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It is vital for expanding GCC telecom operators to create synergies across their operations

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By  Booz & Co Published  April 22, 2011

Over the past decade and a half, an unprecedented wave of expansion has altered the global telecom industry.

New global competitors are emerging swiftly in the GCC region, bringing with them the opportunity for operators to capture their full synergy potential and derive maximum benefits from their enormous footprint.

GCC operators must recognise to what degree they can create synergies across six key areas: procurement, product and service offerings, new revenue sources, shared services, knowledge sharing, and international best practices. They also must establish proper models for their organisational structure and subsidiary governance to capitalise on the potential gains from synergies.

Beginning in the mid-1990s and through the early 2000s, several telecommunications operators embarked on international expansion programs in pursuit of growth opportunities outside their home markets. Several of these operators achieved global status, with a significant portion of revenue from international operations and footprints spanning multiple continents. As a result, investors have favoured telecom companies that expanded aggressively, rewarding companies for growing revenue and setting high expectations for future earnings gains.

Booz & Company analysed the performance of telecom operators with the second-highest market share, behind the incumbent, in 25 large, mature markets, in order to compare the global operators in the number two spot with single-market or regional operators in the same position.

In each case, the difference between the EBITDA margin of the best-performing global operators and those of the smaller companies is substantial. The average difference in EBITDA margin between the four leading operators in terms of international revenue and the incumbent was 3.8%, whereas the single-market and regional operators had an average of 8.1% difference with the incumbents in their markets.

“That 4.5 percentage-point differential translates on average into a more than 10% gain in shareholder value for the successful global operators. The analysis found that successful companies underscored the potential for global operators to outperform the competition,” said Karim Sabbagh, Partner, Booz & Company.

However, by expanding internationally operators will not automatically capture all of the value of having a global operation, according to Amr Goussous, senior associate, Booz & Company.

The most successful global operators have realigned their organisational models, enabling them to fully realise the potential of their global presence. Accordingly, GCC operators will need to realign their organisations and institute synergy programs to benefit from their international expansion and justify the premiums paid for their cross-border acquisitions.

Finding synergies

The potential synergies that lie within an operator’s global footprint can be measured by looking at the scale of the operator’s international portfolio relative to its home market, the group’s level of control in its subsidiaries, and the coherence of its international portfolio. “The larger the operator’s international reach, the more synergy potential it has—and, thus, the greater its need to institute a broadly and deeply integrated approach to capture those synergies,” said Sabbagh.

A strong synergies program can enable operators that have gone or are going global to improve their performance significantly. Operators can seek to create synergies from six key areas.

Procurement consolidation: Consolidating procurement across a global platform involves collaboration among the different subsidiaries that are part of the global operator’s footprint. These subsidiaries can negotiate with the same supplier as a group instead of as individual entities.

Group products and services: Developing an integrated global plan to market products and services, especially those targeting frequent high-end business travelers, is second only to procurement in terms of potential value to reap gains from synergies. Many operators have neglected this category of synergies. Although it is a complex endeavor to develop such a strategy, the potential benefits are substantial.

Access to new revenue sources by leveraging scale: Many global operators can make use of their scale to gain access to additional sources of revenue. For example, a global operator is better positioned to emerge as a preferred wholesale roaming partner for another telecom operator because it can offer that operator access to more markets.

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