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Telecom M&A can be hazardous to your reputation. Years after FairPoint survived its New England “perfect storm“ conversion problems and Hawaiian Telcom got clobbered by a wave of public anger over inaccurate bills, the legends of those post-merger integration disasters live on in occasional press stories and word-of-mouth tales.
Yet here’s the irony. Prior to its New England adventure, FairPoint was fairly successful at the M&A game. In fact, it reached its 330,000 access line point by buying and integrating 27 properties across many states. Not bad. Unfortunately, nobody remembers those successes. Instead you’re labeled a Bill Buckner, the first baseman who fumbled a simple ground ball, costing the Red Sox the World Series.
Here’s a proof point: How many of you readers knew about Frontier’s recent successful conversion of four Verizon states (over 1 million access lines, by my estimate) that completed in October 2011? If you knew that factoid, pat yourself on the back for being well-informed. There was little publicity about that conversion, beyond SEC filings, probably because the conversion went cleanly.
One company that’s been a keen participant at Frontier and focuses much of its business around post-merger integration for communications service providers is Atlanta-based ProCom Consulting, a 120-person firm. Over the last 18 years, ProCom has helped its clients convert about 8 million access lines across a variety of systems and scales of operation.
I first ran into ProCom at this year’s B/OSS Live conference where they co-presented a case study with Frontier. But it was only two weeks ago that I got a chance to speak with the firm’s founder/president, Curtis Mills, and strategic advisor, Al Burgess. Curtis and Al originally hail from Accenture. In fact, Curtis used to work for Al when Al was — for 10 years — lead partner for Accenture’s global telecom practice with 6,000 people on staff.
So I’m sure you’ll enjoy this interview with these two industry heavy-hitters as they explain what’s driving telecom M&A in North America and how carriers can substantially improve their odds of succeeding at both B/OSS and business post-merger integration.
|Dan Baker: Curtis and Al, I’m curious what you make of today’s merger and acquisition scene in the U.S. Where do you see future mergers occurring?|
Curtis Mills: For a decade or more, Dan, AT&T/SBC and Verizon have been eager to shed non-strategic properties. Their aim has been to collapse to major metropolitan areas where they can take advantage of high-density, wireless/wireline areas with fiber-based overlays. That’s why Verizon has unloaded so many non-NFL cities. Although AT&T has not sold non-strategic properties yet, they are rumored to have considered it numerous times over recent years.
In the future, we may even see the copper infrastructure inside major metro areas being sold while the fiber assets are retained.
Interestingly enough, as the Tier 2 players (CenturyLink, Windstream, and Frontier) acquire more properties, it will be interesting to see whether they lose their appetite for smaller acquisition targets that are less than 50,000 access lines — whereas before they eagerly gobbled them up. CLECs, Internet service providers and cable companies may use those as a way to build their telecom presence in certain markets.
We’re also liable to see added interest from Tier 3 carriers. Mergers can be very profitable, especially if the acquired territories are contiguous to what you already own. Plus a new category of acquisition target has come to the forefront — telecom data centers — which are key to the growth of cloud computing. The valuations are actually higher on data center properties — in the range of 11 times EBITDA versus six or seven times EBITDA for traditional telco properties.
Al Burgess: Acquisition synergies and financial performance are the topics that get high-profile attention at the board level and on Wall Street. The synergies and higher EBITDA for enhanced free cash flow are all-important to merger success. And the reason why there have been so many acquisitions in recent years is to enhance growth and profitability. Great savings can be realized by combining systems/processes and reducing redundancy.
Bottom line, it’s about share price. To grow in the mature wireline space, these guys really have to be in acquisition mode all the time. That’s why you saw CenturyLink do the Embarq and Qwest pickups in rapid succession. There are other sources of revenue growth for these companies, as well, such as broadband; however, these companies will also be under pressure to keep stuffing the pipe with acquisitions. Plus the telecom market has become far more competitive in recent years, so organic growth in margins becomes very difficult to attain. You rely on the skill sets of your managers to deliver on that. That’s why there’s so much focus nowadays on business process and leveraging your IT resources to operate the company efficiently. These days, if your EBITDA and free cash flow drops, you will definitely be punished by the market.
|At what point does a carrier need to turn to a telecom post-merger integration expert?|
Curtis Mills: Ideally, a service provider will involve a specialist even before the transaction has occurred. Because of its deep experience in the guts of B/OSS systems and processes, a firm with a focus on this area can help the deal team estimate the operating synergies it can expect to gain. Then there is implementation once the deal is in play.
To make telecom acquisition goals a reality requires knowledge and best practices in the highly specialized area of wireline post-merger integration. The stakes are high. And it’s infinitely more complex than it appears. You would never go to a family doctor for open-heart surgery. Post-merger integration at a telco is definitely open-heart surgery.
While it’s true that a Tier 3 or 4 carrier can often get by doing small integrations on the proverbial “back of an envelope,“ once a carrier reaches critical mass, even as a Tier 3, its operating complexity rises to the point where it needs to employ a more formalized and structured approach. Yet many times, I’ve seen senior executives misunderstand the complexity of integration work. They wonder why it’s not simply a matter of exporting the data from one system into another. This is understandable, because the devil is in the detail; the systems aren’t as straightforward as they seem.
Likewise, executives coming from the cable or wireless industries — where integrations are simpler — are sometimes unaware of the complexity involved on the wireline side. Aspects such as regulations, plant, provisioning and product diversity are just a few examples of where wireline differs.
The hard part of post-merger integration is tedious technical stuff, but your main focus must still be on customer satisfaction and the strategic objectives of the deal. If you do that, you’re less likely to get lost chasing side-shows. Not getting the technical conversion right can certainly get you in trouble. However, even if the technical conversion is successful, you could fail because customers are irate or the business synergies are not there.
|So how would you know that your conversion is troubled?|
Curtis Mills: The starting point is a methodology that allows you to monitor progress and manage risk along the way. You want as few surprises as possible at the actual conversion, so you rehearse, correct, learn and rehearse again. Next, you want to know what constitutes conversion success and look for its telltale signs.
For instance, scanning call-center logs and performance metrics two days after the first bill hits will give you some very valuable intelligence. And it’s also about asking key questions: Are my order backlogs going up? Are call-abandonment rates rising? Are call-center volumes on the rise either from service or billing problems? Are call center average call-handle times workable with volume and staffing?
You also have to know how to read the tea leaves. For example, average call-center handling times will also typically go up, even if training has been executed properly. Experts know how to dig to find out why handling times are higher and whether that’s a good thing or a bad thing. The key then is to look at the conversion process in a holistic way as it affects business operations. You should be monitoring the operational reports even more than the system performance metrics.
If the business operation doesn’t go well, it doesn’t matter how elegant the conversion was. The FairPoint conversion in northern New England is a case in point. Rightly or wrongly, the Public Utility Commission (PUC) complaints were high. That forced FairPoint to fight PUC fires, which took manpower away from its effort to work out its operational challenges at a more methodical pace.
So at ProCom, we feel that a thorough understanding of the overriding business concerns gives focus to the B/OSS effort and allows you to plan implementations to avoid undue risk.
|What should carriers be looking for when they choose a consulting partner to help guide merger/acquisition conversion?|
Al Burgess: Experience and a methodology — the right kind of each — is what makes the difference. For example, the project team may be highly skilled in large-scale telecom integrations on the enterprise customer side. However, that’s very different from the experience needed to integrate a telecom that’s operating in high-volume, residential markets.
Average call-handling times for a telco serving large enterprise customers might be 10-20 minutes, but in a high-volume, mass-market call center, 5-8 minutes is more realistic. The technical conversion aspects of integration — the products and volumes — will also be completely different across retail vs. enterprise sectors.
Tier 1 wireline carriers in the U.S. have really not done major customer conversions on the retail side; scale, complexity and regulatory variations across states have limited their ability to move away from legacy systems like the CRIS billing system; therefore, the consulting firms that work exclusively within Tier 1 probably don’t have situation-specific, post-merger integration experience. In fact, only the Tier 2 guys have done conversions repetitively over the last two decades. So, regardless of size, carriers should seek out consulting firms that have significant and repetitive Tier 2 experience.
Curtis Mills: The level of complexity here can be daunting. For instance, the data-element comparisons must be rationalized from both IT and business perspectives. In many ways, it’s the complexity combined with the seeming simplicity that causes problems. This has been the cause for many unsuccessful initiatives.
But telcos still need experts to help them do these conversions with minimal risk, because, given the competitive climate, there’s no longer any room for error. In addition, all CSPs’ internal staffing is leaner than prior years due to cost reduction efforts, and these integrations require significant, dedicated effort.
A primary method for maintaining control over conversion success is through a heavy metrics focus — comparing comprehensive source and target system outputs for conversion counts, rating, billing, ordering, customer care, etc. You heard Frontier say at the conference that it is a big believer in that philosophy and it’s one reason they are doing mergers/acquisitions so well.
This article first appeared in Billing and OSS World.
Copyright 2012 Black Swan Telecom Journal