Sell your telecoms shares – this merger madness is bound to end in misery

A lot of money will be spent in the telecoms tie-up frenzy – but much of it will be wasted, says Matthew Lynn.

Dealmakers in the City must have felt Christmas had come early this week. On Monday British Telecom (BT) revealed it had opened negotiations to buy mobile operator EE for £12.5bn.

Bankers are probably already licking their lips at the prospect of a round of telecoms mega-mergers. Vodafone is reportedly eyeing Virgin Media or Sky, or O2 might buy TalkTalk, or TalkTalk might buy Three. There are more possible permutations than there are plot twists in Downton Abbey.

Yet the last round of telecoms deals destroyed shareholder wealth on an epic scale and this one will be no different. The best thing to do is to dump the shares of any company gripped by this madness, as soon as a deal is announced.

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The next round of big deals

Now it is determined to get back into the mobile business, which it exited ignominiously more than a decade ago, having run up huge debts. It will buy EE (itself formed out of a huge deal between Orange and T-Mobile), creating a full range of telecoms services for its customers.

That could well spark another round of deals as rivals try to keep up. Vodafone, flush with cash from selling its American business, might well snap up Sky or Virgin Media, or Sky might try and crash the EE deal, or else buy O2, which BT rejected while Virgin Media, if it doesn't get bought by Sky or someone else, will buy Talk Talk; or well, you get the idea.

For City dealmakers, this is all no doubt very exciting. It's a long time since big companies have worked themselves up into a merger frenzy, and plenty of merger and acquisition (M&A) departments must be wondering how long they will survive when there is so little work around.

They will make lots of money if bids are launched, and so will the PR advisers, lawyers and management consultants. For shareholders, however, they are likely to be a disaster.

The fashionable theory behind these deals is 'quad-play' the idea that customers want to buy fixed-line, mobile, broadband and TV all from the same company. Chief executives are getting very excited about the potential synergies between different parts of the market.

They argue that they need to be able to offer all four services to win new customers, and to stop existing ones abandoning them for a rival with a more complete package.

Quad-play is overhyped madness

And BT has had some success with its sports channels although mainly because it basically gives them away. But the rest of the hype about quad-play is nonsense.

Who really cares about getting a phone line, mobile, broadband and TV from the same company? We don't generally buy banking and insurance from the same firm, or computers and light bulbs so why should we care about getting fixed and mobile lines from the same provider?

Sure, we might, depending on the deal. But more often customers are suspicious of buying too much from one company, and rightly so. We tend to split our business, even among very similar products. Lots of people have a credit card and a current account from two different banks, for example.

As a general rule, we are slightly suspicious of giving one company too much control overour lives, and prefer to split our business between several different players.We sense that in the medium term it will keep them on their toes, and we'll get a better deal and we are probably right.

Sell the predators

But it won't happen. In many cases, they will simply drift off to other providers. Mobile numbers are all portable, and the industry is fiercely competitive. It may even be in structural decline few of us actually make many calls on our smart-phones.

Likewise, pay-TV customers may drift away from a telecoms conglomerate as online-streaming services, such as Netflix, grow in importance.

A lot of money will be spent in the next year, just as in 1999 and 2000 duringthe last telecoms deal-making frenzy.But most will be wasted, just as it was last time. If you own shares in a company that gets bought out, that's great.

But if you own one of the companies making an acquisition, get out as fast as you can. It will be making a costly mistake you don't want to end up paying for it.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.