Let the buying begin!

Chaos in the world's financial markets continues. The IMF, which has dealt with such crises before (with varying degrees of success), takes a mildly optimistic view about 2H09 recovery.

In the meantime, risk aversion will rule and we fear many telcos and technology suppliers will adopt a bunker mentality. Distracted managers will miss opportunities arising from the chaos, and will be unprepared for recovery.

We advise that, while caution is inevitable, a more aggressive strategy is advisable for those with tangible resources available.

With the exception of a few truly global carriers - Vodafone, Hutchison, and smaller players such as SingTel Optus, Zain, MTN, and Etisalat - most of the world's service providers operate primarily within one country. Overseas investments are often managed at arm's length.

This crisis could force a change in this landscape.

In the past, national rivalries, regulatory hurdles, and other constraints limited cross-border consolidation. European INOs have aggressively bought into overseas markets but not always integrated operations to maximum effect. They have just started centrally managing procurement, loosely, over the last two to three years.

Carrier consolidation within Asia has been minimal, outside of small deals and the big changes forced by the Chinese government; very little has occurred on a cross-border basis - SingTel Optus is the clearest counterexample.

On a global scale, the collapse of Global Crossing and other undersea network-based players (e.g. FLAG) during the 2000-2 bubble burst scared investors away from business models appearing aimed at creating truly global telecoms firms.

Yet telecoms is characterized by significant economies of scale and scope. The industry is not effectively exploiting this fact, in part because it has never been forced to.

In most countries around the world, no more than three viable, well-funded facilities-based mobile providers are needed for vigorous competition to exist within any given geography.

And even with "just" three competitors - which in many industries would be an oligopoly (leading to high prices, poor service, and low innovation) - the mobile industry on the whole has pushed pricing down low, and innovation has been good, with the support of handset makers, third-party application developers, and faster radio interfaces.

Even two may be enough, with the right government incentives (ask China Mobile and China Unicom). So, regulators' fears of too much consolidation limiting competition should be conditioned by this fact. Maybe it is time to let the buying begin!

Of course, mergers are not easy. Anyone that's been through one, even a small one, knows how difficult and costly it is to integrate all the various internal IT systems, facilities, divisions, etc. together. Yet even the opportunities to pool risk, increase access to capital markets, and better negotiate with suppliers are worthy goals.

Those service providers with cash available or the ability to creatively finance should attack opportunities to grow inorganically over the coming months; there will be many.

Matt Walker, Senior Analyst

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