When 1 + 1 = 0 or The Trouble With Mergers

The state of our economy can create a number of responses from the corporate world. An increase in the number of companies in administration, change of strategic direction, the board retains a fixed course with no change or they actively look to merge with or acquire a suitable partner.

On the topic of merger this can, if managed well, with clear vision and talent be a very positive step. Unfortunately the catalogue of merger histories is well stocked with its fair share of failures.

The original spark that created the merged business is typically founded in solid logic and should have all the ingredients for a successful outcome. Unfortunately the complexity and challenge of putting organisations together can dilute and lose the benefit of economies of scale and combined resources.

Critical to the success is a clearly articulated strategy delivered consistently by an effective leadership team. The focus at all times MUST be on the customer, lose sight of that key fact and matters can start to unravel fast.

Not many employees relish change and mergers present plenty of new challenges and potential threats to personal job security. Keeping the talent engaged is important as is the need to motivate the business to achieve the new goals.

There are many positives to be borne from mergers but before being charmed by a suitable partner it’s worth looking at theirs and other track records. We can and should certainly learn from the mistakes of others.

Interestingly in the world of telecoms there are 2 examples of where we appear to be seeing history repeating itself.

At the end of 2004 US telecom company Sprint announced its merger with Nextel. They were at the time the 3rd and 5th largest mobile phone operators in the US. The potential of such a merger was obvious and had the likes of AT&T and Verizon looking closely at the deal.
Sprint’s acquisition of Nextel ultimately was a financial disaster. In 2008 the company wrote down $30 billion of the $36 billion sum it had paid for Nextel in 2005, wiping out 80% of the value of Nextel at the time it had been acquired. The write down reflected the depreciation in Nextel’s goodwill since the date of acquisition.

CEO Gary D. Forsee was removed in 2007 marking a remarkable and rapid fall from grace. He had in 2004 been lauded as a “best manager” by Business Week only to become regarded as one of the worst CEO’s by Fortune magazine in 2009.

Why did this happen?

Despite much talk to the media of new technologies CEO Gary D. Forsee focussed on the financial savings to be gained out of the merger of the two corporations. He was heavily criticised for initiating programmes of micro management and cutting out costs from the business. The emphasis shifted from churn of customers to profit enhancements through cost savings. Claims of monitoring call centre staff toilet breaks only served to highlight the maniacal zeal Forsee had for getting every possible cent worth from his staff.

Complaints increased, 1,000 customers contracts were terminated by Sprint Nextel as they sought to rid themselves of persistent complainers. But many more followed putting the company at the top of the churn list as customers rushed to join the competition. There were also technical network issues which didn’t assist but overall the lack of investment in bringing customers over to the merged firm and inability to respond to the worrying customer indicators led to disastrous figures.

In the third qtr of 2007 Sprint lost a staggering 337,000 customers.

Fast forward to 2010 and the UK. Orange and T-Mobile announce their merger. A new brand of Everything Everywhere is announced and last year shortened to EE in an attempt to bond the networks together.

It’s a little early to state categorically that this merger mirrors the Sprint Nextel debacle but the signs are not good. Being a once satisfied customer of Orange I have seen a dramatic drop in customer service, lack of knowledge from front line staff and farcical cost management of rebranding high street neighbouring Orange and T Mobile shops to EE.

Efforts to communicate with CEO Olaf Swantee have not been successful – his army of executive office helpers must be very busy handling his inbox traffic too as they take a while to respond.

The @EE twitter feed is full of angry customers who can’t get a signal, or get help in an EE shop, have other technical issues and unable to get a response from the customer service helpdesk. The EE Facebook page is also loaded with frustrated customer comment. It’s worth a browse – raises the question of the logic of having such a facility when it provides such s public shop window of customer dissatisfaction.

Is the CEO of EE presiding over the same drive to save costs, cutting service and technical resource but using the smokescreen of new technologies such as 4G to cover the cracks? All I know is that at the sharp end as a customer things are far from healthy for the UK’s largest operator.

Dutch CEO Olaf Swantee doesn’t take any prisoners in the corporate world. On his first day he fired six of his most senior managers. He then informed a further 120 vice presidents and directors that their jobs were at risk. Not long after a tour of call centres he announced a further 1200 to be put under risk of losing thrir jobs. He’s quoted as saying; “I don’t have an objective to make myself popular,” He’s not wrong there, it’s not a popularity contest but it is an interesting way to generate goodwill and motivation.

EE’s problem is that it’s not as profitable as its competitors, O2 and Vodafone, and Olaf has stated that he intends to close the gap by 2014.

Of course the trouble is you still need revenue, that’s customers and satisfied ones at that. EE need to balance a high level of technical and personal service with a drive to reduce cost. Concentrating exclusively and aggresively on cost will potentially see Mr Swantee joining that Fortune league – do you think he can “Forsee” that?

On the upside mergers can and do deliver, but best look at an equation that gives 1+1 = 3+ not 0.

If you’re considering growth through merger we’d be happy to discuss.

David Laud