Telecom Industry: M&A Strategy to drive digital business models by EY India

1. Telecommunications Capital Confidence Barometer November 2016 | ey.com/ccb/telecommunications | 15th edition Telecommunications companies sharpen M&A focus in the drive towards digital business models

2. Telecommunications highlights Telecom 48% 57% Global Telecom 37% 49% Global expect to actively pursue acquisitions in the next 12 months have five or more deals in the pipeline Telecom 71% 52% Global Telecom 49% 46% Global indicate that acquiring talent is the most important or second most important strategic driver for pursuing an acquisition outside their sector cite sector convergence and increases in competition from companies in other sectors as the biggest disruptor to their core business Telecom 43% 34% Global Telecom 67% 71% Global say that the impact of digital technology on their business model is the most prominent issue on the boardroom agenda are shifting skills and talent within the business to gain efficiencies from greater automation

3. Digital disruption and the talent agenda drive corporate strategy and deal intentions Sector convergence and advances in technology and digitalization are altering the telecommunications landscape. As companies seek to adapt and excel by reimagining business models and making the most of innovation and automation, talent has become a key priority to drive both the corporate strategy and deal intentions, according to the most recent edition of the Capital Confidence Barometer. Positioning for convergence is driving a number of high- profile deals, such as AT&T’s announced acquisition of Time Warner, yet smaller deals that can fill gaps in portfolios or provide innovative assets or people are also moving into focus as companies look to overhaul their business models. In this light, a number of carriers are pursuing “bolt-on” acquisitions in areas such as the Internet of Things (IoT) and over-the-top (OTT) video services. Deal intentions bounce back As deal intentions rebound from six months ago, 48% of telecommunications executives indicate that they are actively pursuing a merger or acquisition in the next 12 months. Deal fundamentals support this surging confidence with executives feeling stable or positive in their confidence about the number of acquisitions and the likelihood of closing. This confidence bears out in the number of deals telecommunications companies have on the go, with 37% indicating that they have five or more deals in the pipeline. Telecommunications companies look to win the war for talent As telecommunications companies react to the digital disruption that has upended business models across the industry, acquiring talent has become the most significant strategic driver for pursuing acquisitions outside of their own sector. Talent is also top of mind as a business imperative as companies look to reskill workers and shift skills and talent within the business to gain efficiencies from greater automation. This is particularly important given that a third of telecommunications respondents indicate that the prior investments they’ve made in automation have not proven to have been as successful as they would have liked. As well, in a move that defies popular perception, increasing automation and technological advances have telecommunications companies creating more new jobs rather than reducing headcount. As telecommunications companies seek to reinvent themselves to compete in a digital world, they are considering deals that not only bring them to the forefront of technology and innovation, but also acquiring the talent they’ll need to get there. Gaeron McClure Global Telecommunications Leader Transaction Advisory Services Capital Confidence Barometer | Capital Confidence Barometer | 1 1

4. Macroeconomic environment Telecommunications executives offer a more tempered economic outlook, but market fundamentals remain strong Political stability and currency volatility, largely a result of the UK’s decision to leave the European Union (Brexit) and the US 2016 election cycle, combined with slowdown in global trade flows, have telecommunications companies feeling less optimistic than six months ago. A feeling of stability remains for the majority of respondents (51%), but a feeling of modest decline is on the rise. 51+49+M 31+69+M Despite a more tempered economic outlook, economic fundamentals appeared to have rebounded somewhat, with the exception of equity valuations. Telecommunications companies are feeling more positive about corporate earnings and short-term market stability, and about the same concerning equity valuations. 54+46+M 32+68+M Telecommunications Global see the state of the global economy today as stable 51% 54% believe high volatility in currencies and commodities to be the greatest economic risk to their M&A strategy in the next 12 months 31% 32% However, their confidence in credit availability has dipped from six months ago, and lags behind the sentiment of their global counterparts. Credit availability concerns may be influenced by the continuation of quantitative easing, particularly by the European Central Bank, and by the timing and tone of the US elections. 38+62+M 41+59+M Telecommunications Global have a positive level of confidence in credit availability 38% 41% 2 |  Capital Confidence Barometer

5. Corporate strategy Telecommunication companies are looking at organic and inorganic opportunities to boost growth and earnings Sector convergence and increasing competition from companies in other sectors, combined with advances in technology and digitalization are disrupting business models across the telecommunications landscape. Industry regulation adds another layer of complexity in a fast-changing, yet already highly regulated environment. 22+78+M 34+66+M 43+57+M 23+77+M 34+66+M 34+66+M Telecommunications Global see sector convergence as the greatest disruptor to their core business 22% 23% identify advances in technology and digitalization as having the second most meaningful disruptive impact on the core business 34% 34% say the impact of digital technology on their business model is the top issue on the boardroom agenda 43% 34% Fifty-nine percent of executives indicate they are seeking organic routes to higher earnings as acquisition opportunities prove more scarce. Capital Confidence Barometer | 3

6. Corporate strategy Telecommunication companies are looking at organic and inorganic opportunities to boost growth and earnings (continued) In terms of boardroom priorities, the impact of digital technologies on the business model tops the list for 43% of respondents, with sector convergence and increased competition ranking as the second most important, as new entrants from outside the sector drive the need to find new ways to thrive in a broader, more dynamic, more complex world. Fifty-nine percent of executives indicate they are seeking organic routes to higher earnings as acquisition opportunities prove more scarce. Another 41% are turning to a mix of buying and partnering to take advantage of a shifting tide across the industry, although alliances have fallen short of expectations, having not produced the returns companies had anticipated. That said, telecommunications companies know that alliances are key to their success as the IoT, robotics and automation become crucial to delivering growth. The talent agenda takes center stage 67+33+M 29+71+M Talent has become a key issue as digital disruption takes center stage, with 67% of telecommunications executives indicating that they need to shift skill sets and talent within their business to gain efficiencies from greater automation. Further, contrary to popular perception, automation and technology appear to be creating more jobs than fewer, with 53% of telecommunications executives saying that they need to hire more talent in the months ahead. 71+29+M 25+75+M Telecommunications Global say they need to shift skills sets and talent within their business to gain efficiencies from greater automation 67% 71% suggest that they are still duplicating automated and non-automated processes 29% 25% Contrary to popular perception, automation and technology appear to be creating more jobs than fewer, with 53% of telecommunications executives saying that they need to hire more talent in the months ahead. 4 |  Capital Confidence Barometer

7. M&A outlook Deal intentions rebound, remaining above historical averages Deal fundamentals support a more positive outlook with executives feeling good about the number of acquisitions and offer stable confidence in the likelihood of closing acquisitions. In terms of the quality of acquisitions available, executives still feel good, but are slightly less optimistic than they were six months ago. Up five percentage points from six months ago, deal intentions have rebounded somewhat and remain above historical averages as telecommunications executives expect the M&A market to remain stable in the next 12 months. 57% 56% Expectations to pursue an acquisition 53% 59% 50% 57% 45% 43% 50% 49% 41% 41% 41% 48% 40% 39% 39% Capital Confidence Barometer average42% 36% 40% 38% 38% 35% 27% 33% 29% 31% 30% 25% Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct 2010 2011 2012 2013 2014 2015 2016 Telecommunications Global Deal pipelines surge, with a focus on innovative technologies and emerging assets of telecommunications respondents indicate that they have five or more deals in the pipeline, almost half of which are valued at US$250m or less. Executives are also feeling more positive about deal completions with 40% looking to close three or more deals in the next 12 months. While in-market convergence and consolidation remain key drivers of sector M&A — witness megadeals such as AT&T/Time Warner — many telecommunications companies are turning their attention to smaller deals and more of them to help fill gaps in existing portfolios and acquire emerging assets that boost innovation and competitive advantage. Up from 17% six months ago, 37% 37+63+M 49+51+M 49+51+M 42+58+M Telecommunications Global 37% 49% have five or more deals in the pipeline are looking at deal sizes of US$250m or less 49% 42% Capital Confidence Barometer | 5

8. M&A outlook Talent tops the list of strategic drivers for acquiring outside the sector executives indicate that acquiring talent is their most and second most strategic driver for pursuing an acquisition. New product or service innovation also tops the list, along with access to differentiated customers, and access to new technologies. As companies look outside their sector to address digital disruption and a rapidly changing industry landscape, they are zeroing in on talent as their number one priority when it comes to dealmaking outside their sector. Twenty-nine percent of telecommunications 71+29+M 33+67+M 52+48+M 23+77+M Telecommunications Global rank acquiring talent as either the most important or second-most important strategic driver for an acquisition outside their own sector 71% 52% When it comes to M&A within the sector, growing market share surfaces as the most important factor, suggesting the importance of market dominance within a geography as a means to remain competitive. Reacting to customer behavior ranks as second most important. Telecommunications Global see growing market share as the primary strategic driver for pursuing acquisitions in their current sector 34% 23% Twenty-nine per cent of telecommunications executives indicate that acquiring talent is the most important strategic driver for pursuing an acquisition outside their own sector. 6 |  Capital Confidence Barometer

9. M&A outlook Start-up opportunities make emerging markets attractive for buyers Top five investment destinations While the US and Canada remain top destinations for acquisitions in the coming months, the UK has fallen out of favor as Brexit concerns make investors cautious. In emerging markets, the vibrancy of the start-up market makes China and South Korea attractive options for M&A activity. Global Telecommunications United States United States 1 2 China China 3 Germany Canada 4 Canada South Korea 5 France Japan Valuation and regulations have investors and boards scrutinizing deals In the past 12 months, 95% of telecommunications respondents say that they have canceled or failed to complete a planned acquisition. Thirty percent say that investor or board scrutiny killed the deal; 25% suggest the gap between buyer and seller was too wide. For 31%, economic or political instability was the second most important reason for a deal not going through. As the gap between buyers and sellers creeps higher, with 49% of telecommunications executives indicating that they expect the valuation gap to be somewhat higher in the next 12 months, investors and boards are being more cautious in approving potential deals. 49+51+M 30+70+M 56+44+M 19+81+M Telecommunications Global see the valuation gap between buyers and sellers as somewhat higher (10% to 25%) 49% 56% cite investor or board scrutiny as the reason they failed to complete an acquisition 30% 19% Capital Confidence Barometer | 7

10. M&A outlook Valuation and regulations have investors and boards scrutinizing deals (continued) realistic about potential negative synergies, including customers who may be unable to continue their relationships with the new entity, additional regulatory costs or underfunded pension obligations. As for the reason a deal does not meet expectations, almost half (47%) cited poor identification and quantification of synergies. The level of preparation and readiness of key functions and stakeholders is key to a successful integration. Executives must be 47+53+M 39+61+M Telecommunications Global cite poor identification and quantification of synergies as the reason a deal didn’t meet expectations 47% 39% About this survey The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas — EY’s framework for strategically managing capital. The Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel comprises selected global EY clients and contacts and regular EIU contributors. • In August and September, we surveyed a panel of more than 1,700 executives in 45 countries. Nearly 50% were CEOs, CFOs and other C-level executives. • Respondents represented 18 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. • Surveyed companies’ annual global revenues were as follows: less than US$500m (18%); US$500m— US$999.9m (24%); US$1b—US$2.9b (17%); US$3b—US$4.9b (17%); and greater than US$5b (24%). • Global company ownership was as follows: publicly listed (66%), privately owned (30%), family-owned (2%) and government/state-owned (2%). 8 | Capital Confidence Barometer

11. Telecommunications contacts For a conversation about your capital strategy, please contact: Adrian Baschnonga Global Telecommunications Lead Analyst Ernst & Young LLP +44 20 7951 1724 abaschnonga@uk.ey.com Gaeron McClure Global Telecommunications Leader Transaction Advisory Services Ernst & Young LLP gaeron.mcclure@ey.com +1 212 773 9988 Prashant Singhal Global Telecommunications Sector Leader Ernst & Young Private Ltd. (EYPL) +91 124 671 4746 prashant.singhal@in.ey.com Global contacts For a conversation about your capital strategy, please contact us: Global Americas Japan Steve Krouskos EY Global Vice Chair Transaction Advisory Services steve.krouskos@uk.ey.com +44 20 7980 0346 Follow me on Twitter: @SteveKrouskos William M. Casey EY Americas Vice Chair Transaction Advisory Services william.casey@ey.com +1 212 773 0058 Vince Smith EY Japan Leader Transaction Advisory Services vince.smith@jp.ey.com +81 3 4582 6523 Asia-Pacific Harsha Basnayake EY Asia-Pacific Leader Transaction Advisory Services harsha.basnayake@sg.ey.com +65 6309 6741 Julie Hood EY Deputy Global Vice Chair Transaction Advisory Services julie.hood@uk.ey.com +44 20 7980 0327 Follow me on Twitter: @JulieHood Europe, Middle East, India and Africa (EMEIA) Barry Perkins EY Global Lead Analyst Transaction Advisory Services bperkins@uk.ey.com +44 20 7951 4528 Andrea Guerzoni EY EMEIA Leader Transaction Advisory Services andrea.guerzoni@it.ey.com +39 028 066 3707 Capital Confidence Barometer| 9

12. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY’s Global Telecommunications Sector can help your business Telecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating challenges around customer ownership. Service innovation, pricing pressures and network capacity are intensifying scrutiny of the return on investments. In addition, regulatory pressures and shareholder expectations require agility and cost efficiency. If you are facing these challenges, we can provide a sector-based perspective on addressing your assurance, advisory, transaction and tax needs. Our Global Telecommunications Sector is a virtual hub that brings together people, cultures and leading ideas from across the world. Whatever your need, we can help you improve the performance of your business. © 2016 EYGM Limited. All Rights Reserved. EYG no. 04035-164Gbl ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/ccb