How can you master merger integration in the digital age?

By

Axel Majert

EY Global Transactions Telecommunications Leader

Strategy and M&A leader in telecoms. Values a multicultural, diverse and ambitious work environment. Passionate about family, history and sports. Former first division hockey player. Father of two.

7 minute read 29 Mar 2018

Successful integration requires balancing strategic intent and capturing value, without negatively impacting the existing business.

M&A is heating up again. As businesses strive to adapt to disrupted markets, they are having to recalibrate their portfolio strategies almost constantly. Executives are evaluating a far greater range of deals than ever before as they look to both preserve current value and future-proof their businesses by making bets on future technology trends. Digital disruption has also become a gateway to industry convergence, breaking down old barriers and creating new paths for companies to add value and expand their customer base.

With M&A offering a potentially faster route to innovation and expansion and the cost of capital currently low, we’re seeing a significant increase in transactions — a trend that shows no sign of abating. The 17th edition of the EY Capital Confidence Barometer, which surveys 3,000 C-suite executives from around the world, showed that 56% of companies globally plan to make acquisitions in the next 12 months.

But with many of these potential deals being either a convergence play or focused on bringing in new technology, integrating acquisitions has never been more complicated. It requires careful planning from the start and flexibility in its execution.

Deal rationale in a converging world

Growth-seeking M&A in the digital age is increasingly driven by two distinct deal rationales:

  • Future-growth convergence, where companies buy small, typically venture-backed technology-focused start-ups to strategically position themselves for anticipated future high-growth markets.
  • Immediate-growth convergence, where firms make larger-scale, often transformational acquisitions in adjacent industries, such as US telco AT&T buying satellite television broadcaster DirecTV, to target more short-term growth.

By their very nature, these convergence deals start with a mismatch. Often, it’s a mismatch of scale, but almost always there are mismatches of culture, purpose, processes and customer attitudes.

Given these mismatches, the traditional deal rationales that shape most merger integration plans, whether it be cost-out synergies, a revenue combination play or gaining market share, may need to take a back seat to other strategic priorities.

Convergence deal success typically comes more from realizing an opportunity through either accelerating or carefully scaling that opportunity without ruining the standalone business, or through undertaking a “reverse integration.” This occurs when the target remains independent and the buyer moves an existing team into it in order to allow new business models and behaviors to grow and organically flow back into the parent.

Getting integration right from the start

Management is under huge pressure from shareholders and boards to get these acquisitions right from the start. They demand almost instant results and yet nearly two-thirds of companies lose market share in the first quarter after a merger and by the third quarter, the figure is 90%. The challenge therefore is how do you realize the strategic intent and capture value while integrating, without negatively impacting current business performance?

Inadequate integration planning and execution are cited as the most common points of failure. Ultimately, for an acquisition or merger to create value, the combination must become more than the sum of the parts. To achieve this, companies have to approach post-merger integration with the same level of commitment and strategic intent as the transaction itself.

“It is about tenureship. Most people think the deal is done when the deal is closed, I actually believe the deal starts when the deal closes. The deal is done when you have delivered the value that the deal is predicated on,” says Faizul Ali, Transaction Advisory Services, Technology, Media & Entertainment and Telecommunications.

One of the mistakes many companies make following deal closure is to not reassess the investment rationale and plan backwards, working out what they want to achieve and by when. If this is done, they can then set the tone and pace with which they will execute the integration and realize the synergies.

Most integrations go wrong because people rarely take time to fully understand the complexity and interdependencies. The team is then shocked when the associated synergies drift to the right.
Roy Cornick
EY Transaction Advisory Services

Without this, businesses rely on a rigid initial integration plan and if the reality does not match the plan, they end up taking a ‘sticking plaster’ approach, trying to implement sporadic tactical fixes rather than addressing the overall strategy. And while there is no one-size-fits-all integration strategy, there are a number of strategic dimensions that need to be analyzed before developing a plan and then continuously reviewed while implementing it.

“Most integrations go wrong because people draft a plan, mobilize a team to execute, but rarely take time to fully understand the complexity and interdependencies within it. The team is then shocked when the associated synergies drift to the right,” says Roy Cornick, Transaction Advisory Services.

Vodafone — KDG: a case study in convergence

In October 2013, mobile telecoms operator Vodafone Group closed its €7.7 billion transformational acquisition of German cable company Kabel Deutschland (KDG). It was a classic convergence play, reflecting the wider industry trend of bringing together mobile, internet and television services as a single bundled service.

But integrating these two giants of the German telecoms landscape was a huge challenge. How do you make this “immediate-growth convergence” play a success without disrupting the existing businesses?

“When you looked at the value of the transaction, yes there were of course synergies, but the biggest value was the growth story of Kabel Deutschland,” says Dr. Andreas Siemen, Chief Financial Officer of Vodafone Germany. “So the biggest risk was that after the acquisition the standalone business would fall down because of interference, people leaving, or defocusing on the existing strategy.”

Dr. Siemen explains the management team decided the priority was to make sure the integration process would not hurt the standalone business. KDG would maintain its momentum, and then on top of that, management would take steps to bring in the synergies — the business initiatives, cost savings, overheads.

“I think the most interesting theme was the speed of the integration. How fast and how ruthless should the integration be happening? There was a debate and we decided to take a more considered stepwise integration approach. You can’t take for granted the business continuing as is after the merger but you have to do deep integration to end up with a new functional organization. So we deliberately gave ourselves time,” says Dr. Siemen.

This meant the merger process was not sequential — integration strategies could run in parallel. Those quick win synergies on costs, purchasing and revenues were addressed from the outset, but the pace would be slower for those areas that needed more time, such as mass processes that required reaching out to large numbers of people.

Dr. Siemen emphasizes the importance of explaining the merger process externally. “You also have to communicate everything to the customer. While inside the company you may think everything is clear, there needs to be a lot of communication outside to the consumers so that they understand what has happened. Similarly, we had to look at the branding side, how do we teach customers about the change. So again, we didn't choose a disruptive approach but a gradual approach,” says Dr. Siemen.

If you give yourself a bit more room to breathe and to work together, you enhance the opportunity to have the exchange of ideas from both sides.
Dr. Andreas Siemen
Chief Financial Officer of Vodafone Germany

Ultimately, for Dr. Siemen, timing is everything when it comes to successful integration. “Looking back, if we had gone for a much faster approach, I think the result would have been that we would have lost a lot of talent and a lot of know-how on the Kabel Deutschland side. If you give yourself a bit more room to breathe and to work together, you enhance the opportunity to have the exchange of ideas from both sides,” says Dr. Siemen

Three approaches for successful merger integration

Evaluating the tone and pace of integration from the start is fundamental to achieving a successful long-term combination no matter what the deal rationale. The critical difference to keep in mind for convergence deals is that regardless of the goal you’re unlikely to get there without adopting important new business behaviors.

To achieve this, executives should shift their thinking and consider the following three approaches:

  1. Identify value-driving businesses: The truly impactful difference-making behaviors are typically few, and unique to each deal. Kick start the merger process by pinpointing those behaviors that matter most in terms of driving value from the deal, and make them the core focus on your integration strategy.
  2. Consider strategic operating model redesign before closing: In convergence deals, success often depends on operating model changes that promote the key business behaviors. It’s important to think these through before closing, because they often determine whether the deal meets expectations.
  3. Consider modular integration: Convergence deals are not like traditional merger integrations in which you integrate everything fast to obtain synergies. Recognize that not everything needs to be integrated as quickly as possible — and perhaps some functions shouldn’t be integrated at all.

Disruption demands fresh thinking

Digital disruption and sector convergence have pushed companies to increasingly future proof themselves through M&A. But businesses need to have both foresight and flexibility in their integration strategy. With the landscape changing so quickly, this year’s brilliant deal may well become next year’s divestment.

Convergence deal buyers should therefore strive to avoid the “all-or-nothing” approach of traditional merger integration. As the merger of Vodafone and KDG has showed, integration can take place on a function-by-function basis, each with different time horizons based on their strategic importance.

And as companies move toward more convergence deals, the focus of merger integration may shift from operational synergies to talent or technology access, from revenue and income growth targets to innovation and technology maturity targets. Driving deal value therefore requires new thinking and new approaches to post-merger integration.

Summary

In the rapidly changing world of M&A, striking a deal requires innovative thinking and a fresh approach to post-merger integration.

About this article

By

Axel Majert

EY Global Transactions Telecommunications Leader

Strategy and M&A leader in telecoms. Values a multicultural, diverse and ambitious work environment. Passionate about family, history and sports. Former first division hockey player. Father of two.