'Growth Through Acquisition' Can Lead to Irrational Exuberance

By Gary Kim November 01, 2013

“Irrational exuberance” has, from time to time, been a major problem in the global telecommunications business. Contestants sometimes have paid too much to acquire assets. That was true of some Western European operators who, in retrospect, paid too much for 3G spectrum.

Irrational expectations were a problem for lots of telecom providers between 1999 and 2001. More recently, mobile operators in India have faced the problem of revenues insufficient to allow recovery of investments.

India's Bharti Airtel, for example, bought Zain's African operations in 2010 for $10.7 billion, considered a high price at the time, to gain access to the high growth potential in Africa. But competition has led to low retail prices.

Bharti's average revenue per user grew 8 percent from 2012 levels to 192 rupees in India and fell 10 percent in Africa.

Some observers believe that will be an issue for AT&T as well, if it tries and succeeds at acquiring a major stake in the European market. 

Image via Shutterstock

The investment thesis has some clear attractions. Western European mobile service providers are valued less richly than U.S. mobile operations, so AT&T might look to buy assets that are undervalued.

AT&T also reckons that Long Term Evolution services, which have propelled growth in the U.S. market, are lagging in Europe, allowing AT&T an opportunity to invest early and hopefully reap the revenue rewards.

Skeptics say the LTE opportunity will not be as large as in the United States or North America because Europeans do not value data access as much as North American consumers. Also, most European markets are fiercely competitive, putting pressure on retail prices, as Bharti encountered in Africa.

On the other hand, some will argue, AT&T has little choice but to consider “growth by acquisition.” The major question is where to make such acquisitions.

In part, that imperative is driven by the relative situation AT&T faces in its core U.S. market, where Verizon Wireless appears to be putting distance between itself and other leading U.S. service providers, while all three other competitors are plowing new capital and marketing effort into the U.S. market.

Under those circumstances, AT&T might rationally conclude its capital is better spent elsewhere, where opportunities for growth are brighter, as tough as growth anywhere might be.

The issue is whether or not any of those mobile service providers are going to find that the returns lag the investments, as sometimes happens in the telecom business.

Edited by Alisen Downey

Contributing Editor

Related Articles

Google Adds CBS to its Unplugged Roster

By: Steve Anderson    10/21/2016

Over-the-top Web-based television seems to be the way of the future, as demonstrated by Netflix, Hulu, and a host of developments to follow, along wit…

Read More

A New Stock Price High for Microsoft?

By: Steve Anderson    10/21/2016

It would be easy to think that Microsoft's stock price glory days were behind it, lost with the dot-com bubble and a little song called "Mambo No. 5."…

Read More

T-Mobile, FCC Reach 10-Figure Settlement Agreement

By: Steve Anderson    10/21/2016

It's a shot in the chops for T-Mobile, as the company recently agreed to a settlement with the Federal Communications Commission (FCC) over the matter…

Read More

DDoS Attack Causes Several Site Outages

By: Alicia Young    10/21/2016

This morning, as thousands of people woke up and started their daily routines, they found that it had been disrupted. Those who like to lie in bed scr…

Read More

Death by Hedge Funds: Why Samsung is Run by Idiots and They Aren't Alone

By: Rob Enderle    10/12/2016

Samsung is certainly having a bad quarter. First their halo product the Samsung Galaxy Note 7 starts blowing up or catching fire and they attempted th…

Read More