The much anticipated rollout of fifth-generation wireless ("5G") technology and changing consumer habits are expected to drive M&A transactions in the telecommunications sector over the next year. According to EY's May 2019 Global Capital Confidence Barometer (the "EY Report") 55% of telecommunications executives expect to actively pursue acquisitions in the next year, a significant increase from the long-term average of 45% for the telecommunications sector.
As consumption patterns for video and gaming continue to change telecommunications executives are anticipating the impact that future 5G speeds and capacity will have on adjacent industries like mobile streaming services and mobile gaming. Increased speeds will also facilitate further developments and consumer demands in the Internet of Things, such as digital home accessories, in-flight cellular, in-vehicle cellular, and in-vehicle infotainment systems. Accordingly, telecommunications executives ranked expansion into these three adjacent sectors as their highest strategic growth priority.
These emerging technologies and markets also require telecommunications companies to begin acquiring new talent and technology, such as increased IT, data science and enterprise capabilities. In the EY Report access to technology, talent, and innovative start-ups was cited as the leading strategic driver behind pursuing acquisitions in the telecommunications sector over the next year. This focus is also reflected in the capital allocation of telecommunications companies, as most of those surveyed were planning significant technology investments this year in order to drive internal efficiencies and create new services in anticipation of the rollout of 5G technology. Changing capital allocations are also impacting the frequency of portfolio reviews, with 41% of telecommunications companies undertaking a reviewing every quarter, compared with 24% in October 2018. The increasing frequency of portfolio reviews will allow telecommunications companies to adapt quickly to market or regulatory conditions and change their capital allocation accordingly.
Telecommunications executives have expressed overall confidence in the M&A market, with 82% expecting the market to improve in the next year, compared with 65% in April 2018. However, telecommunications companies must be mindful of the challenges associated with integrating operations and talent after an acquisition. Further, the regulatory environment is an especially influential external factor in the telecommunications sector, adding potential uncertainty into telecommunications M&A acquisitions.
Accordingly, telecommunications companies should pursue technology and talent thoughtfully, ensuring that integration plans are in place beforehand. Additionally, they should also be mindful of any regulatory changes coming in response to the rollout of 5G technology or changing consumer habits in the sector.
The author would like to thank Malcolm Woodside, summer student, for his assistance in preparing this legal update.
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