Challenges of a giant merger

TELECOMMUNICATIONS is a rapidly-changing field. When mobile technology emerged a few years ago it was a new phenomenon in the telecoms market requiring huge new investments and a focused approach to developing its customer and service base. Now, with the period of ballistic growth over and unlikely to return, telecoms companies are searching for ways to augment existing streams of revenue or find new sources of income. In response to various challenges and opportunities, fixed-line and mobile operators are merging or are acquiring external companies that provide related services. The telecoms sector in Slovakia is also following this general trend and on July 1 Slovakia’s well-established fixed-line operator, Slovak Telekom, merged with the second biggest mobile operator in the country, T-Mobile Slovensko, both already part of Deutsche Telekom Group.

Szabolcs Gáborjáni-SzabóSzabolcs Gáborjáni-Szabó (Source: Courtesy to Slovak Telekom)

TELECOMMUNICATIONS is a rapidly-changing field. When mobile technology emerged a few years ago it was a new phenomenon in the telecoms market requiring huge new investments and a focused approach to developing its customer and service base. Now, with the period of ballistic growth over and unlikely to return, telecoms companies are searching for ways to augment existing streams of revenue or find new sources of income. In response to various challenges and opportunities, fixed-line and mobile operators are merging or are acquiring external companies that provide related services. The telecoms sector in Slovakia is also following this general trend and on July 1 Slovakia’s well-established fixed-line operator, Slovak Telekom, merged with the second biggest mobile operator in the country, T-Mobile Slovensko, both already part of Deutsche Telekom Group.

The Slovak Spectator spoke with Szabolcs Gáborjáni-Szabó, a member of the Board of Directors of Slovak Telekom and Chief Finance Officer, about the merger and how he views recent developments in the telecommunications market.

The Slovak Spectator (TSS): The merger of Slovak Telekom with T-Mobile Slovensko on July 1 is not the only fusion of this kind in the European telecommunications market. What is the driving force behind these mergers?

Szabolcs Gáborjáni-Szabó (SGS): For about the last 10 years there has been a big debate in the telecommunications industry about the best way to serve customers: whether it is combining fixed and mobile businesses and being a one-stop shop for customers or focusing more on stand-alone information services. And I would say that five or ten years ago the answer was quite clear. It was the time when the mobile industry, which was a new phenomenon with greenfield investments in the market, was growing enormously. The best way to catch this market demand was to serve mobile customers in a focused way. Meanwhile, the fixed-line business was in a transformational phase. Now these trends are changing, from the market perspective and also from the regulatory perspective, as well as in the internal status of fixed-line operators. The trends and challenges of mobile and fixed-line operators are becoming similar and most telecommunications companies are deciding to combine these activities. This is a trend not only in Slovakia, but also in the region and within the Deutsche Telekom group to which we belong to, and also among other big telecoms operators in Europe and world wide.

Today we have a situation when the mobile market is not growing so enormously or it is reaching saturation and the technological challenges of how to best serve the customers are becoming similar. We want to do the same on all networks, whether mobile or fixed – we want to support the organisation of the internet and information society and so forth. We are seeing that similar regulatory frameworks are applied to fixed and mobile networks. This overall situation definitely suggests that this is the right time to combine forces and to align the processes and the cultures internally and then we can serve our customers better. And obviously in this business, size matters. With this combination we now have a huge potential to increase revenues, decrease costs and then reinvest the savings into new technological requirements. So I think that this past debate is now over and we are convinced that this is the way to best address the needs of our customers.

TSS: Do you mean that the debate is over in the whole market?

SGS: I would say in the whole industry. There are still big stand-alone mobile operators, but all those operators who had both fixed and mobile assets are now serving their customers in a combined way. This is the case in Croatia, Austria, and Hungary, but you can see the same also in France or Germany. Almost every country in which a strong fixed-line and mobile operator have been combined shows better results in terms of customer satisfaction, profitability and readiness to make the huge investments which are ahead of us.

TSS: What challenges does the merger of Slovak Telekom with T-Mobile Slovensko bring to financial management of the new company? What does this process involve? When will the process be complete?

SGS: From the point of view of financial management I would say that the biggest challenge is how we can make the opportunity happen in the best way. How can we make sure that it is not only an opportunity to increase our revenues or cut costs, or to save on future investment costs and to support the whole company, but to actually accomplish this? I think that this is the biggest point. Within the finance organisation we also have to do our homework. There are financial systems which must serve the company – we must unite the billing systems for example and we must make sure that there is a merged enterprise resource management system in the company. The merger also means a big reorganisation, personnel changes, and so forth and the financial system must provide support down to the smallest details of the wage management systems and so on. But there are other inside technicalities that we need to accomplish also. The most important part is to have the whole company involved in the transformation and to achieve commercial financial benefits and then we can use these to better serve our customers.

With regards to completion of this process, this is a long process. There was one big date, July 1, but this was about our internal readiness from a legal perspective as well as others. From this important milestone forward we will have a new management in place, there is a completely merged organisation, and we have new business strategies to serve our business, residential and wholesale customers. I would say that it will take a year until the changes come to all of our processes. It will be even longer when it comes to full readiness of the IT system. It will take two or three years until all our systems are replaced and combined to support these activities. But I think what our customers will feel is this readiness and it will be visible very quickly.

TSS: What effects should the merger bring in regards to effectiveness and profitability of the combined company?

SGS: This is exactly the way we are approaching the benefits of the integration: we give the same weight to the outside potential, that is on customers or the revenue side and also a similar weight to our internal efficiency. We want to be able to acquire more customers and generate more revenues as the result of the merger, so there is this outside potential. And at the same time we want to save costs on ongoing expenses and particularly on future investments, which is more important. We expect the revenue potential to come from the fact that we will be able to unify two huge customer bases. About half of the households are covered by fixed-line services and the coverage is similar on the side of mobile services. If we combine these forces, if we better understand the needs of our customers, then there is a chance to add some additional services and to bring higher revenues.

On the cost-savings side, this is a practice throughout the industry. A bigger operation means less management proportionally and it will mean savings in terms of support costs and we can better utilise these savings for our future investments.

For example, one of the biggest challenges for us is how we can support the spread of the
internet in this country. We want to be sure that each of our customers has the chance to have broadband service, to be online on the internet wherever they are – at home or at work, when on the go, and later on even bringing broad-band into cars. This requires huge technological changes and investments. Now, we can optimise it, we can find out what the optimal combination of coverage is in Bratislava or in a small village in the High Tatras.

TSS: One of your tasks at Slovak Telekom is to look for ways to improve profitability and effectiveness. Given that the Slovak telecoms sector, with its three players, is very competitive, where do you see opportunities?

SGS: Compared to the size of the country, it’s definitively a very competitive market situation. There are three mobile operators with international brands and backgrounds and also regional fixed-line operators and everybody is shifting into one another’s business. Our main mobile competitor is moving to some extent into the fixed-line business. If we see the related segments like the television market or the internet market, there are dozens of other operators, smaller and mid-sized. I see this from a positive angle because it means there is a huge demand in the market. The real question is not whether our customers want our services because we can certainly see that they want telecommunications services, the question is whether we can provide these services in the expected quality and, of course, at an affordable price level and how we as a business can make this happen and how we can do so in a profitable way over the long run.

Potential for improvement exists from the external as well as the internal perspective. Improvement potential from the external side means that there are ways to innovate. Innovations can trigger additional customer demand. Ahead of us are new investments into newer technologies on the mobile as well as on the fixed-line segments which will make the customer experience with broad-band or the internet much better. This is the so-called LTE technology on the mobile side or optics development in the fixed-line side. This is the innovation aspect that will bring us external efficiency and improvement.

Internally, there is the opportunity to do things better in every business. We are improving our processes in all fields because of market pressure and also because of the entire difficult economic situation last year. We have our savings programme, which we call the ‘save-for-service programme’ because the logic behind it is that when we save, let’s say, €100 on internal costs we want to reinvest most of it to improve our services. But these internal efficiency improvements are more and more difficult to achieve. These two companies, which are now uniting forces, Slovak Telekom and T-Mobile, are quite reasonably efficient when they are compared with the Deutsche Telekom group or overall. But that’s why we are here – management is paid in this company to find additional improvement potentials.

TSS: Slovak Telekom is also following the general trend of acquisitions in the ICT segment. What is the goal in these acquisitions, the last of which was the acquisition of 51 percent in the IT company PosAm?

SGS: The acquisition is a way for us to address the challenges of the market. There is certain saturation in terms of our revenue generation due to regulatory or other market reasons. The previous big revenue growth period is over, not only for us but also for all operators. So we want to find ways to grow further. That is the number one objective. Secondly, we want to find growth opportunities in areas which are close to our core business or which can facilitate or help our business. The ICT market, the systems integration market and the business solution market meet these requirements. They have a high growth potential, much higher than any other part of the industry, and it is complementary to our business. For example, with the latest acquisition of PosAm we now have the capability to address business customers’ needs and combine fixed-line and later mobile needs with IT systems solutions. And another recent investment fits into this picture also and that is to bring to this market the biggest data centre in Bratislava. Because then we can address the so-called cloud-computing needs of enterprises. That means that data can be stored in a secure way and we can put applications and IT services behind this. That’s where an acquisition like PosAm fits into supporting our growth and enabling us to sell more complex solutions, telecommunications as well as IT solutions. I think that in the future Slovak Telekom will continue to search for other such opportunities.

TSS: Slovak Telekom is part of Deutsche Telekom group. To what extent is the policy of the parent company conveyed down to members of the group?

SGS: Yes, Slovak Telekom is 51-percent owned by Deutsche Telekom and that has a significant effect on our operation. This brings lots of upsides to the company, to the market and to customers. An example of an upside is that we are able to bring the iPhone to the Slovak market as a co-exclusive partner. If a telecoms operator is not part of a huge European or global telecoms group, this is impossible. Also the strong brands of Deutsche Telekom, T-Com and T-Mobile, give us big advantages. There are other business opportunities: being part of the group means that we can combine our purchasing power with the whole Deutsche Telekom group, we can buy technologies in a much cheaper way and consequently we are able to price it in a much better way to our customers. Also, the quality of our services could not be on such a high level if we were not a member of the group. Slovak Telekom as well as T-Mobile customers’ satisfaction is one of the highest in the industry. But this is not only a one-way street. There are several cases in which one part of the group, such as here in Slovakia, whether it was T-Mobile or Slovak Telekom, is in the pilot role or we are earlier in the market. For example in the mobile business, Slovakia was in a pilot role within the whole group when we applied our broad-band technology, the so-called Flarion or FLASH-OFDM service, which enabled us years ago to cover most of the country with mobile broad-band service.

On the fixed-line side, in the last one-and-a-half years we covered 330,000 households with fibre-optic service and this is the highest coverage ratio, higher than in Germany. We did it first and based on our knowledge and experience the whole Telekom group is benefiting. Another example is a new successful product on the market, Magio satellite television. This has not been presented yet on the German market, it is only present here and in some other countries in this region. So we are also contributing to the whole group’s R&D and innovations.

TSS: Has the economic crisis changed customer behaviour?

SGS: Like every industry, the telecoms industry also has been feeling the effects of the economic crisis and this is changing the behaviour of our customers to some extent. The good news for us is that there is demand for telecommunications services, whether mobile or fixed, whether voice or internet. I think that what is changing, logically, are the expectations of customers for directness and clarity, especially in terms of pricing. Customers are becoming more price-sensitive and are optimising their programmes as users. Our philosophy is to give customers more and more services at the same or lower prices because lowering prices brings additional market demand. We have clearly seen from this perspective that the telecoms industry is a relatively lucky one. When the economic downturn came we saw slightly lower revenue than we had expected and we had to work on cost-savings programmes. But it is absolutely not comparable with other industries. There were no significant layoffs within this group. We could manage with additional improvement measures within the company and we kept focusing on investments. Our internal investments in IT systems were decreased a little bit but when it came to major technology changes and serving new needs of customers our investments are continuing as before.

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