Art of the deal

With cash-rich Middle East telcos expected to go on a buying spree as asset values fall in 2009, Roger Field looks at the challenges facing operators post-deal.

While many companies in the West are widely expected to cut back on acquisitions, companies in the Middle East, particularly cash-rich telecom operators, are already anticipating the possibility of buying telecom assets that just a year ago would have appeared prohibitively expensive.

But while there might be a strong business case for making acquisitions at bargain prices, there are numerous challenges that acquisitive telecom operators face post-deal that can prove to be onerously expensive and erode the value that the deal was intended to bring in the first place.

Antonio Carvalho, a partner at Delta Partners, points to a number challenges faced by operators that have just completed a deal, including implementing the deal strategy; ensuring that management remain focused during the integration process; and minimising the impact due to the disturbance of integrating two companies.

Indeed, once a deal is completed, it is vital for the management to assess whether the synergies identified before the deal were correctly identified, and to ensure that the value of those synergies is realised.

"Being able to capture the value that you promised your share holders you would be able to capture by the deal is probably the most important challenge," Carvalho says.

The nature of the challenges faced also depends on the approach the acquirer is taking to the deal. For Carvalho, there are two main approaches - a soft approach and hard approach - in terms of any merger or acquisition, and this has a big influence on the challenges the company is likely to face as it integrates the acquired company.

The soft approach typically sees the acquirer carry out the integration process more slowly, allowing both companies to get to know each other's cultures, and allowing the acquirer to make a more careful assessment of which people to keep in certain key roles. This has the benefit of helping retain staff with potential, but can also lead to uncertainty among staff, according to Carvalho.

"You want to take one step at a time and this takes a bit more time, but it also creates a bit more frustration in people because there is more uncertainty and that is where you have a bit of talent drain," he says.

Companies that take the hard approach will typically aim to complete the integration process more quickly, shedding jobs where there is any overlap, and giving little time for the two companies to adapt to each other's cultures.

"You risk firing good people but you take that risk. You don't let the people leave because you take the decision for them," Carvalho says.

While Carvalho says he has seen more telecom companies adopt the soft approach to deals rather than the hard approach, he adds that there is "not really a winner or a loser" in terms of the best of the two strategies.

"It really depends on the companies and the DNA of the acquirer," he says.

With the soft approach, both companies often continue to operate independently in the initial phase following the deal, and the management may set up specific projects to force collaboration between the two companies. Integration is usually completed in one or even two years. But with the hard approach, integration is "almost over night", according to Carvalho.

"You develop an integration plan from the first day that includes the integration of operations and processes. You leave the organisation as is while the integration plan is being developed."

There are also pros and cons to these two approaches. For example, with the soft approach, the integration is more controlled and talent is more likely to be retained, although the deal is also likely to capture synergies and generate value more slowly than the hard approach.