The Australian telco space has witnessed much M&A activity in the last few years, with the likes of Comms Group, Aussie Broadband, Switched On Australia, Pennytel, Singtel-owned NCS Australia, and Telstra Purple all making market plays.\nWith the acquisitions set to continue, the local market can expect more changes to come. Although this list of providers covers both legacy players like Telstra and others including Amaysim and Vocus\u00a0, there are some common drivers of this activity in the Australian market.\nAustralian telecoms eyeing economies of scale, convergence wave in local buys\nAustralia and its neighbour New Zealand are seeing this market upheaval in a similar vein as the rest of the world. The pressure on margins and the shift toward convergence are global trends, according to independent analyst Paul Budde. However, these trends are bringing local providers together rather than seeing overseas telcos buying in to Australia.\n\u201cWith geo-political pressure there is an increased focus on national consolidation rather than in combination with international partners,\u201d Budde says.\nIn Australia, Telstra\u2019s structural separation, like its recent 35% stake in Fetch, leads to new opportunities, while in New Zealand, 2Degrees and Vodafone merged.\n\u00a0With margins going down, costs need to be reduced, which makes mergers one of the options to stay competitive. For instance, in its 2021 financial year report, TPG says it achieved $71 million in \u201ccost synergies\u201d in 2021, with the aim of making it $125 million to $150 million this year following its merger with Vodafone. The telco says it\u2019s dealing with margin erosion in fixed broadband from legacy customers transitioning to NBN services and higher NBN wholesale prices among a range of challenging conditions.\nThere\u2019s also a widespread convergence between IT and communications that\u2019s driving the market activity. Budde notes that data centres, telco infrastructure (broadband), and cloud computing are getting integrated, driving many mergers between smaller and midsize companies.\n\u00a0Such an integration can lessen competition, while improving services to customers, according to Budde.\nTech Research Asia analyst and consultant Mark Iles agrees that convergence is playing out in Australia, as elsewhere.\n\u201cHistorically, there have been communications and connectivity providers, or telcos. Then there were those that did servers and PCs, with just a little bit of overlap. Now what we're seeing, thanks partly to private equity funding and technology changes, is that it\u2019s a lot easier for MSPs to be offering the service all the way from the network up,\u201d Iles says.\n\u201cWe\u2019ve got this kind of unique, competitive dynamic where they're all now trying to fit into each other\u2019s territory,\u201d he says.\nIles describes it as telcos moving up to acquire providers and sell more profitable services in some cases, and managed services providers (MSPs) moving their way down and trying to own the network. \u201cThis is all about who owns the whole stack for a customer,\u201d he says.\nWith the growth of software-as-a-service (SaaS) applications and so many elements running through a network, it can be difficult for businesses to know where to go when there\u2019s an issue. Having one point of access, simplifies this.\n\u201cIf you're running a SaaS application, and it's not running very well, who do you phone? Do you find your network provider because the network's the issue? Would you phone your IT provider because there\u2019s something wrong with the IT infrastructure?\u201d Iles says.\nOne provider across network and services means a single point of contact that should streamline support, provide more seamless services, and better consistency. That\u2019s if providers can make it fit all together properly.\nTelcos, face the challenge of integrating different services within the one business and deliver a seamless customer experience.\n\u201cIt's all well and good to go and buy three or four different companies. It's another thing entirely to integrate them,\u201d Iles says.\nWith a single service made up of three or four different acquisitions \u201cthere's a lot of work involved in being able to merge everything so that it looks seamless to the customer\u201d, according to Iles. \u201cIt\u2019s doable, but there are some growing pains\u00a0.\u201d\n\u201cWe also see that more and more telcos are splitting off their infrastructure\u2014the towers, networks and data centres\u2014and this creates new market dynamics as infrastructure will become more available on a wholesale basis, moving away from the vertically-integrated business operation of the telcos,\u201d Budde tells Networkworld Asia.\n\u201cWith Telstra, we saw Macquarie buy telco infrastructure. This is only the beginning, and much more is expected here as market restructuring makes sense to lower the costs and to re-strategise the direction of companies such as Telstra, Optus and TPG, with more focus on customers, retail, services and less on owning infrastructure,\u201d says Budde\u00a0.\nWhat\u2019s the Australian regulator\u2019s view?\nThe spate of deals makes sense as the optimal number of operators in each country seems to be three, according to IDC analyst and VP, telecommunications and IOT APEJ Hugh Ujhazy. While this is a generic equation, it is borne out across the APAC region, evidenced in the Vodafone\/TPG merger in Australia, the Celcom\/Maxis one in Malaysia and Vodafone\/IDEA.\n\u201cThese examples seem to support this as a larger customer base and more sources of revenue make the raising of capital easier,\u201d he says.\nHe believes the Australian regulator seems comfortable at this level, but anything less and that might not be the case. \u201cThe regulators seem okay to allow a reduction of number of operators to three, but I would be surprised if they allowed a drop to two,\u201d Ujhazy says.\nBudde notes that so far, the regulator has accepted the business changes across the telco space, although in relation to the TPG\/Vodafone merger, the Australian Competition and Consumer Commission (ACCC) initially rejected the merger, although it was subsequently overturned by the courts.\nHowever, he pointed out the regulator seems to be less concerned around the smaller players in the Australian market.\nIn contrast to other countries, Australia\u2019s ACCC does not have the power to approve mergers, rather it works on a \u2018merger enforcement\u2019 model where it makes an appeal to the Federal Court if it believes a merger would diminish market competition.\nIt\u2019s something the regulator would like to change, arguing the Australian approach is out of step with most merger regimes internationally and should require a pre-merger approval rather than trying to prevent or even address the issue afterwards. In many other jurisdictions, mergers are required to be notified as part of a formal assessment regime and must obtain clearance before they can proceed.\nThe ACCC has also argued there are flaws in the way the Australian merger law is applied. It wants to see changes to the test for assessing mergers "to ensure the focus is on the competition that will be lost if the merger proceeds, and on the impact of the merger on structural conditions for competition in the relevant market,\u201d ACCC former chair Rod Sims told a Law Council workshop in 2021.\nEven so, while its focus is on market power in Australia, or fostering competition, only a small sub-set of mergers\u2014around 1-2%\u2014give rise to significant competition concerns. \u201cWe recognise that the vast majority of acquisitions are competitively benign and should proceed easily, without a significant regulatory burden,\u201d Sims said at the time.\nAussie telco M&A: How long is it likely to continue?\nWith some acquisitions still happening in the local market, the key question is whether this activity is likely to taper off anytime soon, but analysts don\u2019t see it slowing down.\n\u201cIt's basically coming down to a race as to who's going to provide all the infrastructure for customers, from the network, the phones and the phone systems, the IP systems, the security, the cyber, and all the transformation and other projects. The telcos are trying to do this as a one-stop shop,\u201d Iles says.\nWhile managed services have typically been contracted, with communications and phone systems, which means predictable revenue. \u201cIt\u2019s very sticky guaranteed revenue, which is certainly something investment companies like as well,\u201d he says.\nIles says that in the Australian market it\u2019s something of a \u201cland grab\u201d now, with everyone's trying to secure customers.\n\u201cThe MSPs are trying to make sure they can win the network and telco providers who've got the network are trying to move up and sell the cyber security and the managed services. We're seeing this in providers all the way from enterprise right the way down to SMB. And there\u2019s more headroom in this yet. We don't expect it to slow down,\u201d he says.\nLarger enterprises will break deals apart, according to Iles, putting separate tenders out for each part because they know if someone's bundling up the whole deal, they're putting too much margin inside that deal.