With M&A activity once again buoyant in the telecoms market, Celona Technologyís Charles Andrews examines how financial and commercial value can be devastated by a failure to consolidate IT systems quickly and efficiently and looks at what can be done to prevent this.
We may still be some way from the heady days of 2000 which saw merger and acquisition levels in the telecoms sector peak globally at not far short of Ä500 billion, but the market is again seeing renewed levels of activity.
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According to figures from Thomson Financial the market emerged from a trough in 2004 of Ä36 billion to levels of more than Ä150 billion in 2005 and 2006. Analysys Researchís Teresa Cottam comments: ìM&A levels in the global sector were reported by Reuters at around Ä53 billion, but this figure hides a high level of transactions. Weíre seeing significant consolidation of smaller players ñ particularly in high-growth markets ñ as well as telcos buying into new markets. An example of the first trend would be China VoIP buying Hangzhou Zhongfang; on the other hand you have KPN acquiring Getronics, which is part of a trend for telcos to strengthen their IT services portfolio for business customers. On the supply side consolidation continues to be significant and ongoing, with larger players absorbing technology-based start-ups to reinvigorate their product sets, or merging with rivals to create real scale and breadth of operation.î
But while M&A activity makes headline news, what happens after the champagne corks stop popping is not usually so well covered. The real post-merger hangover comes when the reality of merging two sets of business processes and supporting IT infrastructures finally hits home. And what makes it worse is that even if youíre lucky enough to have a good team on board to do this, before theyíve finished consolidating one set of applications the business might acquire again. Many of todayís service providers are therefore still facing the IT challenges from yesterdayís acquisitions. And while combining businesses to increase geographical coverage or to extend into new domains might make commercial sense, consolidating the businesses effectively can be a significant challenge.
ìA traditional IT objective in telecom M&A,î notes M&A expert Peter Sokoloff ìhas been to migrate acquired companies onto the same standardized platforms. In practice this is usually a devilish task, requiring years and many millions in costs to accomplish. Further, the integration is rarely fully completed and IT execs can expect to contend with disparate systems, and installing the band-aids necessary to get them to cooperate, for decades to come. Management focus is usually driven by a desire to standardize front end systems like billing and customer care. But these, in turn, must tie into a multitude of other applications such as workflow, inventory, service activation, provisioning, and so on, each of which also taps into deeper network-level elements. The objectives set by larger carriers when contemplating integration are usually to drive greater cost efficiencies.
While this plays well on Wall Street, this is where the trouble always begins. When the objectives of the integration are not driven by better customer service and improved network performance, the risk increases of serious execution errors and certainly causes countless headaches for the IT crew.î
Sokoloff cites the example of Sprint/Nextel where at the time of the $70 billion deal, Sprint predicted $12 billion of savings from reduced capex and opex. Says Sokoloff: ìThe savings were expected to be achieved as a result of expenditures of $1.2ñ1.8 billion over 2006 and 2007. This past December Sprint announced a $29.5 billion loss, mostly relating to goodwill write-down of the purchase price paid for Nextel. How much of this loss might be attributed to fall out from integration and conversion issues has not been made public, but several reports have cited integration issues as contributing factors. At the end of the day, IT integration after an M&A rarely creates the cost efficiencies which look so great on paper.î
Peter is spot on in his assessment, as you would expect. But my question is whether this situation is acceptable? Wouldnít it be of great interest to acquirers, business managers and shareholders if they were able to guarantee the efficiencies predicted at the point of acquisition? Shouldnít they do more than accept these impressive-looking numbers on face value?
For all those that are still digesting their acquisitions or who now have a new target in their sights, my recommendation is to spend time and effort scrutinizing how complex IT consolidation is going to be delivered before leaping into the unknown spend. Also it is critical to assemble a team that spans both the business and the technologists, because your business managers are best placed to identify and prioritise where the greatest needs and benefits lie. This, in turn, frees up your IT staff to concentrate on the important job of delivering the migration. Next, expect that a business-driven migration will begin to show business benefits early and incrementally. You should not have to wait for a long ñ often unspecified ñ period of time wondering and hoping if and when you will see any benefits. Time-to-benefits should be short and ROI should be quantifiable.
Finally the migration method and tool you use should be flexible enough to adapt during the migration to accommodate the changing needs of the business. For example, at the beginning of the migration you might decide you would like to move your biggest customers over first, followed by all of those that select a particular new service (which can only be supported on the target application), followed by all of those that live in a particular locality, followed by a bulk load of the remainder. Many of todayís migration tools would not be able to deliver a migration in this fashion, because they donít allow you to identify and prioritise different business data sets, but instead see a mass of undifferentiated customer records.
If you really want to realize the commercial and operational efficiency that you know is there then the choice is yours. Donít accept old technology or tools not built to cope with business-critical consolidation. Donít commission custom-built solutions and then wonder why your project is so expensive or takes so long. There is an alternative to solutions that are high risk and slow to deliver. Instead demand that you are using proven, state-of-the-art migration technology that can easily support a flexible, fast and business-driven migration. Business value does not have to be haemorrhaged. Technology is now available that will stop your IT infrastructure from bleeding the value out of your acquisition and instead delivers the business value you desire.
1. See M&A Insights: Telecoms Sector, by Andrew Green and Philip Shepherd available from www.pwc.com/telecomsinsights
2. Teresa Cottam is Associate Principal Analyst in Analysys Researchís Next-Generation Telecoms IT practice
3. Peter Sokoloff is MD of Peter A Sokoloff and Company, specialist advisers in security and telecommunications mergers & acquisitions
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