Merger integration in a converging world

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When it comes to merger integration, convergence matters

Leaders in the technology, media and entertainment, and telecommunications (TMT) sectors understand the challenge of creating long-term value from M&A, and likely are aware of a recent acquisition that failed to fully achieve pre-deal expectations. As the nature and purpose of TMT dealmaking evolves, corresponding changes to merger integration strategy and execution are lagging behind.

Meanwhile, the importance of getting TMT M&A right is increasing.

TMT deal rationales undergo "convergence shift"

“Convergence deals” encompass two types of growth-seeking M&A that TMT companies have pursued from time to time, but which reached critical mass in recent years to become a core component of the growth agenda developed in executive suites and boardrooms across the sector. They are:

  • Future-growth convergence
  • Immediate-growth convergence

Three factors have created the environment for convergence deals’ explosive growth:

  • First, is the rapid evolution of disruptive technologies and the new business model possibilities they enable.
  • Second, is convergence at the customer level of many adjacent sectors, leading to new kinds of offering bundles and extreme competition — particularly due to the emergence of the mobile device as the primary communications/entertainment/business tool.
  • Third, and one which virtually guarantees the future of convergence-shifted M&A, is growth in venture capital investment.
The convergence deal mismatch

By definition, convergence deals start with a mismatch. Often, it’s a mismatch of scale, which can manifest in many different dimensions of each business. But almost always there are mismatches of culture, purpose, customer attitudes and more.

Given these mismatches, the classic “cost-out synergies” portion of traditional deal rationales — the key driver of most merger integration execution plans — may take a back seat to other strategic priorities in convergence deals.

Instead, convergence deal success comes more from realizing an opportunity, which often lies down one of two paths:

  1. Accelerating the growth opportunity represented by the target, or scaling the technology throughout the new parent organization, without “ruining” it with the new parent’s culture.

Or

  1. “Reverse integration” — moving an existing team from the buyer into the target, which remains independent, or using the deal to drive changes in aspects of the acquirer’s business processes, cultural behaviors or both to better match disrupted market conditions. 
How merger integration thinking must shift

Merger integration focus should be on behavioral and process change maybe even more than on synergies. Success requires the combined company to:

  • Identify value-driving business behaviors
  • Consider strategic operating model redesign before closing
  • Consider modular integration

We recommend determining the different level of integration function by function. In many cases, it’s best to maintain a “loosely coupled” integration approach, which can allow for fast unwinding of a deal if this year’s brilliant deal becomes next year’s divestment.

Conclusion

As TMT companies move toward doing more convergence deals, the focus of merger integration may shift from operational synergies to talent or technology access and protection; from revenue and income growth targets to innovation and technology maturity targets; and from full organizational and functional integration to reverse integration, adoption of the target’s cultural behaviors and separate evaluation of each function to determine the appropriate level of integration.

“Don't let 'pre-digital' metrics derail convergence deal success.”

— Clarence Mitchell
EY Global TMT Strategy Leader