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Serge Lupas, Director, AlixPartners argues that by strengthening the quality of their Postmerger Integration execution planning and preparation, telecommunications companies can empower their M&A strategy
European telecommunications companies are on the hunt for attractive mergers-and-acquisitions (M&A) deals—especially ones that can help them boost their competitive positions in order to drive profitability and growth. However, they’re potentially setting themselves up for massive disappointment during the postmerger integration (PMI) process because the deals they’re engaging in are increasingly complex—creating Gordian knots that have to be untangled before companies can “tie the knot.” Making matters worse, all too many telecoms are still struggling to master PMI basics, which could result in value destruction of €1.5 billion to €2.5 billion annually after the ink on their M&A contracts has dried. But it doesn’t have to end up that way—if companies strengthen the quality of their PMI planning and preparation.
M&A integrations are never easy. In AlixPartners’ recent survey of 120 telco executives on the theme of PMI performance, many of the respondents acknowledged grappling with “wicked problems”—challenges widely recognised as persistent and very difficult, if not impossible to solve. The thorniest of them include consolidating deal partners’ legacy systems, converging and cross-selling the different companies’ products, and migrating customer databases. But our survey findings also show that telcos are underperforming on PMI basics as well—particularly on validation of synergies, workforce reductions, preparation and planning, and leadership-team transitioning. What’s more, such mistakes are in capability areas that executives themselves view as critical for successful postmerger integration. This is sobering news in a world already defined by a frightening degree of complexity.
Meanwhile, new regulatory requirements M&A players face are deepening the levels of complexity even further, turning PMI negotiations and execution into Gordian knots nearly impossible to untangle – as a look at the VIMPELCOM-THREE deal in Italy clearly shows. To pull off an M&A deal today, companies may have to extricate assets out of network-sharing deals or retail partnerships; carve out operations or assets; swap towers, fibre, or retail stores; or build a new business (for example, by creating a new mobile virtual network operator or committing to infrastructure investment)—all to satisfy regulators bent on ensuring fair competition.
The way out
To tie the knot successfully in any M&A deal, companies will first have to untangle the complexity knots. But merely picking at the most-visible, most accessible threads at the outer edges of the knots won’t be enough. As Liberty Global CEO Mike Fries put it, “You are going to have to go in with a much heavier toolbox...I don’t think the consolidation game is over—it’s just different.”
With Mike’s advice in mind—and drawing on our own PMI toolbox—we herewith offer two tips for tying the M&A knot successfully under today’s hyper-complex conditions: move faster and prep better.
PMI is similar to a military campaign in many respects: to have any hope of succeeding, you have to plan thoroughly, prepare as if your life depended on it, and move as fast as possible. In PMI, those actions are especially crucial when it comes to accelerating decisions about organisational redesign and speeding up the validation of potential synergies.
Accelerating organisational-design decisions
Whether an M&A team uses a rapid organisational visualisation and prototyping tool or takes another approach, it has to swiftly experiment with design options, including each scenario’s associated costs. Using rapid prototyping, teams can envision overlaying two or more deal participants’ current organisations to compare them at the full-time-equivalent, department, and business-unit levels. Thus they can build a picture of what the current companies look like now and then explore options— including those associated costs—for what the combined entity might look like after PMI execution.
The goal is to map resources used for similar activities, duplication of functions, discrepancies in spans of control, inefficient organisational structures, high and low performers, and misalignment in remuneration and incentive levels. The process helps M&A teams quickly identify unusual organisational features and high cost areas and thereby uncover redesign options that could deliver new efficiencies and capture previously invisible synergies. For instance, the analysis might suggest the need for such moves as reducing organisational layers, decreasing head count in specific parts of the newly integrated entity, or decreasing costs by aligning salary bands.
What’s more, the analysis can help reduce time to result— the amount of time it takes to design the combined new entity and identify organisational synergies—which can translate into more-informed and better decisions.
Speeding up synergy validation
But accelerating organisational-design decisions isn’t in itself enough to help M&A teams move faster. Teams must also speed up their validation of potential synergies the deal on the table could capture. To do so, teams can visualise and compare similar costs in two or more organisations, identify high-cost areas and overlaps, and plot where specific costs are highest in each organisation. As a result, they can more easily spot unusual patterns, such as costs that are being incurred in unexpected parts of the companies, and test the validity of synergy assumptions made earlier in the deal process. Thus, companies would spend less time modelling the deal and more time ensuring high-quality analyses, thereby avoiding a major pitfall our PMI survey respondents identified: overly optimistic synergy estimates.
Careful preparation can spell the difference between success and failure. Accordingly, we offer three preparation don’ts that, can save considerable heartache further down the M&A line.
1. Don’t wait for the deal to close
When an M&A team submits a potential deal to the competition and regulatory authorities, those authorities’ processes of required review and negotiation of remedies can drag on for as long as a year. But that doesn’t mean you should wait for the deal to close before sinking your teeth into the nitty-gritty, detailed work of PMI preparation.
In fact, we maintain that you can thoroughly prepare for many aspects of the PMI’s military campaign well before closing. Specifically, it’ll help you execute transformation of the merged entity more quickly— and start realising anticipated synergies sooner. Moreover, it will improve your negotiation capacity on remedies.
2. Don’t assume that wicked problems are unsolvable
You can also use the pre-close period to start tackling the particularly challenging problems, for which a hefty dose of technology can help. For example, when it comes to legacy systems, today’s plug-and-play, software-as-a-service technologies can help you quickly move to a next-generation, fully integrated platform during the PMI period. You can choose to have your entire new system operate in parallel to the old legacy systems before migrating, or you might want to build parts of your system based on standardised modules. This can help you clean out inefficient or expensive legacy systems and leapfrog the competition with cutting-edge processes and services.
3. Don’t fear structural remedies
When M&A teams present business cases for particular deals to their board, the cases tend to be overly optimistic about deals’ potential benefits, and when structural remedies are factored in the deal ends up looking much less attractive after the regulator has imposed a set of remedies more severe than expected. But rather than fear remedies, enhance your remedy-scenario-planning skills. Using game theory, financial modelling, and seasoned regulatory experts, treat the remedy situation as a chess game, where you figure out who’s going to make which moves, when, and how you’ll respond. Understand ahead of time the potential economic impact a particular remedy might have on your deal. That way you won’t overestimate the value you’ll get out of the deal if it gets executed. By doing all of this work up front, you’ll become able to enter the remedy negotiation process from a well-informed and confident position.
Conclusion: An Ounce of Prevention Is Worth a Pound of Cure
PMIs have never been easy for European telcos, and today new complications piled on top of persistent, wicked problems, plus telcos’ ongoing struggles with PMI basics, have created a hyper-complex M&A environment. Failure to unsnarl the complexities in that environment before tying the knot could doom deals—leading to value destruction that’s frightening to shareholders in its potential magnitude.
Thankfully, telcos can take steps to avoid that scenario. The antidote requires considerable investment in planning and preparation that get carried out early in the deal-making process. However, the payoff is well worth it: a more accurate picture of a deal’s potential value and risks. That picture can help a telco make better M&A decisions, gain a stronger negotiation position with business partners and regulators, capture synergies faster during the PMI period, and build a new entity that delivers the promised advantages.
Serge Lupas, Director
+44 (0) 20 7098 7597
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