Pros and Cons of Growing Through Mergers

Last week I wrote about some insights I gained from my conversation with mergers-and-acquisitions specialist Peter Cummings of Opera Solutions. He stressed the importance of reducing complexity post-merger so as to achieve quicker and greater profitability.

 

After that discussion, I was able to get him to reply to some of my questions in more detail in a further interview. I was especially interested in knowing how a company can most effectively integrate the knowledge and capabilities of newly-acquired entities across all business units. Below is a transcript of Peter's responses to my series of questions.

 

 

We have five main practices, a few of which I will discuss in the answers to questions below.

 

Opera focuses on rapid profit improvement within 24 months for companies -- by utilizing its experience and rigor in expense optimization and revenue enhancement strategies.

 

Rapid Procurement Optimization is one of the ways that we help companies optimize their buy-side dynamics. Mergers not only bring about two organizations together, it also imposes multiple suppliers and contracts which are critical to running those organizations. A soup company, for instance, will acquire several smaller soup recipes and production lines, and end up buying the same type of product from numerous suppliers. Opera helps the companies reassess the new demand of this merged entity, ascertain the best market prices, negotiates new contracts and standardizes procurement to retain the savings. This results in tangible savings and makes purchasing a dynamic and proactive function in companies.

 

Another field in which Opera helps companies which is particularly relevant in the telecom field is in Analytics by using advanced mathematical and behavioral modeling and other statistical tools to assess end customers' transactional data, for example, minutes usage and payment history in the telecom case. The deep analysis conducted on internal (plan usage) and external (behavior, credit score, demographics, etc.) sources of data reveals patterns which help companies in identifying profitable customers and implement proactive marketing by offering cross-sell and up-sell . This is especially critical given that ‘Churn’ in Telco companies is very high.

 

Phone companies, for instance, supply services to 45 to 50 million people. They know the behavioral patterns of each of their customers, and yet they do not realize that this dictates a certain set of needs from the company. Every year, this costs phone companies around 25% of their customer base. There is a huge cost around understanding the needs of the customer and tailoring products/services to cater to that demand.

 

This behavioral analysis requires sophisticated mathematical modeling. Opera has created a global delivery model combining onshore and offshore components - China serves as the hub of the required analytics skill sets and hence a Centre of excellence.

 

Another element of our services is helping companies with business transformation management, or business process outsourcing. During mergers, we help clients remove costs by outsourcing and/or offshoring to most efficient vendors and destinations. The objective is not to cut costs, it is to establish a global, nimble organization which leverages competitive advantage for its benefit.

 

Another area of practice is Investment Rationalization -- applying a Private Equity approach to internal investments done by firms and ensuring positive returns and fueling growth and innovation.

 

 

 

A: M&As induce immense complexity in the supply chain of the firms involved. Complexity reduction is a focus area for Opera; we approach complexity reduction by proprietary methods of expense optimization (through methods described above) and change management. This enables the creation of a global, flexible, leaner organization which can compete in the market ahead of others.

 

 

 

A: AT&T and the SBC merger is a good example of how telecom mergers will affect the telecom industry. The merger brings wireless, fixed and satellite delivery platforms together, and now it can be offered as a bundled service. The concept that fixed phone companies can integrate all of these elements will have global repercussions. Delivery of voice, data and content on a single device in a seamless way is the end result which is driving these changes in the marketplace.

 

Another merger which will have an impact is Lucent and Alcatel. The merger means that suppliers are losing their bargaining power, and a merger strengthens this bargaining power. Wal-Mart, for instance, wields a huge amount of power when it comes to suppliers. Each supplier only has a small percentage of power, because their importance has been diluted. This was the case with Proctor and Gamble, which became bigger and bigger vis-à-vis Wal-Mart. The bottom line is that mergers affect suppliers.

    

 

 

A: At Opera we do not apply a cookie-cutter approach to advise companies, as each one of them faces different challenges while involved in a merger scenario. In a lot of ways, merger can be compared to a marriage of two individuals where diverse background is extremely important to consider. It is also important to understand the rationale behind the propositions and make sure that the post-merger integration plan is in place way ahead in time to ensure seamless integration of people, processes and technology for the merged entity. It is this implementation and complexity reduction that is key to success.

 

 

 

Growing through mergers has both pros and cons. On one hand, it gives access to a larger customer base, induces economies of scale and scope. On the other hand it induces complexity, duplication of people, processes and technology. There are various aspects which if not managed carefully during a merger can become major pitfalls, for example, issues of managing Intellectual Property, human resources encompassing cultural diversity and perspectives, technology platforms, supply chain management, product/service delivery channels, etc.

 

Opera focuses on rapid profit improvement within 24 months, in many cases for companies that have just gone through a merger and are underperforming as a result of high costs and inefficiency.

 

One of Opera’s practices is Integrated Complexity Reduction, which is very relevant to a newly merged company. Mergers can create a tremendous amount of internal complexity because the small companies that have been integrated continue to operate as before, and therefore the umbrella company is merely managing many stand-alone companies.

 

Opera looks throughout the company and analyzes how it spends money in each division. Each company that is integrated has its own stocks, inventory, and flows of products. For example, every time a food company buys a smaller company, the recipe, manufacturing process, factories and ingredients are all added to the long list of vendors and methodologies that the company already has. All of these smaller companies ask the larger company for money for new projects, and none of these divisions are speaking to one another. If the individual formulas for each company are standardized, this will cut costs dramatically.

 

 

 

A: Owing to various parameters that go into making a merger successful or unsuccessful, it would not be wise to fit a best-practice approach across scenarios. What is more important is to model an ideal end state and plan the implementation process that facilitates the achievement of the ideal state.

 

 

 

A: In many cases, intellectual property and human resources are lost when smaller companies are integrated in a merger. Most companies do not do this well. There are two types of cases:

 

1) The acquiring company, Company A, has a framework for making the smaller company like them. But the smaller company B could have great intellectual property.

 

An example would be Compaq's merger with DEC. Compaq tried to make DEC like Compaq but it did not take into account DEC’s unique properties and knowledge. As a result, the merger never really gelled -- they are still two distinct companies.

I think it should be HP and Compaq and not DEC!

 

When AOL bought Netscape, AOL did nothing to integrate Netscape, and the company disappeared, along with all of its intellectual property.

 

No one has quantified the amount of money lost when intellectual property and know-how is lost as small companies get swallowed, but I believe it is a substantial loss financially for both sides.

 

2) The other type of case is when Company A has no system with which to integrate Company B. This creates silos, so that company employees are either on one side of the fence or on the other. Internecine warfare is the consequence of this mistake.

 

Companies each have their own culture of practice and circumstances, so there is no one solution for this problem. Each merger must be dealt with in a separate manner, depending on the companies’ style of operation.

 

AB -- 5/2/06