Given the surge in M&A activity this year, I thought it might be worthwhile to take a look backwards and remember some of the mistakes made in acquiring and integrating telecommunications assets over the past decade. After all, too large a percentage of M&A activity winds up destroying rather than creating value and you know what they say about those who forget their history. Now, this list is of my own creation, but I’m hardly the last word on the subject. Hence, I’ll keep it open to further additions, details, and corrections from readers, so don’t hold back. These are not in any particular order.
- Put milestones ahead of customer satisfaction. Possibly the worst mistake you can make in an integration is to piss off your customers. Screw up internally, and when it’s fixed then it’s fixed. But if you damage your reputation, it can take many years of elevated customer churn before you fully recover. The most obvious case of this in past years was at Sprint, where bungled integration of the Nextel assets tumbled into deteriorating network performance across the company’s wireless base. The result? Five very long years of bleeding off subscribers, revenue declines, layoffs, and other various miseries they have only begun to turn around in the past year. One can also trace a good portion of Level 3’s increased churn over the past few years to the reputation lost when their backlogs ballooned back in 2007.
- Get ahead of yourselves. After a quarter of integrating the Xspedius assets, TW Telecom had a minor shortfall in revenue that it attributed to some salesfolk not selling products they did have while waiting for products they didn’t have yet that they hoped were in the integration pipeline. For TW Telecom it was a hiccup that was quickly corrected, but losing focus on the here and now while engaged in a transformative acquisition is an easy pitfall to, err, fall into. I’ll bet it happens in various forms far more than is ever admitted, and can have more far-reaching effects – especially when those at the top are the ones looking too far ahead.
- Place too much emphasis in synergies you can’t quantify. Remember the Time-Warner/AOL mega deal? The whole rationale for it was to bring the internet and media together and thereby create something new and obviously powerful. The trouble was, nobody could actually tell you what that was or what steps might be taken to actually find it – and they obviously never did find it. Another more recent such example was EBay/Skype, where the online auctioneer expected to find synergies by, well, by using VoIP somehow in auctions. Skype continued to flourish in its own right, which meant that EBay didn’t get hurt as bad as it might have. But I still can’t figure out what they were thinking…
- Reduce headcount before identifying critical personnel. Sounds crazy of course, but headcount reductions are high on almost every synergy list and companies also like to give clarity as early as possible to their workforce. But there is such a thing as too early. Back in the Fall of 2007, Level 3 actually had to suspend sales of a group of Ethernet products for more than a quarter. The reason? According to management on an earnings call, apparently the people from Broadwing and WilTel who knew how to provision them were, umm, not there anymore and the orders had been piling up anyway. Oops. Now, this was a rather public example, but I’ll bet something similar happens more often than anyone cares to admit.
- Expect greater scale to make everything better. Well, there are numerous companies guilty of this one of course. One we haven’t mentioned thus far is the purchase of Allegiance by XO. They took one low-margin, fiber-heavy telecom, added one low-margin, fiber-light telecom, and turned it into a single, larger, low-margin, less-fiber-based telecom with $1.4B in scale that has mostly jogged in place for many years. Had XO turned its focus on its metro assets back in 2004-2005 the way some others were doing, they really might look a lot more like Abovenet does now.
- Fail to put your own house in order first. The poster child here, in my humble opinion, is Level 3 – and all their other integration troubles of a few years ago derived from this starting point. From conversations with numerous who worked there through the transition, long before Level 3 started integrating WilTel and the half dozen or so other purchases that followed, internal communications at the company were frayed. There was a schism between some parts of management and the rank and file. It was mainly scar tissue from what everyone there went through to survive the telecom nuclear winter when almost everyone went under. They certainly survived but they did not make it unscathed and some of the organizational wounds didn’t heal smoothly. Those frayed internal communications were totally overwhelmed by the tasks of integration, so when things went wrong that information didn’t make it up the chain of command. Management was methodically implementing a complicated integration plan even while chaos was spreading internally. By the time they realized the integration might be going off the tracks, it had already crashed.
- Leave no room for error on your balance sheet. When Fairpoint bought all those lines from Verizon up in New England, the balance sheet they came out with wasn’t capable of handling any deviations from the plan. So when things went wrong, they simply didn’t have the resources available to adjust. Then they spent much of the next year begging for mercy from the state PUCs and their lenders before finally filing for Chapter 11. Yes, even with a healthier balance sheet they still might have bit off more than they could chew – but we’ll never know, will we.
There, that’s my initial list. Comments, additions, etc are all welcome. I’ll add the best ones to the article itself.
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Categories: Mergers and Acquisitions
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Your compendium is difficult to add to, as such broad brush strokes encompass various layers of underlying mistakes. For example, “overpaying” for an asset would fall under #7.
It’s such a good list, it might be finalized by reverse engineering Buffett advice to managers of public companies, that being, manage shareholder expectations properly, or in this case, don’t MISMANAGE shareholder expectations during the important process of “communication” along the way.
The penalties that will be levied upon your stock price during such a period, will be RELENTLESS and last for what will appear to many as AGES, assuming your company maintains the financial wherewithal to endure the carnage in the first place.
Very nice job, Powell.
Item 6: Fail to put your own house in order first. concerning Level 3 has some errors and hard reading due to missing words, etc and a rewriting would be most helpful in understanding just how they got to the position and situation where they now exist…
#8: What’s the Vision? Besides just consolidating or eliminating a competitor, are you just buying revenue? Because usually that doesn’t work out the way they predict, since reality (and integration) is a far cry from theory.
While most acquirors are obviously chasing scale and operating leverage in such a fixed asset business, integration complexity and risk grows disproportionately (exponentially?) with acquisition size in my view
As noted by the Panel, alot of these overlap… Your #3 (synergies) is perhaps at the root of most issues, as it is a nice way of saying that many of these deals are overpriced,,, in some theoretical anticipation of post closing synergies (which of course, aren’t that interesting if you are already paying for them).
to you excellent list, i would add a #8 — buying something that is better rented. Examples are long haul capacity, sub scale CDN provider, dark fiber utilities, etc. In most of these deals, the acquiring company could have received 100% of the funcitonal advantage for 1% of the purchase price. in fact, they could have likely licensed or optioned growth capacity, thereby making the “rent” the no brainer, if less sexy option
I look forward to seeing another post on this and see how Windstream stack ranks on the list 😉
High on my list… Engineering validation and verification of the M&A target’s stated capabilities, capacity and technical assumptions. In my experience you don’t have to dig but a few inches deep as a litmus test to see if your M&A team has been gamed.