3 minute read 21 Sep 2018
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Why convergence matters for merger integration

The path to success in the technology, media and telecom sectors will involve significant convergence M&A activity. 

Leaders in the technology, media and entertainment, and telecommunications (TMT) sectors understand the challenge of creating long-term value from M&A, and they are likely 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. Meanwhile, the importance of getting TMT M&A right is increasing.

The end goal is a consistent, unified and controlled environment where all the business functions do their essential work — starting from a foundation of common enterprise data sets, technology and architecture, governance models, and processes.

Such are “convergence deals.” These encompass two types of growth-seeking M&A that TMT companies have pursued from time to time. But, these have 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: These are acquisitions of small, often private, typically venture-backed start-ups to strategically position for anticipated future high-growth markets. Targets typically possess strategic technology elements, potentially disruptive digital business models, extremely hard-to-find talent or some combination of the three
  • Immediate-growth convergence: These are larger-scale acquisitions to achieve more immediate growth by targeting adjacent industries. Targets typically are incumbents operating businesses that can extend from, or leverage the use of, the buyer’s core business or infrastructure, complementing the buyer’s existing revenue model.

Three factors have created an environment for explosive growth in these types of deals:

  1. The rapid evolution of disruptive technologies and the new business model possibilities they enable
  2. 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, and business tool
  3. Growth in VC investment, which virtually guarantees the future of convergence-shifted M&A
Don't let 'pre-digital' metrics derail convergence deal success.
Clarence Mitchell
EY Global TMT Strategy Leader

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
  2. “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.

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, or from revenue and income growth targets to innovation and technology maturity targets. Or, it may shift 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.

Success with M&A can mean discarding the old merger integration playbook when it comes to convergence deals.

Summary

M&A success in technology, media and telecom can mean discarding the old convergence-deal playbook.