adapt tothese shifts are being left behind.

The choices they face are blunt:they must grow digital expertise in-house andthey need scale – frequently achieved throughmergers and acquisitions – to beef up theirweakened negotiating positions in the face ofpowerful new distributors.

Take music, for example. The sector haschanged almost beyond recognition over the pastdecade. Today virtually all UK single sales – withthe exception of a handful of promoted tracksaround Christmas – are sold digitally. Andalthough album sales are still predominantlyphysical, digital sales are growing significantly.Indeed, digital music sales in the UK could welltop physical sales for the first time this year.

The consequences have been far-reaching andmusic publishers have been forced to adapt tothese shifts as album sales, the traditional bigmoney spinners for the labels, have slumped asconsumers have flocked to single tracks in thedigital era.

This has also led to a dramatic shift in powerfrom content owners to distributors. In the past,music publishers dealt with multiple retailers,from smaller independents to big chains. Buteven these retail giants controlled only a smallproportion of overall distribution.

Today, with the rapid growth of digital, newsuper-distributors, such as Apple, have emerged.And this shift is changing the power base inmusic, giving greater influence to the emerginggiant digital distributors.

In both Sony’s $2.2bn purchase of EMI’s musicpublishing business and Vivendi’s acquisition ofEMI’s record labels, achieving scale to negotiatebetter with Apple were cited as key motivators.

Similar changes are happening in book publish-ing. Today, close to 20 per cent of the US adultpopulation owns an ereader device, according toresearch firm eMarketer. This is continuing torise and, by one estimate, ebooks will account formore than half of US publishing revenue by 2016.

power to avoid being squeezed by Amazon andits tough negotiating tactics.

The most active area for M&A activity, how-ever, is in the advertising world – and it is easyto see why. As consumers shift online, so doesadvertising. Despite sluggish economic growth inthe developed world, media services groupZenithOptimedia has predicted internet advertis-ing will grow 15 per cent annually between 2011and 2014. By 2014, internet advertising willaccount for 21.4 per cent of all advertising spend,up from 16 per cent in 2011.

BIG MARKETING SERVICES GROUPShave been quick to follow. Over thepast five years, French advertisinggroup Publicis has almost doubled itsdigital revenues to €1.8bn, according

to Clarity, a corporate finance adviser specialis-ing in media and technology. Over the sameperiod, digital revenues at advertising giant WPPhave climbed 168 per cent to £3bn, it calculates.

M&A has helped in this growth. Last year, the“big six” advertising companies completed 98deals, spending £1.8bn, Clarity says. It predictsthat activity in 2012 will be even higher.

“A lot of the big acquisitions we’ve been seeingare about big groups targeting capabilities,” saysMarcus Anselm, partner at Clarity. “They can getcapability a lot more quickly by buying a teamthan they can do so organically.”

And some of these bigger deals – WPP buyingAKQA, Publicis purchasing LBi or Dentsu acquir-ing Innovation Interactive – have been aboutgaining digital expertise.

On the positive side, technological innovationhas made it easier than ever to buy books. Andwith owners of ereaders typically being muchbigger consumers of books, new ebook-hungry,digitally savvy consumers are emerging.

The downsides, however, are strikingly familiar.Again a single retailer – this time Amazon – dom-inates digital distribution. Amazon is also a toughnegotiator. In the past it has been known tocease distributing certain publishers’ books iffavourable commercial terms were not reached. Inphysical book sales this was a problem – Amazonhas about 25 per cent of this market in the US.But in the digital world it could prove suicidal. Inthe US, Amazon commands a 60 per cent share ofthe US ebook market.

This is why scale is so important. In October,Penguin, owned by Pearson, which also owns theFinancial Times, and Bertelsmann-owned Ran-dom House announced they were pursuing amerger in a move that will give the combinedgroup about a quarter of the global English-language publishing market.

Amazon would find it much harder to walkaway from such a powerful content owner.

Since this deal was announced, it has alsoemerged that Rupert Murdoch’s News Corp isconsidering a bid for publisher Simon & Schus-ter, that could add the CBS-owned book businessto its HarperCollins arm.

For book publishers the question is whether,through M&A, they can retain enough market

For book publishers the questionis whether, through M&A, theycan retain market power to avoidbeing squeezed by Amazon

This year he made hismark with one of thelargest advertisingdeals ever struck

Standing tall:Tim Andree isDentsu’s firstnon-Japaneseexecutive


DEALS & DEALMAKERS | CONVERGENCE

THE CONVERGENCE BETWEENthe telecoms and media sectorshas been disrupted in recentyears by rapidly growing tech-nology groups that require theaccess and content to push theadoption of their own devicesand internet services. The flow

of profits from traditional business in media andtelecoms to Silicon Valley start-ups that havespawned dotcom heroes such as Google andApple has also meant that the power increas-ingly lies away from these once-mighty con-verged models of content and distribution.

The web has been a great leveller, with inter-net companies able to have almost instant low-cost access to customers who have adopted thelatest mobile devices. This has brought a level ofglobal competition to previously local telecomsand media markets.

Apple has become the most obvious successstory of modern convergence – a company thatstarted in technology, branched into telecomsacross its devices and has developed a mediamodel based around its iTunes store.

In a sense, there is no greater sign of the con-verged interests in the technology, media and tel-ecoms (TMT) market than the universal jealousyof Apple’s achievements and eagerness to mimic,partner or ride on its success.

Most obviously, these include close rivals suchas Google, with its suite of Android handsets andtablets and internet services, and Microsoft withits Windows platform. These platforms have beenput together within the companies but alsothrough many bolt-on acquisitions for the neces-sary expertise, technology and patents.

Their success and the resulting shift of investorinterest and profits to the US has come at a timewhen more traditional models are being ques-tioned. Some of the largest potential deals being

The case of Vivendi underlines that real synergy is essential if the convergence of media and telecoms is to work. By Dan Thomas

The same wavelength

DEALS & DEALMAKERS | OPINION

MANY WERE TAKEN BY SURPRISEthis summer when BT won therights to screen Premier Leaguefootball on television. Why werewe spending hundreds of millions

of pounds to showcase the likes of Wayne Rooneyand Mario Balotelli? What did it have to do withselling broadband and phone calls?

The reason we bid was “convergence” – thecoming together of the way in which people usephone, broadband and TV services. We have seena huge shift in how people communicate andconsume media content.

The shift was there for all to see at the London2012 Olympic and Paralympic Games, where wehad to provide seven times the bandwidth availa-ble at Beijing. At the time of the 2008 Games, theApple app store was in its infancy, Androidphones had not been released and the handful oftablet devices that existed were a sideshow.

These devices are now near ubiquitous. Oneconsequence was that the number of tweets sentin one day during the London Games exceededthe total for the whole of Beijing 2008. Anotherwas that I was able to watch Tom Daley divingin the Aquatics Centre live in HD on my iPadwhile sitting beside the running track in themain stadium.

One of the overarching changes we are nowseeing involves bringing the world of your com-puter to your TV. Broadband-enabled TV meansgreater consumer choice and also new services,such as the ability to research programmes orshare views and recommendations with friendsonline, via the TV screen, while you view.

The technologies and services now availablepromise new horizons in education too. The filmproducer, David Puttnam, for example, has takento giving lectures from his home in Ireland to

students in Australia, 10,000 miles away. Not solong ago, any such video-link experience mighthave been jittery and uncompelling. Not so today.

For my industry, this revolution is a hugeopportunity. That is why BT is investing heavilyin fibre optic cable to speed up broadband – thefoundation for internet-connected TV and WiFi.Good progress with this programme has been keyto the UK claiming second place for broadbandspeed in the G8, just after Japan. But we all needto go on anticipating change.

That means acknowledging that almost a thirdof UK households now buy their telephony,broadband and pay TV from a single provider.That proportion will go on growing, thanks tonew innovations and the proliferation of mediacontent available online.

We began our response years ago with its ownpay TV service, and evolving consumer habitswere the driver to invest further. We thereforetook part in the Premier League’s blind auctionof rights, and also went on to secure rights forfour years to show Aviva Premiership Rugby andthe football leagues around the world.

The launch of our sports channels next yearwill bring more competition to the market, whilethe rollout of fibre broadband will make watch-ing sport far more interactive.

What we are seeing here is markets operatingas they should. Companies compete, invest andinnovate, making profits by delivering greaterchoice and better value. What should not be over-looked, however, is one area of the British envi-ronment where market dominance exists, and willcause increasing problems unless addressed.

This is in pay TV content, where one companyowns most of what is available. Regulation intelecoms rightly means Sky has an absolute rightto buy BT’s network service to provide telephoneand broadband at regulated prices, but its rivalscannot do the same with Sky’s content.

OF COURSE, SKY’S RIVALS – COMPANIESsuch as Virgin and TalkTalk as well as BT– can in theory bid against it in content

auctions. Even for a company as large as ours,however, beating a dominant incumbent is nearimpossible. This applies more to those with fewerresources, and thus limits the scope of new orsmaller companies to offer innovative services.

In a converged world, communications compa-nies should surely be able to offer TV services aseasily as TV companies can offer broadband, ormobile companies can offer fixed line services.What we have is a situation where the regulators,Ofcom and the Competition Commission, havedeclared the UK’s pay TV market to be broken.Anyone who doubts this needs to ask themselveswhy the story of unregulated pay TV pricing isso different from that of broadband in Britain.

Broadband prices have tumbled, speeds haveincreased and the UK is recognised as having oneof the most competitive markets in the westernworld. By contrast, pay TV prices have increasedyear by year in a market where, in my view, wesee a dominant player with 60 per cent of retailcustomers charging high prices for services, thenusing the profit to outbid rivals at content auc-tions. Having won at the auction, the incumbent’sposition is stronger than ever, and an unvirtuouscycle becomes more entrenched.

Britain’s coalition government is, thankfully,committed to new legislation, that will hopefullyaid convergence. Jeremy Hunt, the former secre-tary of state for culture, media and sport,observed that Britain has a Communications Actthat does not mention the word “internet”. Heargued that an upgrade is required, to move leg-islation into the era of convergence.

His successor, Maria Miller, will now oversee aconsultation – one that many of us hope willacknowledge both the advent of the internet andthe realities of convergence. Adjusting to thenew era in communications is not for the privatesector alone, but must involve regulators andgovernment, who need to ensure that regulationkeeps up with the accelerating pace of change.To comment go to www.ft.com/dealmakers

Government needs toensure regulationkeeps up with change

talked about in the market have come about fromthe expected unwinding of the convergence modelthat underpinned the creation of Vivendi.

The French group has announced a root-and-branch review this year that is expected to resultin the separation of its telecoms and media busi-nesses. Critics say the model never worked as awhole, given the lack of synergies.

Philippe Capron, Vivendi’s chief financialofficer, says: “The previous structure was notunderstood by the market [and so] we needed achange in tack. Vivendi has been a product ofhistory as much as design. We may not be thebest owner for each of our assets – that is at thecentre of what we are thinking about.”

This example, says one banker who asked notto be named, shows the key to successful conver-gence deals: not just striking them but also man-aging to assimilate them into a unified businessstrategy where the various parts work with eachother rather than alongside.

In the case of Vivendi, it appears all too easyfor the group to sell its various telecoms assetsgiven the lack of crossover with the crown jewelsof its music business. This has meant bankersbeing appointed or lined up for the sales ofMaroc Telecom and GVT in Brazil, and an openmind as to the future of SFR.

Vivendi is not alone in questioning the extentof synergies across sectors. Other fixed-line tele-coms businesses such as Deutsche Telekomappear to have placed less emphasis on winningexpensive sports rights, for example, while Tele-com Italia is in talks to sell its media arm.

However, there are still some who see theadvantages in traditional telecoms and mediaconvergence in order to create customer loyaltythrough value-added services that can protectand, ideally, grow their core operations.

BT in particular will be one of the biggesttests of a converged media and telecoms model,having spent close to £1bn on sports rights inrecent months. The strategy appears twofold,with a stated desire to bring more customers toits TV platform but also to fight more equallyagainst Sky, a company that has successfullymerged exclusive content with technological

Companies now desire to be allthings to every customer ascompetition stretches across allthree TMT sectors

Ian Livingston: BT’s chief executive on convergence in TMT

We have seen a huge shift inhow people communicate andconsume media content

Dougal Scott, deputy head of strategy, Sky

“We’ve known for some time that our customers prefer tobuy home entertainment and communications from a singleplace. But [they] also now expect to watch video andaccess content over a wide range of connected devices. Asa consequence... customers are consuming record amountsof video, which is good news for content creators. Butwhile new technologies will continue to evolve and shapenew customer behaviours, we shouldn’t lose sight of thefundamental importance of content.”

World view

delivery, and is now entering BT’s traditionalheartland in telecoms with broadband services.

Other telecoms companies also say that contentis still important for the future. Vittorio Colao,chief executive of Vodafone, says that the com-pany has given up on attempts to create its owndigital “ecosystem” – another area where tele-coms groups have tried to make the connectionbetween the industries – but is looking to createcommercial partnerships with content owners.

When EE launched its 4G service in the UK inOctober, it came with a bundle of free content,including a free movie download each week andstreaming music and TV, to draw people to thenetwork. With such high-speed networks, voicecalling itself becomes just another data servicealongside video and applications.

However, unlike BT, these models do notinvolve much investment. Indeed, Olaf Swantee,chief executive of EE, describes it as an “asset-light” model that allows customers to benefitfrom content without having to acquire therights. He says that this strategy is more aboutcustomer retention than driving revenues.

Tony Worthington, head of TMT at StandardChartered, says the success or otherwise of con-vergent TMT business models depends on themarket, and whether or not managements havea clear model of synergy delivery. History hasproven, he says, that the ones that have to carrylegacy infrastructure have struggled more asinvestors have taken a dimmer view on the

pipes and cables compared to the “asset-light”approach of Apple.

Corporate advisers say the problem has beenthat the infrastructure-heavy elements of telecomshave struggled to break down the walls into theother sectors partly because they lack the morenimble mindset found in technology and media.“The needle does not move for these giants veryeasily,” says one adviser. “And teams quickly getlost and forgotten about within the group.”

In Spain, Telefónica has tried to correct thisfailing by creating a standalone digital unit,which is linked to the company’s venture capitalfunds that invest in and buy digital start-ups,although again this has yet to prove itself a suc-cess within the Spanish telecoms company.

But it is unlikely that TMT convergence willever end given that many companies now desireto be all things to every customer as competitionstretches across all three sectors. It is ironic thatpart of the reason why the convergent modelthat has underpinned many traditional M&Adeals in the past has become less persuasive isbecause TMT itself as a sector has becomeincreasingly blurred.

Indeed, the next level of convergence wouldappear to be outside TMT, in markets such asfinancial services, given a race between thelarge telecoms groups and technology companiessuch as Google and Apple to launch “mobilewallets” that can offer financial services acrossmobile devices.

12 FINANCIAL TIMES TUESDAY DECEMBER 4 2012

december 4 2012 deals& dealmakers -...

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