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Publications
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Vol. 8, No. 4, May 2010
HOW TO PROFIT FROM THE “NEW RULES” IN TELCOM:
In the article below, “Challenges and Opportunities in Middle Market Telcom,” FOCUS Managing Director Richard Pierce describes in detail how the telecommunications industry environment has evolved significantly over the last decade, changing the rules of the game for middle market companies and their investors.
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Active FOCUS Deals
Operating nationally and internationally, FOCUS currently is working with buy- and sell-side corporate clients, private equity groups, holding companies and late stage venture capital firms in the following areas:
- Advertising & Marketing
- Building Materials
- Business Consulting Services
- Business Process Outsourcing
- Call Center Services
- Distribution
- Education and Human Capital
- Electronics
- Energy
- Engineering
- Financial Services
- Government, Aerospace & Defense
- Healthcare & Life Sciences
- Information Technology
- Manufacturing
- Media
- Parking Services
- Retail Franchising
- Semiconductor Equipment
- Telecommunications, Wireless and Media
- Telemarketing
- Warehouse Distribution
We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.
Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-470-1973 or by fax to 202-785-9413.
SecurAmerica Has Acquired Celadon Security Services and North Shore Security Services
SecurAmerica, LLC, an Atlanta-based privately-held company dedicated to providing premium contract security services, has acquired Celadon Security Services and North Shore Security Services in a package deal. FOCUS represented SecurAmerica in the transaction. Celadon Security Services and North Shore Security Services are providers of professional security guards, concierge and mobile services to a wide variety of properties in Massachusetts.
According to Jonathan Wilfong, FOCUS Regional Managing Partner, “This transaction unites two strong firms with similar cultures and will create benefits of scale for SecurAmerica. The acquisitions were a natural fit.” Read more...
Challenges and Opportunities in Middle Market Telecom
By Richard Pierce, Managing Director, FOCUS
It is difficult to deny that the Telecommunications industry is an extremely important part of the economy. Insight estimates that annual global spending on telecommunications services is approaching $2 trillion, while Forrester estimates worldwide telecommunications equipment spending to be in excess of $300 billion.
In the US alone, the most recent FCC data show individuals and businesses spending more than $300 billion annually on telecommunications services and Forrester estimates US telecommunications equipment expenditures of more than $100 billion. Anecdotally, most of us can see our personal communications spend rising dramatically as items that may have been considered luxuries a decade ago (cell phones, wirelesses email devices, broadband connections) have become necessities for functioning efficiently in our business and even personal lives.
Furthermore, the building blocks for robust continued industry growth are firmly in place. Service providers worldwide are investing in next generation networks that will provide ubiquitous wireless broadband, “on demand” access to video services and the robust fiber infrastructures needed to support a variety of hosted and “cloud-based” services.
Middle Market Telecommunications: The Challenges
Yet despite these favorable dynamics, the telecommunications industry poses a number of challenges for middle market companies and their investors. These challenges include:
Capital Intensity. The capital intensive nature of traditional telecom service provider business models puts most late-stage companies out of reach of middle market investors and creates a major challenge for investing in earlier-stage companies. Investors have not forgotten the Telecom bubble of 2000 when many service providers took longer than expected to reach cash flow positive and, when access to additional capital dried up, were forced to liquidate assets at a fraction of their book value.
Service Provider Consolidation. Consolidation has made it increasingly challenging for new entrants to compete in the market for traditional telecommunications services. Large competitors with existing networks and tremendous scale economies have strong brand recognition and can offer services at attractive rates. Scale has also become an important way to gain access to the devices (BlackBerrys, iPhones, etc.) and applications that have become a critical part of many telecommunications service offerings.
Lengthening Sales Cycles. A corollary to industry consolidation is the increasingly long sales cycle for companies seeking to sell to the large “Tier I” telecommunications service providers. This issue is particularly acute for smaller vendors that may need speedier purchasing decisions to drive cash flow or attract additional financing on favorable terms.
Furthermore, when the time comes for an eventual exit, Tier I customers are critical to attracting strong interest from large acquirers. The practice of large service providers consolidating their vendor relationships further exacerbates this issue and makes it even more challenging for small vendors to gain a toehold with large service providers.Maturation of the Valuation Paradigm. Even after the tech bust in the early part of the century there was still the sense that telecommunications companies (as well as many other sectors of the technology industry) should be valued differently than their “old economy” counterparts. Many companies in the sector expected that if they had a leading edge technology in a fast growing market, they could command a valuation that had little relation to their actual financial performance.
While we occasionally still see these “strategic” valuations, it occurs infrequently enough that investors are unwise to pin their investment thesis on this outcome. Instead, companies and investors that want to generate premium valuations must plan to build “real” businesses that will be valued based on traditional metrics like EBITDA and net income.
So where does this leave middle market telecommunications companies and their investors? We believe that with a focus on the right investment characteristics and a willingness to look at the sector broadly there are still many opportunities in this part of the market. These opportunities occur throughout FOCUS’ three main groupings of telecommunications companies:
- Telecommunications Service Providers
- Hardware and Software Providers
- Network and Infrastructure Support Services
Telecommunications Service Providers: Going Over the Top
Telecommunications service providers provide voice, data, video and other services to consumers, businesses and other service providers. The keys to success for middle market investors in this segment relate to efficient use of capital and a service offering that is not a “me too” replica of the larger service providers.
In terms of using capital efficiently, the emergence of IP-based applications provides numerous opportunities for offering high value-added, “over-the-top” services that leverage leased wireline or wireless network capacity. Examples include hosted PBX, hosted call center and machine-to-machine applications.
Utilizing leased network elements not only reduces the absolute capex spend, but it also has the advantage of making the spend success based. In addition to being “asset light,” offering a service that is differentiated from larger firms with strong brand recognition is also important to success. Middle market companies can do this in a variety of ways including targeting services not typically provided by telecommunications companies, targeting underserved markets such as rural areas or small businesses or having a proprietary technology or process that provides a price or quality of service advantage.
Hardware and Software Providers: Avoid the Bottleneck
Telecommunications hardware and software companies provide service providers and businesses with the equipment and software necessary to operate and maintain their networks. The key in this market segment is to minimize the risks associated with the extended decision cycles of large carriers.
The easiest ways to minimize these risks is either to seek companies that already have existing relationships with large service providers or to forego the service provider market altogether and target companies that sell to the business market. Barring either of these, having a market opportunity that includes smaller service providers in the US and internationally gives companies access to a base of customers with faster decision cycles and an opportunity to prove their products in the field.
In addition, as large telecommunications hardware and software companies are increasingly playing the role of system integrators for large telecommunications networks, partnerships (or at least the potential for partnerships) with large vendors are extremely important.
Finally, all but the most risk-loving companies and investors are well advised to “keep it simple.” Middle market companies are much more likely to be successful selling a relatively low-tech product or a product that sits at the edge of a large network as opposed to a product that sits close to the network core where a failure could impact thousands of customers.
Network and Infrastructure Support Services: The Indirect Play
Network and infrastructure support services include a broad range of service offerings for service providers and businesses including network planning and design, network construction and logistics and equipment repair services. A key advantage of this segment is that it can provide creative (and often overlooked) ways to indirectly play major trends in the telecommunications industry.
For example, whereas middle market investors have virtually no opportunity to participate in the wireless services industry, they can still position themselves to benefit from wireless growth by investing in a company that provides wireless engineering or tower construction services.
For companies in this segment that target the service provider market, consolidation has made customer concentration a key issue. Because of this, companies that have a diverse revenue stream (or that can diversify their revenue stream through business development and/or acquisitions) tend to be the most attractive targets.
Conclusion: Tailor Offers to the New Environment
The telecommunications industry environment has evolved significantly over the last decade, and changed the rules of the game for middle market companies and their investors. We will still see the occasional high profile management team attract large amounts of early stage capital for a “big idea” company.
We will also still see telecommunications companies that sell or go public at valuations that seemingly bear no relation to their financial performance. However, these occurrences will be the exception and not the rule. While it may sound obvious, the path to success for most middle market companies and their investors will be to tailor their business models and investment strategies to succeed in this new environment and then execute to build strong, sustainable businesses.
James Braley Joins FOCUS’ Atlanta Office as a Senior Advisor
James Braley has joined FOCUS as a Senior Advisor in its Atlanta, GA office. For the past 11 years, Mr. Braley served as senior managing director in the FTI Healthcare group of FTI’s Corporate Finance practice. According to Jonathan Wilfong, FOCUS Managing Partner, Southeast, “Jim brings to FOCUS a wealth of healthcare industry experience and will be a tremendous asset to our Healthcare and Life Sciences team.”
About James Braley
Mr. Braley’s prior experience includes serving as multi-facility manager and chief executive officer (CEO) in an academic medical center, as well as acute care and specialty hospital settings. He led a team that turned a $25 million loss to break-even in 14 months. Mr. Braley holds a B.S. from the University of Montana and has completed postgraduate work in hospital administration at the University of Alabama in Birmingham.
Jim Kelly Joins FOCUS’ Washington, DC Office as a Senior Advisor
Jim Kelly has joined FOCUS as a Senior Advisor in Pittsburgh, PA. Mr. Kelly will be a member of the Washington, DC office. He brings experience in the information technology, manufacturing, government, banking, education and advertising industries. According to Doug Rodgers, CEO and Managing Partner of FOCUS, “Jim has more than 30 years of strategic, marketing, fiscal and management experience in publicly traded companies and entrepreneurial firms. He has the background and hands-on experiences that serve our clients well.” Read more...
About Jim Kelly
Mr. Kelly founded KCS Computer Services in 1984. He served as CEO and President and grew the company into a national organization. For the past 12 years, Mr. Kelly has served on Allin Corporation’s board and is chairman of the Audit Committee. In addition, he is president of KIS Business Consultants LLC, a consulting firm. He has a MBA from the University of Pittsburgh, a BS in management from LaRoche College, and an AS degree in computer science. Read more...
FOCUS Industry Practice Groups
► Education & Human Capital -- www.focusbankers.com/education
► Energy -- www.focusbankers.com/energy
► General Middle Market Businesses
► Government, Aerospace & Defense -- www.focusbankers.com/gad
► Healthcare & Life Sciences -- www.focusbankers.com/health
► Information Technology -- www.focusbankers.com/technology
► Telecommunications, Wireless & Media
- Active FOCUS Deals
- SecurAmerica Has Acquired Celadon Security Services and North Shore Security Services
- Challenges and Opportunities in Middle Market Telecom by Richard Pierce, Managing Director, FOCUS
- James Braley Joins FOCUS’ Atlanta Office as a Senior Advisor
- Jim Kelly Joins FOCUS’ Washington, DC Office as a Senior Advisor
- FOCUS Industry Practice Group