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pressure to unify voice activities with other communication channels. The idea is to enable efficient
collaboration both internally - whether it involves the front, middle or back office - and externally
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systems at a single bank or IDB, however, can be staggering. Can they streamline and improve
collaboration solutions across a range of devices, particularly as more and more voice and
messaging services are IP-based and available via the cloud and hosted solutions? How can they
leverage technology to gain maximum business benefit? There are a plethora of ways that market
participants can answer both questions. But there are two words specialists say firms need to keep
in their mind at all times: Think Holistically!
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Working with our global panel, we have built a detailed picture of the digital disruption phenomenon, probing the key questions that organizations need answers to:
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• Why are we seeing so many disruptions?
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• What shape are these disruptions taking?
• Which startups are likely to emerge to disrupt sector value chains over the coming years?
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Don't let the common issues catch you out. M&A IT projects are difficult however the issues tend to be common ones. In this whitepaper we help guide you through them so come Day One you have a smile on your face and not a frown.
Digital disruption is a top-of-mind issue in the C-suites of every industry. Senior executives of traditional firms are looking over their shoulders and wondering if they are in the crosshairs of a digital insurgent.
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Similar to AlixPartners - Successful Postmerger Integration in Telecommunications - Sept 2016 vf (20)
1. INSIGHT
Telecommunications
September 2016
1
Successful Postmerger
Integration in Telecommunications
Tying the Knot? Untangle it First
For M&A-minded telecom players in Europe, tying the knot
today looks decidedly different from tying the knot 10 years
ago. Back then, the M&A landscape saw fewer same-territory
deals than today—which always come with complicated
mandates handed down by competition authorities. Deal
structures were more straightforward then, and the players
involved faced fewer regulatory hurdles. Finally, the most-iconic
deals aimed at expanding geographic presence and revenues
by bolting acquired companies onto their new parent
organisations, and the deals involved only a few parties—
typically, just two. Against that plain-vanilla backdrop, the
integration of companies was fairly manageable. We’re not
saying it was easy (what marriage is?). And in fact, many deals
failed to deliver the hoped-for value in the PMI period. But
compared with the scene today, companies had to wrestle with
fewer levels of complexity a decade ago.
Fast-forward 10 years to today, and it’s a whole new picture: The
European telecom industry has matured considerably, and
companies have seen their rates of growth level off. The M&A
landscape is awash in complicated, same-territory deals
powered by consolidation strategies for improving competitive
positions in order to drive profitability and growth. Acquired
firms have to be more thoroughly integrated into their new
parents to support consolidation. And more deals involve
higher numbers of players. In the Three UK and O2 deal, for
instance, existing network-sharing agreements with Vodafone
and EE highly complicated matters. Then there was the deal
contemplated among Bouygues, Orange, SFR, and Iliad—
perhaps the most mind-boggling of them all, with three players
sharing bits and pieces of Bouygues among themselves. Both
deals failed, but the targets are still very much in play—and any
new deals that emerge won’t be simple to execute on. The
latest complex deal, which this time has survived regulatory
scrutiny, is the merger between Wind and Three in Italy. Iliad is
stepping in here to create a fourth operator by picking up select
assets divested by the merging companies. The watchword for
today’s overall scene could arguably be exotic.
Ever-deeper entanglements
Again, M&A integrations are never easy. In AlixPartners’ recent
survey2
of 120 telco executives on the theme of PMI
performance, many of the respondents acknowledged
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. But they’re potentially setting themselves up for massive
disappointment during the postmerger integration (PMI) process. Why? Because the deals they’re
engaging in are astonishingly 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. The upshot? If they don’t act now to surmount those challenges, our
calculations suggest that they could experience value destruction to the tune of €1.5 billion to
€2.5 billion1
annually after the ink on their M&A contracts has dried. Not the picture of wedded
bliss that every M&A player dreams of. But it doesn’t have to end up that way—if companies
strengthen the quality of their PMI planning and preparation.
1 The amount of telecom M&A deal value in Europe stands at €50 billion to €70 billion every year. Our estimates suggest that value destruction could reach an average of 1 to 3%
of deal value, climbing to 2 to 5% for the largest deals posing especially complex PMI challenges—which would translate into the €1.5 billion to €2.5 billion in value destruction
calculated above.
2 AlixPartners Telecom Executive Survey, conducted in association with ResearchNow.
2. 2
INSIGHT | Tying the Knot? Untangle it First
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 (figure 2). 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
Increasing deal complexity
driven by industry maturity
• Few same-territory deals, mostly
growth focused
• Few players involved
• Simple deal structures, few regulatory hurdles
‘Plain vanilla’
TYING THE KNOT 10 YEARS AGO
• Many same-territory deals and
consolidation plays
• Multiple players involved
• Complex regulatory and operational implications
‘Exotic’
TYING THE KNOT TODAY
• Tele Danmark acquired by PE consortium
12 billion – largest PE deal in Europe at that time)
• Cesky Telekom acquired by Telefonica (€6.3 billion)
Iconic deals
• Three + Wind Italy (+Iliad involved) (€20 billion)
• Three + O2 (+ Vodafone & EE involved) (€13.5 billion)
• Orange + Bouygues + SFR + Iliad (€10 billion)
Iconic deals
Source: AlixPartners
• It’s an accepted wisdom that
persistent “wicked problems” keep
Telcos from getting the full value
of M&A, e.g.
– Legacy systems difficult
to consolidate
– Products difficult to converge
and cross-sell
– Customer bases difficult to migrate
• However, Telco executives admit
that they are even challenged on
some of the basics, e.g.
– Leadership team transition
– Validation of synergies
– Work force reduction
– Preparing well during pre-closing
• What’s more, the most common PMI
mistakes made are in areas that Telcos
themselves see as key for successful
post-merger integration
Top 10 most common mistakes during the preparation
of a PMI before deal closing
Top 10 PMI areas where Telcos underperform
Up or cross-selling of products between customer bases........... 24%
Source: AlixPartners survey of 120 Telco executives (in association with ResearchNow)
Poor preparation of network infrastructure for merger.................. 35%
Insufficiently detailed and thought through PMI planning.............. 37%
Insufficient prep. for merger of Customer Support........................... 37%
Insufficient focus on preparing the support functions merger....... 38%
Unclear go-to market strategy for the combined future entity...... 42%
Not enough communication externally and internally.................... 42%
Poor preparation of IT infrastructure for merger............................. 46%
Insufficient preparation of handling leadership team transition.... 52%
Poor ‘cultural audit’ and preparation of cultural integration........... 52%
Insufficient effort spent on validating theoretical synergies........... 53%
Handling leadership team transition................................................... 19%
Preparation between signing and regulatory approval.................. 19%
Products & Services convergence and/or migration...................... 20%
Go-to-market channels merging and optimisation........................... 20%
Support and Admin functions merging and optimisation................ 20%
Customer Service operations merging and optimisation................ 23%
Management of Work Force Reduction (WFR)/redundancies....... 25%
Customer base migration to new systems (billing, CRM, etc)......... 26%
Consolidation of IT stack...................................................................... 29%
FIGURE 1: Telco M&A deals have gone from ‘plain vanilla to ‘exotic’
FIGURE 2: Telcos still struggle to master some of the essentials of PMI
3. 3
INSIGHT | Tying the Knot? Untangle it First
impossible to untangle. 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
network or committing to infrastructure investment)—all to
satisfy regulators bent on ensuring fair competition (figure 3).
The spectre of massive value destruction
If you’re thinking, “This sounds like a tall order,” you’ve read our
minds. Tie together wicked problems with underperformance
on the basics and then weave in many players and regulatory-
driven negotiation and execution challenges—and you’ve got
complication of unprecedented magnitude. And as most
executives know, complexity kills. Indeed, some deals today
don’t even reach the PMI stage; instead, they crumble under
the weight of their overly complex structures.
According to research undertaken by certain academia and
management consultants for deals that do manage to make it
into PMI, more than half fail to deliver the hoped-for outcomes,
including cost savings. And some—especially the biggest,
most-complex deals—end up even destroying value. In fact,
AlixPartners estimates that the European telecom industry could
collectively see annual value destruction reaching as high as
€1.5 billion to €2.5 billion because of badly executed and
increasingly complex M&A deals.3
The way out
Clearly, telcos have to take action. To tie the knot successfully in
any M&A deal, they’ll have to first untangle the complexity
knots. But how? Merely picking at the most-visible, most-
accessible threads at the outer edges of the knots won’t be
enough. As Liberty Global CEO and master deal-maker 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.”4
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 hypercomplex conditions: move
faster and prep better.
Moving faster
We see PMI as 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
Let’s talk about organisational-design decisions first. 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 (1) resources used for similar activities, (2)
duplication of functions, (3) discrepancies in spans of control,
(4) inefficient organisational structures, (5) high and low
performers, and (6) 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.
COST SYNERGIES
BRAND AND
GO-TO MARKET
CUSTOMER AND
PRODUCT MIGRATION
OSS/BSS
LEGACY SYSTEMS
WELL-KNOWN TELCO PMI
CHALLENGES…
…ARE COMPOUNDED BY NEW
REQUIREMENTS
PEOPLE, CULTURE AND
ORGANISATION
EXTRICATE
Network sharing deals,
Retail partnerships,
Content deals…
CARVE OUT
Operations, Assets,
Distribution, Rights…
SWAP
Towers, Fiber,
Retail shops…
(RE)BUILD
Create an MVNO or a
fourth network, Commit
to infrastructure
investment…
Source: AlixPartners
3 See footnote 1.
4 Daniel Thomas, “EU favours competition over deals in telecoms sector,” Financial Times, October 22, 2015.
FIGURE 3: Telcos are facing hyper-complex PMI execution challenges
4. 4
INSIGHT | Tying the Knot? Untangle it First
What’s more, the analysis can help reduce time to result—which
is the amount of time it takes to design the combined new entity
and identify organisational synergies—our experience suggests
by a factor of five. And that 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 they can use the resulting insights
to 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. And they can thereby avoid a major pitfall our PMI
survey respondents identified: overly optimistic
synergy estimates.
Prepping better
In a telecom PMI—as is true for all important endeavours in
life—careful preparation can spell the difference between
success and failure. Accordingly, we offer three preparation
don’ts that, properly respected, can save you considerable
heartache further down the M&A line.
}} 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.
Yes, you’ll have to wait for approval from the authorities, but
remember: time is money. Investing in effort to prepare for
PMI while the regulatory and competition approvals are in
process pays big dividends. 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.
What if the deal ultimately fails? The cost of prepping won’t
make a huge difference to the big picture. Imagine investing
a few hundred thousand or a million dollars in robust
preparation early on. If the deal breaks up, the costs you’ve
already incurred along the way could easily reach as high as
tens of millions. And if the deal goes through, you could end
up saving even more. The money used for prepping starts
looking like a drop in the bucket in this scenario.
For all of those reasons, we would usually recommend
overinvesting in prep during the preclosing period. Using a
We estimate there is potentially
€1.5 billion to
€2.5 billion annual value
destruction in European Telecom industry
due to underperformance in executing
increasingly complex PMIs
FIGURE 4: A comprehensive toolbox is required to deal with Telco PMI complexity
Maximising preparation during
Pre-Closing
Using ‘Clean rooms’ to front-load
PMI execution
Rapid Organizational Prototyping
Synergy validation
‘QuickStrike®’
Data and Technology to solve
“wicked problems”
High-precision Cross-selling
Reducing migration churn
Carving out business operations
Work Force Reduction
Regulatory strategy and negotiation
Talent retention & Leadership
transition
Cultural integration – Building the
Bridge
Relentless over-communication
Managing Complexity – Prioritization
and planning
Interim and Functional Expert
support
Effective Integration Enabler teams
Effective Synergy Capture teams
Strong and ‘content-heavy’ PMI
PMO
Source: AlixPartners
5. 5
INSIGHT | Tying the Knot? Untangle it First
clean room can help. Clean rooms are especially important
when bidders in an M&A deal require highly sensitive
information in order to assess key transaction issues, such as
those involving customers, organisation, employees,
suppliers, or R&D. A clean team—comprising neutral,
third-party professionals—is bound by strict impartiality and
confidentiality protocols. Team members consolidate and
sanitise the information provided by each of the merging
parties, they analyse it, and they convey only relevant
conclusions to the parties. If the deal falls apart, the parties
don’t have to worry that sensitive information they’ve
disclosed during due diligence will be made available to the
other party or get out to the marketplace.
}} Don’t assume that wicked problems are unsolvable
You can also use the preclose period to start tackling those
wicked problems we described earlier. Take the especially
tough nuts, like how to combine previously separate—and
conflicting—legacy systems, how to migrate customers to
your new entity’s offering, and how to converge products
and services from the different companies. Technology—and
a hefty dose of courage—can help.
When it comes to legacy systems, for example, today’s
plug-and-play, software-as-a-service technologies can help
you quickly move to a next-generation, fully integrated
information technology platform, possibly hosted in the
cloud, 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.
What about customer migration and product convergence?
Here advanced data analytics can save the day by helping
your newly merged business gather valuable insights about
customers and tailor your offerings accordingly. For
instance, through rapid data mining in a clean room, you can
identify early in the prep phase certain microsegments in the
merging customer databases according to how—and how
much—each customer uses a smartphone and broadband
line for voice calls, over-the-top apps, or entertainment
downloads. Then you can design the right mix of features in
your service offering in order to persuade customers to
rapidly migrate to the new offering after the integration. This
could help you reduce migration churn from the often-
observed 15 to 20% levels down to roughly 5 to 7%, which
the best in class achieve.
}} Don’t fear structural remedies
Let’s be honest: all too many telcos adopt a rather cavalier
attitude when it comes to the structural remedies that
regulators impose while reviewing a deal—though the tough
stance recently taken by European Union and national
regulators has had a sobering effect. When M&A teams
present business cases for particular deals to their board, the
cases tend to be overly optimistic about deals’ potential
benefits—such as in the area of cost savings. Then the
structural remedies come along—and the picture doesn’t
look quite as pretty. As a result, the deal ends up looking
much less attractive after the regulator has imposed a set of
remedies more severe than expected.
But that doesn’t mean you have to fear remedies. Instead,
beef up 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.
Carve-outs especially aren’t for beginners or the faint of
heart. Evaluating, planning, and executing them requires
quasi-military precision. So, good prep work is critical here.
We would usually recommend that you set up a dedicated
team focused solely on the carve-out and invest effort in a
solid pro forma earnings-before-interest-taxes-depreciation-
and-amortisation and cash model of a potential carve-out’s
impact on your deal. The team members should have
extensive experience with similar situations and possess a
broad array of relevant skills—from operations to finance, to
legal. By evaluating potential carve-outs early in the deal
process, you’ll stand a much better chance of swiftly and
effectively responding to remedy negotiations—and skilfully
implementing a carve-out if the deal comes down to that.
Conclusion: An Ounce of Prevention Is Worth a Pound
of Cure
PMIs have never been easy for European telcos—even in the
supposedly good old days of 10 years ago, when M&A deals
were simpler in many respects. Today new complications piled
on top of persistent, wicked problems, plus telcos’ ongoing
struggles with PMI basics, have created a hypercomplex M&A
environment. And 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. But 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.