ICT industry for sale

By Kimberly Guest for Telkom
Johannesburg, 29 Jan 2008

Increased international pressure on stock markets, as well as a tightening in the South African economy, could result in increased mergers and acquisitions taking place in the ICT sector.

This is according to local investment analysts and market players

One investment analyst, who asked not to be named, highlighted Oger's recent bid for local telecommunications giant Telkom as an example.

"To our understanding, this was an unsolicited bid. I have no doubt we are going to see more of this type of activity. International players, who have been eyeing the South African market for a while, will probably choose to make their moves now because the cost is significantly cheaper," he explains.

Last week, ITWeb reported that MTN was considering re-entering the battle for Telkom. Sources close to the company revealed MTN hoped the fixed-line telco's declining share price would make last year's offer more attractive.

Telkom's share price had declined 35% since September last year. However, the Oger announcement helped it to regain 10%, to close at R138.55, yesterday.

Playing locally

However, it is not only international players that could decide to take advantage of lower prices.

Simeka Business Solutions Group CEO Mohammed Varachia and GijimaAst executive chairman Robert Gumede note the current stock market offers opportunities to all players.

Varachia last week told analysts that the general decline in share prices could make companies in the sector more vulnerable to takeover. However, he pointed out that the companies could choose to take advantage of the environment themselves by fulfilling their own acquisitive strategies.

Gumede, whose company is currently trading under cautionary, declined to say more than "opportunities lie on all sides of the table".

Not consolidation

Despite the lower prices, Irnest Kaplan, MD of Kaplan Equity Analysts, says companies should be wary of falling for market sentiment.

"We have been hearing for a while now that the ICT industry is 'ripe for consolidation'. But I have done research into this idea and it is not true. Sure, there are some small areas which could still do with consolidation, but on the whole, the ICT sector has been performing better than it ever has."

Kaplan explains that there are generally three reasons for market consolidation. In the first, a sector may need to consolidate in order to survive an economic downturn. In the second, a spurt in the number of companies offering similar services to customers may place too much bargaining power in the hands of the client and consolidation emerges as a way to regain margins.

Finally, companies may choose to start buying because they are hungry for growth, he explains.

"If you look at the financial performances of listed ICT companies, there is nothing to indicate the first or second riders are relevant in today's market. We could see some companies use the current environment to feed growth aspirations, but I would warn these businesses to ensure it is because there is a strategic fit between the businesses," he comments.

As for the possibility of international investors using current depressed prices to enter the country, Kaplan cautions that international players may not be as interested as SA would like to believe.

"If an international player is going to buy a local company then it will be in line with a long-term strategy. Currently, prices may be attractive; however, international investors are going to seriously consider our power situation and political environment before making such a long-term decision," he says.