TECH DEALS: A tale of two telcos

Tech Deals is a weekly column covering the latest deals in one of the busiest sectors for M&A. To read previous articles go to our Tech Deals page. 

Telstra's crystal ball on iiNet/TPG

The telco sector has become a hotbed for M&A action and with iiNet swallowing Internode before Christmas last year all eyes will be on iiNet shareholder TPG in 2012 when we will find out just how serious it is about making a full takeover play for the Perth-based internet service provider. TPG holds 7.24 per cent of iiNet and this stake could well be the beachhead before an eventual assault.

That's certainly how Telstra seems to think things will play out if its latest newsletter to its retail staff is any indication. The Telstra communiqué, highlighted by Delimiter, states that a full takeover push by TPG is only a matter of time and will propel the ISP to the third spot in the broadband market.

Well not quite, because the Internode buy has already made iiNet the third player in the market and if and when TPG comes to the table a successful deal will actually see TPG leapfrog SingTel Optus to become Telstra's biggest rival.

We will have to wait and see whether the scenario plays out accordingly, but there is no denying consolidation is the name of the game for telcos, in a sector where fixed-line broadband penetration is reaching saturation levels and customer growth is slowing down. The post National Broadband Network (NBN) landscape will be the playing field for the big boys where size will really matter and the only effective way to do that is through acquisitions. It's a strategy that has so far worked for iiNet and after playing the part of the predator during 2011 it will be interesting to see how it reacts when the shoe is on the other foot.

iiNet boss Michael Malone probably won't give up without a fight and with Internode's boss Simon Hackett sticking around with his 7.5 per cent stake in iiNet  for twelve months after the acquisition is completed, Malone may have a handy ally in fending off TPG's advances.

As for Telstra, it will safely give the acquisition merry-go-round in the telco sector a miss and rather utilise its billions to ensure it remains the dominant force in the sector, a heavyweight with quicker hands and nimbler feet. The mobile market  has already been earmarked by Telstra boss David Thodey as an area of particular focus this year so the telco's M&A focus will be more geared towards boosting its capabilities in the digital content  and media space.

CSG board licks its wounds 

While the deal momentum in the telco sector has certainly carried into the new year, one deal that failed to eventuate was the potential takeover of Darwin-based print and technology company CSG Limited. CSG was thrust into the spotlight in September last year when it told the market it had received a mysterious $340 million, $1.20 a share, takeover offer from an un-named suitor. While CSG's management mulled over the initial offer another take-over proposal soon made an appearance.

There were a number of interested parties lined up for the deal but as it turns out not everyone was keen on the whole business. According to The Australian Financial Review, a number of suitors, including private equity players, were only interested in the IT services part of the business.  The one suitor interested in the whole business, and the one that lobbed the initial $340 million offer, was Japan's NEC and CSG predictably decided to pursue talks with NEC and give everyone else the flick.  

Unfortunately for CSG's board the talks with NEC failed to deliver an outcome and the company's shares took a pounding before Christmas, sliding 40 per cent to 60 cents. So, CSG starts 2012 back where it started and after licking its wounds there is talk now that the company is thinking of revisiting putting the IT side of the business up for sale. The unit, estimated to be worth $240 million to $260 million, excluding debt of $80 million, had its fans last year and despite having been shown the door by CSG last year, a number of them should be keen to re-engage.   

Facebook confidence boosters 

Facebook is set to go public this year, in what will be one of the biggest tech IPO's ever. The critical question will be whether the social network will break the trend of high profile tech IPOs failing  to deliver on their promise. There is a good chance that Facebook will not go down the same path as the likes of Groupon, Zynga and Pandora but that will depend on how successful Facebook founder Mark Zuckerberg and chief operating officer Sheryl Sandberg are when it comes to  convincing investors that Facebook has what it takes to make the cut on Wall Street. 

The excerpts of interviews given to the Wall Street Journal in October, shed some light on their thinking. As Zuckerberg points out, he is cognisant of the fact that Facebook isn't just a product anymore it's a company and a business that will need to show it can make more money. As for Sandberg, the former Google executive has highlighted her focus isn't just on building the customer base but actually encourage them to do more on Facebook. It's this user activity that translates into advertising revenue so Sandberg certainly has her finger on the pulse.

With Facebook's IPO, expected sometime between April and June, expect to see a lot more confidence building exercises from Facebook, because the faith of the investors will be a key factor in whether this IPO lives up to the hype.

Wrapping up

In other news, Google has scored its largest enterprise contract ever, with 110,000 employees of Spain's second largest lender, Banco Bilbao Vizcaya Argentaria SA, to start using Google Apps. Meanwhile, the search engine giant has also beefed up its efforts to keep its TV aspirations alive, with LG Electronics reportedly joining the roster of TV makers supporting Google TV. Sony is currently the only TV manufacturer that provides Google TV software but the Wall Street Journal reports that Google is scrambling to revive its TV product and along with the growing roster of TV makers, Google is also teaming up with semiconductor maker Marvell to source technology for its new TV products that will rely on ARM chips.

Elsewhere, Microsoft and LG have signed a new patent agreement that will cover LG tablets, mobile phones and other devices running the Android operating system. Finally, Australian IT security company TrustDefender has been acquired by American group ThreatMetrix in a move the companies say will allow them to create better software solutions and score bigger deals.