Font Size

- Aa +

Wed 17 Dec 2008 04:00 AM

Font Size

- Aa +

Art of the deal

With cash-rich Middle East telcos expected to go on a buying spree as asset values fall in 2009, Roger Field looks at the challenges facing operators post-deal.

With cash-rich Middle East telcos expected to go on a buying spree as asset values fall in 2009, Roger Field looks at the challenges facing operators post-deal.

While many companies in the West are widely expected to cut back on acquisitions, companies in the Middle East, particularly cash-rich telecom operators, are already anticipating the possibility of buying telecom assets that just a year ago would have appeared prohibitively expensive.

But while there might be a strong business case for making acquisitions at bargain prices, there are numerous challenges that acquisitive telecom operators face post-deal that can prove to be onerously expensive and erode the value that the deal was intended to bring in the first place.

Being able to capture the value that you promised your share holders you would be able to capture by the deal is probably the most important challenge. - Antonio Carvalho.

Antonio Carvalho, a partner at Delta Partners, points to a number challenges faced by operators that have just completed a deal, including implementing the deal strategy; ensuring that management remain focused during the integration process; and minimising the impact due to the disturbance of integrating two companies.

Indeed, once a deal is completed, it is vital for the management to assess whether the synergies identified before the deal were correctly identified, and to ensure that the value of those synergies is realised.

"Being able to capture the value that you promised your share holders you would be able to capture by the deal is probably the most important challenge," Carvalho says.

The nature of the challenges faced also depends on the approach the acquirer is taking to the deal. For Carvalho, there are two main approaches - a soft approach and hard approach - in terms of any merger or acquisition, and this has a big influence on the challenges the company is likely to face as it integrates the acquired company.

The soft approach typically sees the acquirer carry out the integration process more slowly, allowing both companies to get to know each other's cultures, and allowing the acquirer to make a more careful assessment of which people to keep in certain key roles. This has the benefit of helping retain staff with potential, but can also lead to uncertainty among staff, according to Carvalho.

"You want to take one step at a time and this takes a bit more time, but it also creates a bit more frustration in people because there is more uncertainty and that is where you have a bit of talent drain," he says.

Companies that take the hard approach will typically aim to complete the integration process more quickly, shedding jobs where there is any overlap, and giving little time for the two companies to adapt to each other's cultures.

"You risk firing good people but you take that risk. You don't let the people leave because you take the decision for them," Carvalho says.

While Carvalho says he has seen more telecom companies adopt the soft approach to deals rather than the hard approach, he adds that there is "not really a winner or a loser" in terms of the best of the two strategies.

"It really depends on the companies and the DNA of the acquirer," he says.

With the soft approach, both companies often continue to operate independently in the initial phase following the deal, and the management may set up specific projects to force collaboration between the two companies. Integration is usually completed in one or even two years. But with the hard approach, integration is "almost over night", according to Carvalho.

"You develop an integration plan from the first day that includes the integration of operations and processes. You leave the organisation as is while the integration plan is being developed."

There are also pros and cons to these two approaches. For example, with the soft approach, the integration is more controlled and talent is more likely to be retained, although the deal is also likely to capture synergies and generate value more slowly than the hard approach.The hard approach also has the benefit of fast tracking the benefits and synergies of the deal, and reducing uncertainty because its offer more transparency and clarity to stakeholders.

But with a shorter time to decide what to integrate, the hard approach also brings greater potential risks, according to Carvalho. People power

Customer churn is perhaps the greatest area of concentration post-M&A activity in telecoms. A lot of that has to do with branding strength and customer experience of the acquiring company. - Akshay Lamba.

One of the most common problems faced by telecom operators engaged in post M&A integration is staff retention, as some members of staff may start to feel alienated and even threatened by the integration process.

To ensure that value is gained from synergies, such as complementary technology or services, it is also important for the acquirer to ensure staff from both companies do not become disillusioned during the integration process.

For Akshay Lamba, head of strategic businesses and new initiatiatives at Al-Futtaim Technologies, staffing issues are among the most delicate for acquisitive operators to handle. "In an ideal situation, one tries to ensure that the acquirer teams and the acquired teams are both given a fair deal," he says.

"However, this is not always practically possible. Pay scales, organisation cultures and responsibility matrices are generally distinct in different firms.

"Perhaps the key to success in post-deal integration of human resources is bringing together the organisation cultures of the two companies. This morphing of the two cultures would typically give birth to a third distinct culture with remnants from the parents."

Carvalho suggests that management should look at ways of retaining their staff during the integration period and "avoid the people getting frustrated and leaving the company" as operations are streamlined and optimised.

"Let's not fool ourselves," he says. "Synergies will always go down to people. Some of the synergies are always related to the number of full time equivalents or collaborators that you have in both companies," he adds.

To avoid "brain drain" Carvalho recommends that acquisitive companies should be transparent throughout the process, regardless of whether they have opted for the soft or hard approach to doing the acquisition.

Building value

Telecom operators face particular hurdles when integrating their companies, usually owing to size and complexity of the operations. This can create additional challenges for acquisitive operators as they seek to consolidate operations and create value following an acquisition.

"One of the issues that is very particular to the telecoms sector is synergies realisation," Carvalho says. "It is critical that you involve expertise to understand where the synergies come from and how can this be captured to maximise value and minimise the time revising with them."

Companies such as Etisalat, Zain and Qtel, which have made numerous overseas acquisitions in the past few years, have been faced with the questions of how fast they should integrate the company within their own group. "In such fast-moving markets as Africa you don't want these companies to lose space," Carvalho says.

"You want these companies to keep focus in capturing share of the market growth, so it is a dilemma how fast you want to integrate the company versus the focus that the growth in the market requires for you to achieve this market share.

"Players such as Zain, Etisalat, Qtel and MTN have been following a growth strategy fuelled by acquisitions. How do these companies ensure they manage their portfolios? I would imagine that thinking about the internal structure to adapt to this reality should be a daily topic as there should be daily challenges related to that."

Tech spec

While many deals in the region are the result of telcos looking to expand their geographical footprint, acquisitive operators also need to keep a focus on technological aspects of acquisitions, and the related repercussions on integration.

Some analysts have pointed to the merger between US operators Sprint and Nextel in 2005 as an example of a deal that went awry largely due to technical issues. Sprint faced problems consolidating Nextel's network with its own legacy network, and lost a significant number of customers on the way, leading the company to post a loss in 2007.Lamba says that on the technology front, telcos have to look at the possibility of integrating wireline and wireless networks and their IT infrastructures.

"First, the integration and consolidation of the telecom network in the wireline or wireless space," he says. "Typically, one of the by-products of any acquisition in the telco space is the increased reach of the wireless or wireline network, hence the primary activity here is to integrate the network with the host network. Secondly, the acquiring telco needs to look at the IT infrastructure, two areas of immediate concerns are the billing and the provisioning environments."

Aside from the basic telecom infrastructure, acquisitive telcos also need to look at customer-facing business processes, such as billing systems. "The acquiring company would ideally like to move over the acquired customer base to their own billing and provisioning platforms in order to be able to leverage the customer base and ensure customer experience," Lamba adds.

"However, this is typically a time-taking and gradual exercise where the customers are migrated to the host organisations platforms in a phased manner."

Failure to strike the right balance with technology and other aspects of a deal can lead to a loss of customers, as Sprint Nextel found out. To this end, acquisitive operators also have to keep an eye on how the end users are affected by the deal.

"Customer churn is perhaps the greatest area of concentration post-M&A activity in telecoms," Lamba says. "A lot of that has to do with branding strength and customer experience of the acquiring company. It is imperative that customers feel a perceived increase in value due to the M&A activity in order to ensure stickiness.

"While there are unique integration issues in the technology arena, the vital unique integration issues in the telecoms environment emerge from customer management. Billing integration, cross selling opportunities and customer experience are the key issues," he adds.

Process management

While the acquisitive company will usually have had a clear reason for making the acquisition, such as to gain entry into a new geographical market or to acquire a complementary technology, it is likely that the two companies will have to merge key parts of their business processes in order to unify the new business and make savings.

"Telco operators are quite heavy on process utilisation due to the inherent business model and to ensure standardised customer experience," Lamba says.

"As a result, it becomes imperative during an acquisition that critical business processes are identified early on and migration paths defined. The best take off in the process front is not necessarily a move to the acquiring organizations processes, rather a systematic approach to understanding where the best process efficiencies reside and tapping on those capabilities," he adds.

"At times, it may also be absolutely necessary to refine a process in order to be able to incorporate the needs from both the organisations with a road map towards standardisation," Lamba adds.

Key to successful integrationGirish Trivedi, deputy director, telecom practice, Frost & Sullivan, South Asia & Middle East, recommends four main steps to successful M&A deals in the region's telecoms sector:

• A clear understanding of the goals to be achieved through the M&A

• An established team, budget, and ownership within the organisation

• A proactive and opportunistic approach

• A comprehensive understanding of the best practices for each step in the process

Trivedi says most M&A deals fail if human resource integration is not taken into account. He adds that telecom operators should look for strategic and cultural fit while acquiring a company. Acquisitive companies should also ensure they have strong management to see through the process from funding to integration.

"One of the major problems of an M&A deal is that it takes away focus of the management from its day to day goals and the competition uses this opportunity to take away key customers from them," he adds.

"Due diligence can be a very tough act during the deal. It identifies, confirms or disputes the business reasons for proposed merger or acquisition transactions.

"The challenge for many M&A teams is collecting and sifting through vast amounts of data to make reasoned purchase decisions, often under extreme time constraints."

For all the latest tech news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.