Telecom's buyout future
We are clearly in the midst of leveraged-buyout mania. According to Thomason Financial, there were $115.5 billion in U.S. private equity deals announced in May alone. Well-funded leveraged-buyout funds are snapping up corporations worldwide. Now, similar to what we've seen in industries such as manufacturing, consumer products, food and financial services, private equity investors are showing strong interest in domestic telecom companies.
The massive $25.7 billion acquisition of Alltel Corp. by the private equity arm of Goldman Sachs Group Inc. and TPG Capital LLP (formerly Texas Pacific Group) is evidence of this trend in the telco industry. As a result, a flurry of additional telecom buyouts is on the horizon, partly due to the rapid growth in areas such as broadband and wireless.
While leveraged-buyout takeovers are often good for company performance, the prospect of a buyout and the internal changes it might entail can cause uncertainty and angst among employees. While each company differs, telco executives can anticipate a few general changes that often follow a leveraged buyout, including the following:
Long-term cash flow vs. short-term earnings: In some cases, a leveraged-buyout firm will allow companies to make major structural transformations that will lead to enhanced long-term cash flow, potentially de-emphasizing the focus on short-term earnings required by the public market. While short-term results may suffer, such changes can produce breakthrough long-term improvements.
Profit before revenue: In most companies, revenue growth typically equates directly to earnings growth. However, meticulous auditing of profit and loss drivers in a business almost always shows that not all revenue growth leads directly to profit or value growth. Discerning leveraged-buyout firm directors and their management teams will seek to maximize profit. In some cases, this may lead to a paring or even the elimination of certain revenue streams.
Stronger board-management ties: Many public company boards usually meet once every one or two months. Board members often must reacquaint themselves with the business during these meetings and then provide counsel in good faith on how to improve the company. A leveraged-buyout board, on the other hand, will request frequent management meetings, delve into substantial detail and provide significant input and guidance. Rather than shuffling through business line profit and loss statements, the leveraged-buyout board will focus on performance and plans at a more granular level. Greater overlap and oversight between the board and management will emerge. Some executives will excel within this environment, while others will not.
Divestiture of non-core business lines: As part of the rationalization of the business and focus on its core, post-leveraged-buyout takeover divestitures will become more commonplace, especially among bigger conglomerate telcos with multiple business lines. A leveraged buyout will seek to monetize non-core assets and re-focus management to return the primary business to profitable, sustained growth.
Reduction of large investor relations/corporate compliance organizations: Over the years, public companies have expanded their own compliance teams to address investor relations, Sarbanes-Oxley and other market requirements. As a private company, management can cut back on these functions and reallocate resources to forward-thinking, strategic projects.
As telco leveraged buyouts continue to heat up, industry executives can minimize concern by anticipating internal changes that will likely arise following a buyout. By planning ahead, executives can prepare for, and ideally benefit from, the potential advantages of a leveraged buyout.
Ed Vilandrie is cofounder of Altman Vilandrie & Co., a pure-play strategy consulting firm, based in North America that focuses on the communications, media/entertainment and related technology and investor sectors. He can be reached at firstname.lastname@example.org.
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