Verizon to Microsoft Buoy M&A Surge to Counter Tech Disruption

Verizon to Microsoft Buoy M&A Surge to Counter Tech Disruption

Ask telecommunications and technology bankers what they did this summer and many will have a simple answer: Deals.

There have been more than $240 billion of tech and telecom takeovers this quarter, led by Verizon Communications Inc. (VZ)’s $130 billion buyout of Vodafone Group Plc (VOD)’s stake in their wireless venture, according to data compiled by Bloomberg. That puts the period on pace to be the busiest quarter since 2000, when AOL Inc. and Time Warner Inc. announced their merger, then valued at as much as $186 billion.Tech and telecom deals have already helped push total mergers and acquisitions volume this quarter past the previous one, with more than $520 billion in transactions worldwide, data compiled by Bloomberg show. The activity underscores how more companies are finally making strategic moves to counter technological disruption, said Jennifer Nason, global chairman of tech-media-telecom investment banking at JPMorgan Chase & Co.

“The fast pace of innovation, increasing competitive dynamics and the potential for increasing capital costs have created the perfect storm for strategic moves which had been contemplated for a while,” said Nason, 53, who advised Verizon on the wireless venture buyout and worked on Nokia Oyj’s proposed sale of its mobile-phone business to Microsoft Corp. (MSFT), both announced Sept. 2. “Once you see a few deals happen, you can expect more.”

Vodafone’s Moves

Vodafone’s sale of the stake in Verizon Wireless gives it billions of dollars to make its own acquisitions while simultaneously making the U.K. wireless operator a potential target. The transaction also puts pressure on competitors such as AT&T Inc. (T) to accelerate strategic moves. AT&T, second in U.S. mobile-phone customers to Verizon Wireless, said this year that Europe may offer attractive options for expansion.

In the handset space, BlackBerry Ltd. said last month that it’s weighing a sale, following the lackluster debut of the BlackBerry 10 lineup. Lenovo Group Ltd. (992), the world’s largest maker of personal computers, also said this month it’s looking for acquisitions in PCs and smartphones.

Innovations from smartphones to social media are creating new opportunities for some companies and ruining the business models of others, driving dealmaking in both cases. Verizon’s deal with Vodafone crowns a summer that saw Publicis Groupe SA and Omnicom Group Inc. agree to combine to create a $35 billion advertising powerhouse, as well as Microsoft’s $7.2 billion bid for the Nokia mobile business and patents.

Nokia’s Future

Verizon and Vodafone had discussed a buyout of the wireless stake on and off for a decade, according to people familiar with the talks. For the U.S. company, the case for full ownership became more compelling with growth in mobile-data use by high-spending customers, allowing it to increase its offer to a level acceptable to Vodafone, they said.

Nokia’s (NOK1V) future, meanwhile, has been a subject of speculation almost from the moment Apple Inc. debuted the iPhone in 2007. Once the world’s leading mobile-phone manufacturer, Nokia has fallen badly behind Apple and Samsung Electronics Co., and the Windows Phone operating system its devices run accounts for less than 5 percent of new smartphones, according to researcher IDC.

Telecom companies such as Telefonica SA (TEF), which is attempting to merge its German business with that of Royal KPN NV, are looking to consolidate as growing data use demands more expensive networks and regulators restrict fees for services like roaming.

Good Climate

“The dynamism in the wireless sector is quite strong, and as it moves to video capability the industry requires upgrades,” said Eli Noam, a professor of finance and economics at Columbia Business School, as well as the director of the Columbia Institute for Tele-Information. That’s putting pressure on mobile carriers to build scale by expanding their global footprint, he said.

For boards and chief executive officers wary of making big decisions amid volatile economic conditions and markets, recent weeks have offered a respite. While the fiscal problems of Greece, Spain, and other struggling Euro-area countries are far from solved, none has caused a market-roiling crisis since Cyprus’s bailout in March. That’s helped global stock-market indexes stay buoyant, with the S&P 500 rising about 15 percent since the start of the year and London’s FTSE 100 up about 10 percent.

Borrowing Costs

The expectation that interest rates will rise has also spurred some companies to act. Verizon took advantage of the favorable interest rate environment to borrow about $60 billion to fund the wireless venture buyout.

While yields have climbed from earlier record lows, they’re well below historic averages. The average yield investors demand to hold bonds in the Bank of America Merrill Lynch U.S. Telecommunications Index, which includes debt from AT&T and Vodafone, was 3.88 percent as of Sept. 2, up from an unprecedented 2.92 percent last October. The average over the past 10 years was 5 percent.

For the Vodafone deal, Verizon will probably issue $40 billion to $50 billion in bonds, according to a person with knowledge of its plans. Depending on how the borrowing is structured, its first offering could set a new record for the largest-ever U.S. bond issue, surpassing Apple’s $17 billion sale in April, the person said.

Silicon Valley Strength

Apple and rival Google Inc. (GOOG), whose mobile software powers more than 90 percent of new smartphones, are the source of many of the disruptions that are encouraging deals. Publicis CEO Maurice Levy cited the need for consolidation to confront the growing power of the Silicon Valley firms when he announced the Omnicom deal, which will create the world’s largest advertising agency.

Given encouraging signs for the economic environment, deal activity may continue, particularly in tech and telecom, said Pip McCrostie, global vice chairman of transaction advisory services at EY, formerly called Ernst & Young LLP.

“Activity will be very much based on the fact that as companies and CEOs get more confident, in a sustainable growth picture, we’ll see more M&A,” McCrostie said.

To contact the reporters on this story: Matthew Campbell in London at mcampbell39@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net; Aaron Kirchfeld in London at akirchfeld@bloomberg.net