Telecom marriages rarely made in heaven: mega-mergers don't work unless they are focused and disciplined

America's Network, April 15, 2004 by Raul L. Katz

In an almost simultaneous display of systemic moves, the long-awaited consolidation in the telecommunications industry is gaining momentum. Within the lapse of a month:

* AT&T Wireless put itself on the block and was acquired by Cingular, reducing the number of U.S. national wireless players to five.

* BellSouth, searching for cash to fill up its coffers, sold its Latin American wireless properties to Telefonica, thereby limiting the number of regional players to three.

* And MCI, coming out of bankruptcy, has entered into a definitive agreement to sell its stake in Embratel to Telmex.

These signs are evidence of a search for efficient industry structures that portend a return to scale, a restoration of price discipline, or the reintegration of the long distance, local and wireless segments.

SPOTTY SUCCESS

Mega-mergers in the telecommunications industry, in fact, have a spotty record at best. Typically, synergies heralded at transaction announcement time have remained elusive. Promises of price rationalization were rarely realized, and competition yielded continued price declines, benefiting consumers at the expense of the financial health of surviving carriers. Why is it so difficult for the proven benefits of consolidation to translate into the telecom real world? What can carriers do to enhance their chances of successful, large-scale M&As?

A frank analysis of the M&A track record in the U.S. telecommunications industry indicates that, in general terms, mergers between players in adjacent geographies or between those exhibiting a close horizontal fit--such as Bell Atlantic's acquisition of NYNEX, or VoiceStream's (now T-Mobile) acquisition of Powertel--tend to be more successful than mega mergers such as Bell Atlantic's acquisition of GTE.

Focused mergers are more likely to yield revenue, expense and capital synergies than mega-mergers. For example, Bell Atlantic achieved $1.1 billion in cost synergies within a year of acquiring NYNEX, and VoiceStream reduced operating costs per subscriber by 15% a year-and-a-half after acquiring Powertel.

Post-merger complexities include difficulty retiring legacy systems and moving to common business processes.

Another factor playing against the success of large transactions is the free-riding behavior of competitors. Mega-mergers do take a relatively long period of time to gain regulatory approval.

In the meantime, competitors are focused on gaining share from the acquired operator and poaching valuable management talent.

PUT IT TO THE TEST

Successful large-scale mergers in other industries, such as banking and pharmaceuticals, are proof that mega-mergers can work, but only when disciplined, rigorous project management and transition implementation are applied. Keys to success include:

* Rapidly articulate the strategic intent

* Raise stakeholder enthusiasm by reducing uncertainty

* Blueprint the "one company" business model and articulate the transition roadmap early in the process

* Reenergize the management team of the acquired carrier

* Define metrics that stabilize the operating environment

* Outline plans to deal with customer defections or management talent loss

A large-scale merger in the telecommunications industry is a high-risk event, particularly when the acquisition price puts pressure on the need to capture value. Nevertheless, the experience of other industries indicates that success is possible and can result in market leadership.

Raul Katz is a partner at Booz Allen Hamilton, the global management and technology consultancy, and leads the firm's telecommunications practice in North America.