BCX could be Telkom's millstone

By Paul Vecchiatto for Gartner
Cape Town, 22 Mar 2007

Telkom's planned purchase of IT company Business Connexion (BCX) could easily become a millstone for the telecommunications group, if the history of such mergers is examined, analysts warn.

The analysts, from international research and consultancy firms Gartner and Frost & Sullivan, were commenting on Telkom's proposed R2.4 billion BCX takeover, which is before the Competition Tribunal.

The deadline for the companies' shareholders to approve the deal has been extended from 15 March to 31 May. Merger discussions began 16 months ago.

While the concept of convergence, whereby voice and data services merge, means it makes sense for a telecoms operator to move into the IT business services arena, say the analysts, the fact is the two forms of business are different. Historically, the marriage has not been a happy one, they note.

Telecoms provision is generally a commodity-type business, while that of providing IT services is a people-type business and so brings a different type of understanding, they add.

Declining voice

The analysts also point out that telecoms companies, such as Telkom, are finding their voice revenues being eroded through competition from mobile operators and the increasing use of voice over IP, with the latter being treated as ordinary data and billed as such.

Gartner analyst Jean-Claude Delcroix says one of the first instances of such a merger was when Deutsche Telekom bought the entire share capital of a unit of Daimler Chrysler in 2002, for 5.5 billion euros (about R45 billion).

"[Deutsche Telekom subsidiary] T-Systems has performed poorly over the years. T-Systems has two main divisions: business services, serving German companies, and enterprise services, serving large multinational corporations (MNCs). The first one struggles, while the MNC division shows only a moderate growth and can't compensate for losses," Delcroix says.

He says recent announcements that T-Systems is looking for a strategic partner for its "rapid global expansion", indicates it is under pressure from its shareholder, which wants higher value.

Scaring clients

Frost & Sullivan analyst Fisher Kamanga says Telkom and BCX already offer similar services, but Telkom needs a vehicle that would boost its presence in the IT services market.

"They [Telkom] have seen IT services can bring in higher profits, but essentially they are two different businesses. They think that buying an existing business with existing clients, rather than going out and winning these clients on their own, makes sense. But the fact is they run foul of the competition rules and scare off their other potential clients with their huge footprint," he says.

Delcroix says Telkom's move to buy BCX is typical of a large telecoms operator in a developing economy, where its options to grow revenues are limited to geographical expansion and/or local sector penetration.

"Geographic expansion is logical, but difficult, because countries often try to hold onto the major telcos for nationalistic reasons, such as Telkom's abortive attempt to buy Uganda Telecom. On the other hand, sector expansion means creating a powerful entity that has to be firmly regulated," he says.