AT&T recently announced its latest acquisition bid for Time Warner at a whopping $85B deal value. We will have to wait and see how it goes down with the federal regulators and if it will receive their nod. It has received a lot of attention from the media and rightly so. Parallels can be drawn from Comcast’s acquisition of NBC, which turned out to be a sweet deal for both companies. However, there is also a great probability of failure due to a lack of synergy between the companies as they have been in fundamentally different domains. They play different games and the same rules won’t apply.
Looking at this from a perspective of vertical integration, it gives AT&T access to a completely new business vertical. However, it is a vertical in which it has little to no experience and raises some serious doubts on how efficiently they can run this business. I am curious as to how they will alter their business model to bring Time Warner on board. Will they integrate the company into their corporate landscape completely? Will they run it as a standalone firm and not interfere much with their business model? What would be the best way to integrate if at all it can be done? What are some of the challenges in doing so? These are difficult questions to answer.
What does this mean for consumers? From what the company had to say, they are in direct competition with the cable companies, however with a wireless offer. Hitting the same price points for the wireless offering will definitely heat up competition and put pressure on players like Netflix. With AT&T’s access to the huge mobile customer base, it can offer customized streaming services to capture market share. However, the downside is that it can potentially kill most of the smaller sized firms just by its sheer size.
Being part of an academic research project studying mergers and acquisitions, I have been surprised by the percentage of mergers and acquisitions that fail to add value to either party. Some of the metrics that potentially affect the success or failure of such an activity can broadly be analysed under the following categories: Financial metrics, Product/Market metrics, Organisational metrics and Human Resource metrics.
Under financials, one can look at the top line growth rates and its potential impact on the bottom line for the companies by having a symbiotic infrastructure utilization (Physical, technological and intellectual) to cut costs. Other important metrics can be the price to sales ratio, EBITA trends and cost savings apart from the market perception based metrics like earnings per share. Under product/market metrics, we need to analyse the strategy alignment of both parties and how they can create shared value. It can be anything from an increased addressable market size, access to new segments and/or technology that can have a positive effect and enhance the go to market capabilities of the company. Under operational, it is important to analyse the productivity impacts due to the change, and the utilization levels of the available resources. It is extremely important to iron out redundancies across different business functions and ensure an effective and efficient business environment at the end of the day.
Human resource management has one of the most important and the often ignored impacts on any merger and acquisition. How are the managements of two organisations being restructured? How will it affect the employee morale? Will the key employees quit? What plans do the management have to ensure key employee retention? How are the corporate hierarchies being affected?
All of these aspects need to be carefully looked at and an exhaustive plan needs to be put in place for any such endeavor to produce results. Not that the companies don’t know this, but somehow they fail to do it right more often than not. Why do they fail? Why do they fail even after doing a thorough due diligence?
The reasons can be plenty. For starters, poor change management. Lack of a defined process to manage change can scuttle the company very quickly. Inappropriate synergy level was listed as one of the key reasons for the failure in a report from PWC. Inefficient execution of the plan, missing management support and the lack of qualified resources to guide the companies through massive change can all potentially ruin the end goal and have a negative impact which would bring the entire decision under scrutiny.
There can be many other factors and by no means am I an expert in this field. These are just my initial thoughts on the topic and I hope to learn more from my very interesting research project going further!
About Sharath Subrahmanya
Sharath Subrahmanya has over 5 years of experience and has worked with organizations like Fuqua School of Business, Mi-Corporation, Duke University, Citrix, SKF Group & Schneider Electric. Sharath holds a Masters in Engineering Management, Business Administration, Management and Operations from Duke University.