Expect ICT M&A slowdown

It's a buyer's market for ICT businesses with cash in the bank; however, analysts say mergers and acquisitions (M&A) will be few and far between this year.

Dimension Data, Altech, Datacentrix and EOH all have war chests at the ready should a good acquisitive deal come up, says Irnest Kaplan, MD of Kaplan Equity Analysts.

Last year was a bumper year for the ICT M&A market, with several high profile deals. Vodacom bought into Gateway Communications and StorTech. MTN snapped up iTalk Cellular and Verizon Business SA, deals that came to fruition this year. On the technology side, Dimension Data took on Datacraft.

This year, Kaplan expects the most excitement will come from communications companies. Voice businesses will start acquiring data companies as convergence becomes more of a reality, he adds. Already, MTN has purchased Verizon to secure a stake in that arena.

Consolidation will gather momentum over the next five years, as cellular and telecommunications companies start to hedge their bets for when voice over IP goes mainstream, Kaplan notes.

However, it is too early for consolidation in the broader ICT industry, he adds. He expects firms to start looking at acquiring, should companies produce less robust financial results come the end of the year.

At the moment, balance sheets are sound, making acquisition in the sector less likely, he says. “I don't think the broad market is suffering the woes that Faritec is seeing.”

Faritec has been on a financial freefall since last year, with no cash available to it and dismal results which forced the company to recapitalise.

KPMG partner in corporate finance Neeraj Shah says technological changes and new products could encourage companies to buy out smaller firms that would give them an advantage.

However, Shah does not see much activity happening in the local market as the credit crunch hits home. He says the days of South African companies with deep pockets marching onto the continent to take up new mobile licences are over, for now.

Instead, Shah says, companies are more likely to bed down acquisitions, and consolidate minority interests, such as when Telkom bought out the rest of Multi-Links earlier this year.

In addition, the difficult regulatory environment, and uncertainty over the future after the change in government, will make companies think twice before making a move, explains Shah.

Frost & Sullivan senior ICT industry analyst Lindsey Mc Donald does expect some consolidation. However, she sees activity being limited to smaller companies that are not listed on the JSE.

Again, these buyouts will only start picking up speed near the end of the year, with more aggressive uptake towards the end of 2010, she says.

For the listed businesses, Mc Donald says consolidation will be postponed until an improvement in the economy is seen and a few years of good growth. Frost & Sullivan does not expect the economy to start improving until 2011.

With low share prices dogging the JSE and companies hoping to avoid the high cost of debt, Mc Donald says using either to acquire a company does not make financial sense.

Warwick Lucas, Imara SP Reid analyst, agrees that incurring debt is not a good idea for businesses in the current climate. He adds that, without an asset base as security, IT companies usually find it difficult to raise financing anyway.

Independent market analyst Paul Booth says there has been a shift between the first half of last year and the second, with deals starting to dry up in the second half of last year. Booth attributes this to lead times, which meant deals were already on the table when the crisis happened.

And, although “the time is ripe to buy”, companies with cash piles are the only ones that are likely to do any deals, says Booth. And that is if they do not need the cash for operations.

Booth says the largest deal that is likely to happen in the local ICT market this year is the proposed $23 billion merger of MTN and Bharti, which he expects to go ahead. Other deals that may happen include Telkom being bought out, possibly by Cell C's parent company, Oger Telecom.

He also would not be surprised to see Orange enter SA more actively through buying a local company.

Last year, among the major deals that happened, there were multiple acquisitions and investments from the Altron Group, including Bytes Technology Group.

Datatec also made several acquisitions, including Inflow Technologies, in India, as did Dimension Data, which purchased Datacraft, among other companies, says Booth.

MTN bought Verizon Business, while Naspers also extended its technological reach.

Booth says Vodacom bought StorTech and Gateway Communications, while Vodafone acquired an additional 15% in Vodacom.

Other major local mergers, acquisitions or investment activities included S-Tec, by Vox Telecom; Computer Software Consultants, by UCS; MIS Corporate Defence Solutions (UK), by SecureData; Tier One Electronics, by Mustek; and Ubushu, by Faritec, says Booth.

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