Increasing M&A Activity in Telecom Power Market

Implications: 1.As in all other telecommunications sectors, there will be further consolidation in the power equipment space. 2.A prime example is Eltek Energy’s recent acquisition of Valere Power. 3.While private equity firms are always in the mix, they should think twice before getting involved with any major vendor in this space.

Analysis: While it is hard to anticipate the reaction of a large carrier, to a private equity company buying out a big player, such as the Tyco Power division of Tyco Electronics, it would be amazing if an AT&T took too kindly to such a situation. Even if the management of the power company were still left to run their own show, there would be doubts as to whether quality, customer service, and most importantly – whether new product development would be maintained.

While a large installed base in a lot of industries can be a valuable cash cow, in telecom, the continued generation of money is highly dependent on the ability to spin new products off of it. Owning such an embedded footprint is of no use to a player who is not going to invest in technology. At some point in time, supplying those legacy products actually becomes very expensive. The only other viable option for equity players in this space is to split up the supplier into two or more divisions (such as the power systems and components groups) and sell those off given the belief that the values would be higher than the sum of the parts.

While there have been private entity equity transactions involving Bell Canada, Alltel and Avaya, there has not been any purchases of companies in the critical portions of the public network infrastructure. The lack of activity there is probably not a coincidence. Especially in the power business, in quoting for any supply, guaranteed delivery for at least seven years is required. It is a necessity to retain experienced people from design engineering to the final packaging of the system. Major customers will not appreciate the their perception of a fly by night operator in this space.