September 4, 2013
In the telecom world, the hits keep coming as huge corporations like Verizon and Microsoft continue to swallow partners and competition alike. These developments come in the wake of important acquisitions like those in July, for example when “Sprint acquired Clearwire while SoftBank acquired 78 percent of Sprint.
At the beginning of the week, Verizon announced its most recent deal – a conquest spanning more than ten years – to shell out $130 billion to own Britain’s Vodafone, its own wireless unit (Verizon Wireless) and business partner.*
On Tuesday, Microsoft revealed plans to buy out the once dominant phone maker, Nokia, for the equivalent of $7.2 billion.**
Verizon remains confident in its huge $130 billion deal, operating on the belief that U.S. consumers’ desire for mobile and broadband services has not yet reached its peak. It remains yet to be seen whether Verizon made the right call, especially since the price tag on the deal nearly amounts to Verizon’s entire market value.
Other details of the deal: Verizon will pay $58.9 billion in cash as well as $60.2 billion worth of its shares to Vodafone, and the latter will be distributed to Vodafone’s shareholders. In addition, Verizon will sell its minority stake in Vodafone’s Italian business for $3.5 billion.
The deal will also leave Vodafone with ample funds to reinvest and buy competitors in Europe, as well as in other emerging markets. The European telecom industry, for example, has suffered from slow earnings in the midst of growing international competition. Thus, experts want carriers to invest in new high-speed data networks to help the industry compete with those in the U.S.
Microsoft’s deal closed less than a week after its CEO, Steve Ballmer, announced his plans to retire within the year. Coincidentally (or not so much, if you ask Finnish media**), this deal with Nokia could help Nokia CEO Stephen Elop to emerge as an even stronger contender for Ballmer’s replacement as CEO of Microsoft.
Though Ballmer explains the $7.2 billion deal as an attempt to move Microsoft into the gadgets and services market (much like Apple), shareholders have very mixed opinions. Many criticized Microsoft for investing in an “underperforming and marginalized corporation” that lost more than $4 billion in 2012.** In fact, after the news surfaced, Microsoft shares dropped a substantial six percent – more than $15 billion off its market value.
As a result of the deal, Microsoft could make a $40+ profit on each smartphone it sells once it officially owns Nokia (versus making less than $10 now). However, the business will probably not be fully profitable until fiscal year 2016. Plus, just to break even, it will need to sell more than 50 million smartphones a year. In comparison, Nokia sold a mere 7.4 million smartphones last quarter.
Experts predict that services to Verizon Wireless customers probably won’t change in the short term – but the long term impact is harder to predict.
This mammoth deal comes during a time when the entire telecom industry is caught in the middle of a revolution, reeling as new competition and new opportunities for wireless services emerge. In fact, wireless services accounted for $20 billion of Verizon’s revenue of nearly $30 billion in Q2 of 2013. Verizon also reportedly plans to bundle mobile broadband services with wired offerings like high-speed, fiber-optic connections.*
Overall, looking at the U.S. telecom industry, wireless business and subscriber growth has slowed in the last few years due to increasing saturation in the smartphone market. Because of this, carriers say that newer devices like tablets would help improve growth, a belief that also played a factor in fueling Verizon’s decision.
However, market research shows that most people only use tablets connected to Wi-Fi networks, not cellular service. Thus, it remains to be seen exactly how these deals will play out and how wireless consumers will react to the changes.
* Verizon Seals Long-Sought $130 Billion Deal to Own Wireless Unit, The New York Times
** Microsoft swallows Nokia’s phone business for $7.2 billion, Thomson Reuters