Courting MTN

Ravishing prospects can make overly demanding partners. So Bharti Airtel seemed to think, anyway, after unceremoniously dumping MTN last weekend. The Indian operator’s courtship of South Africa’s most eligible bachelorette was a short-lived affair, collapsing just three weeks after Bharti had popped the big question. Having gathered up US$60bn in funds to pay for the wedding, Bharti was eventually turned off by MTN’s determination to play a dominant role in the marriage.

So far, however, that doesn’t seem to have dampened the ardour of Reliance Communications, Bharti’s main Indian competitor. After watching its rival suitor quickly lose interest in MTN, Reliance has moved in with an offer of its own. A prospective tie-up between the two could take the form of a ‘reverse take-over’ – whereby Reliance would make the proposal but MTN would end up calling the shots.

Reliance would be marrying into lots of money and power. In practical terms, its chairman, the billionaire Anil Ambani, would accept MTN stock in exchange for his 66% stake in Reliance, becoming the single biggest shareholder in the merged entity. Other big Reliance shareholders would be similarly compensated.

By retaining control, MTN, for its part, would not demean itself in the eyes of the South African elite. It would also become one of the strongest players in emerging markets worldwide, with nearly 120m subscribers across Africa, the Middle East and, of course, India.

As did Bharti, Reliance has emphasised this is early days in the process. But if it does go ahead, Bharti could stand to lose out in a rather embarrassing fashion. Having exposed MTN’s willingness to tie the knot – albeit on its own terms – the Indian number one may unwittingly have invited an African behemoth to run riot in its own backyard.

Hard rain isn’t falling

With talk worldwide of a US recession, soaring oil prices, and the global credit crunch, it seems natural to assume that the tech and telecoms industry will suffer along with everyone else. In fact, this doesn’t seem to be happening. According to US tech consultants IDC, IT spending in the US broadly kept pace with expectations in the first quarter, leading the company to forecast 4% growth for 2008.

True, 4% is an unexciting figure, but forecasters are more optimistic about global growth. Thanks to continuing demand in China and other emerging markets, IDC expects IT spending globally to increase by 6% this year and next. Gartner, another respected IT consultancy, is expecting 6.1% growth in IT spending this year worldwide and 5.5% next year. This is a big drop from last year’s 8.7% increase but still well ahead of forecasts of global GDP growth this year and next.

In terms of products, two of the biggest drivers of this spending will be sales of software and telecom equipment to the emerging economies. According to Gartner, software sales will increase by a compound annual growth rate of 14.3% in the five years between 2006 and 2011 in the developing world, compared to just 8.3% growth in the mature economies. Telecom equipment will show a CAGR of 12.7% in the same period, compared to just 3.8% for the developed world.

All this is welcome news for the IT and telecoms sector - with the notable exception of those companies not well established in emerging economies. If prospects for the mature economies continue to darken, those businesses may be getting a touch damp in the months ahead.

 

 

Microsoft, Google and the five and dime principle

In all the he-said, she-said aftermath of the failed Microsoft bid for Yahoo!, all parties are unanimous about one thing. Google was the reason the bid was launched and Google was the reason it failed. Microsoft needed Yahoo! to compete against Google in the online world. But Google managed to spoil the deal by offering to share some of its advertising skill with Yahoo! This gave its board the confidence to hang on for a better price. 

In an interesting New York Times article on the deal’s collapse, the author muses that about the search giant’s influence:

(Google’s) economic power is still derived largely from a simple, seemingly prosaic business: the ability to place interesting text advertisements in front of people when they do searches. Advertisers pay for those ads - sometimes $1 or less - only when users click on them. In a sense, Google has built a highly profitabley$16.6bn empire a dollar at a time.

This comment made me think of the five and dime stores which sprang up in the US in the era before the shopping mall. The five and dime, in essence, would stock anything that would sell for a nickel or a dime. And on that basis, customers streamed in, finding themselves irresistably drawn to items that were affordable, attractive and cheap. The concept became the basis of 20th century mass-market retailing, later up-dated by Sam Walton into Wal-Mart, the world’s biggest retailer.

With the internet fast becoming the retailer of choice for more and more consumers, Google is today’s five and dime. And the moral here is that Microsoft needs to start thinking like Sam Walton if it wants to outsmart Google at its own game. And here’s a message for the Microsoft board: Walton didn’t get rich by taking over other companies.

 

Microsoft at the altar

All dressed up and no place to go? Microsoft’s deadline for its US$41.2bn bid for Yahoo! has come and gone and the company remains undecided about what to do now. The fact is that the world’s biggest software company needs to act if it wants to prevent itself sliding into the status of a yesterday’s man in the fast-changing tech world.  It’s shares have dropped 20% this year and last week it announced a 11% fall in quarterly earnings. It’s not even certain that an agreed purchase of Yahoo! - a clear second to Google in the online world - would return Microsoft to a growth path.

The company, however, is sitting on an embarassment of riches thanks to its near monopoly of the PC operating environment to date. It’s net cash as of March 31st was a stunning US$11.8bn, up from US$7.6bn a year ago. In its latest quarterly statement, Microsoft stated that about 9% of its pre-tax earnings came from investment income. If it can’t find a home for this money, it’s going to become a bank, not a technology company. In the meantime, it remains a very rich groom indeed.