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Can Hutchison Whampoa deliver on the promises behind bid for O2UK?

This article was first published on Growth Business online and the full article can be found online here.

On 25 March 2015 Hutchison Whampoa Limited (HWL) parent company of UK mobile operator 'Three' announced its agreement with Spanish Telefónica to buy O2 UK for £9.25bn plus up to £1bn if cash flow of the combined businesses reaches agreed targets.

The merger, which would create the UK's largest mobile operator of 33m customers, is (subject to EU competition approval) expected to complete in 2016.

Advantages from the merger claimed in HWL's press release include:

  • complementary assets of the 2 businesses,
  • generation of significant synergy,
  • creation of scale and financial strength,
  • stronger ability to compete,
  • combined networks delivering better coverage and quality of service.

Such vaunted benefits, claimed for so many mergers, are easier to state in a press release than to deliver on the ground.

Reasons for a merger (not always those in the press release) generally include:

  • Growth by acquiring new customers, access to facilities, brands, trademarks, patents, technology or employees;
  • Synergies that turn into revenue growth, cost reductions, cost savings, financial synergies and improved management;
  • Horizontal Integration to acquire competitors and increase market share;
  • Vertical Integration by acquiring customers to increase sales, vendors to achieve cheaper supplies and improved competitor advantage generally.
  • Defensive response to other threatening mergers. To what extent was HWL's bid for O2 (first intimated in January) prompted by disclosure last November that BT was in talks with Telefónica for the repurchase of O2 (BT sold BTCellnet, later O2, to Telefónica in 2005 for £18bn).
  • Pressure to do a Deal, Any Deal given that CEOs are under pressure to generate cash, earnings and a narrative for their tenure.

Notwithstanding the optimism projected in merger announcements, McKinsey & Company, (Perspectives on Merger Integration) contend that "Anyone who has researched merger success rate knows that more than 70% of all the mergers and acquisitions fail to produce any benefit for the shareholders and over half actually destroy value."

The challenges facing such a mega-merger as, let's call it 3O2, are not that different from those faced by smaller, less illustrious mergers.

Merger fall-out commonly includes resistance to change, cultural challenges across businesses sectors and geographies, loss of key people and know-how, loss of customers, reduced business effectiveness and falling sales from the distractions of the integration process.

Best practices to address such fall-out include aiming not lose a single customer, communicating the integration business principles upfront, managing the integration process through a dedicated team and regular communication with internal and external stakeholders.

"Do it faster" is the mantra heard from Jack Welsh after most GE acquisitions. Get the human resources, the business teams and the general management immersed in the due diligence process. Draft the Integration Plan prior to acquisition with some short term "first 100 days" objectives. If acquisition decisions are sometimes intuitive ("Acquiring a business is a nose, stomach thing"), integration is a process-driven one that should involve teams, planning, timelines, workshops, milestones, reporting and communication (Jack Welsh on GE acquisitions).

A merger calls for integration across all elements including marketing, production, IT, accounting, finance and human resources. Merging telephonic computer platform technology may be challenging, but the most intractable issues usually surround the employees themselves. KPMG's Whitepaper on "Post-Merger People Integration" reports that most merger failures are attributed to personnel and organizational issues such as lack of shared vision, leadership clash, cultural mismatch, loss of key talent, misaligned structures, lack of management commitment, lack of employee motivation, poor communication and poor change management.

The HR team need to be asking searching questions throughout the merger negotiations. There needs to be an integration team with its own leadership and budget (1% - 2% of enterprise value) distinct from the acquisition team.

The subjective experience of the employee undergoing merger is vividly described in Cameron & Green's "Making Sense of Change Management" like this - Merger announced - Shock, disbelief, Denial - It's not really happening, mixture of excitement and anxiety, Anger and Blame: "This is all about greed", Changes start to happen, new boss, new colleagues, new customers, Depression - then finally letting go of the old and acceptance of the new company.

Measures recommended by Cameron & Green to help employees through the process include such innovative ideas as holding a wake for the old company with memorabilia, perhaps a mug inscribed "O2 RIP - Hello 3O2".

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