Breaking Into A Takeover Sweat

Asian barriers are down, and wireless deals are popping

Asians are among the world's most avid users of wireless technology. Yet some of the region's leading telecom companies, racked by price wars, overcrowded markets, and the aftereffects of the economic crisis, are ranked among the world's worst stocks. Making matters worse, government-imposed restrictions on foreign investment have prevented Asian operators from hooking up with deep-pocketed foreign partners. For many companies in hyper-competitive markets like Hong Kong, the picture has been "awful," says Rohit Sobti, head of regional telecommunications at Salomon Smith Barney in Hong Kong.

But if the current rush of mergers and acquisitions is any sign, big changes lie ahead. The dealmaking was kicked off by Richard Li, chairman of Internet company Pacific Century CyberWorks Ltd., who is putting the finishing touches on his $26.5 billion acquisition of Cable & Wireless HKT, Hong Kong's No. 1 mobile and fixed-line operator. And it's not just locals on the prowl. Global players ranging from Australia's Telstra to AT&T are scoping out the area, which is seen as a prime market for the next generation of the wireless Internet.

Deals are popping around the region. Singapore Telecommunications Ltd., which lost out to Li in its bid for HKT, is looking at operators in Hong Kong. One likely target: The telecom subsidiary of the New World group. Hutchison Whampoa Ltd., the Hong Kong conglomerate run by Li's billionaire father, Li Ka-shing, is shopping around in India. Among the foreigners, Norway's Telenor has picked up stakes in Thai and Malaysian cellular operators.

As the pace of consolidation picks up, Asian consumers may find themselves with a mixed bag. They'll enjoy better services and selection. But consolidation means fewer players. South Korea now has just three mobile operators vs. five a year ago, and Hong Kong is expected to drop from six now to four by yearend. Consumers in both places have long enjoyed low tariffs and cheap handsets, but an easing of price wars should lead to higher costs for some services.

That's good news, of course, for beleaguered operators. Some thanks should go to Asian governments. Several have pushed through measures making foreign investment easier and telecom markets more attractive. For instance, Taiwan has finally lifted state-owned Chunghwa Telecommunications Co.'s monopoly on fixed-line services and is allowing foreigners to own up to 40% of local operators. India is considering allowing foreigners to own 100% of telecom companies, up from 49% now.

"BEAUTY CONTEST." Perhaps the biggest force for change, though, comes from the advent of wireless Internet access. While companies worldwide are excited about the prospects of so-called Third Generation (3G) mobile, many are looking to Asian markets as leaders, since relatively few people in China, India, or Southeast Asia have fixed-line Internet access. "There is going to be tremendous growth," says Jean-Luc Jezouin, a vice-president at Nortel Networks Corp. in Hong Kong. Within three years, Jezouin predicts, Asia will have 150 million users of 3G devices.

Trouble is, governments could choose to auction off 3G licenses, emboldened by the over $35 billion windfall that the British government earned in April from selling them to the highest bidders. Most operators naturally prefer a merit-based "beauty contest," in which governments award licenses for free. That's the method Japan chose in June. But Korea on July 12 said it would award three licenses on merit but also charge each winner a $1.2 billion fee. The fear is that the burden of paying for high-priced licenses could jeopardize the industry's viability.

Despite such concerns, Western companies argue that they need Asian deals more than ever as integrated parts of their global networks. "Asia is their next move," says Joseph Fan, president of Taiwan Cellular Corp., the island's leading mobile company. As far as many Asian operators are concerned, that's not a moment too soon.

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