Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the June 6, 2006 issue of the Bangkok Post.
By Verasa Attanun
Is the convergence of digital technologies creating an urge to merge? Or will convergence lead to the age-old corporate pitfall of marrying in haste only to repent at leisure? Much hinges on the answer, not least the possibility of another digital bust.
In a 2006 survey by the Economist Intelligence Unit and PricewaterhouseCoopers, executives worldwide declared that the era of digital convergence had arrived, pointing to phones that take pictures, download music and play video games, and home ovens and thermostats controllable via the internet.
The mood is positive, and as a result executives expect a lot more mergers and acquisitions (M&As) in this sector in the future. In fact, 22% anticipated they would participate in a significant transaction within one year, while 38% foresaw a transaction within three years.
It was this sort of market overexuberance that played a key role in the technology sector's crash in 2000. So how likely are today's digital convergence-focused executives to over-extend themselves through corporate transactions?
The survey showed that executives viewed digital convergence in terms of opportunity rather than risk. Among respondents, 42% agreed strongly that digital convergence presented their companies with significant opportunities. Despite this apparent optimism, 41% of respondents said they anticipated significant corporate failures. They feared that firms would venture too far from what they knew best.
The risks of any acquisition are relative. Certainly a large organisation can acquire a much smaller entity, and the risks weighed against the balance sheet are lessened. But when smaller companies combine, or when large companies combine with other large companies, the stakes are raised. Far and away the most frequently cited pre-deal financial challenges surround accurately valuing organisational synergies, followed by the ''getting to know you'' issues surrounding assessing the quality of the target's financial data, and the quality of its assets and cash flows.
While multi-billion dollar mega-deals are becoming a prominent fixture in the high-tech marketplace, smaller transactions are by far the most common. A key driver behind the increasing number of small companies being purchased by larger entities is the perception among respondents that small, technology-focused start-ups tend to be the most likely sources of significant innovation in digital convergence.
Beyond the small high-tech M&A deals, there are a growing number of digital-convergence-driven mega-deals, many with the potential to shift competitive positions and entire markets. Size often becomes a win-win for both the vendor and customer. The customer gains simplicity and efficiency, not to mention the leverage that comes from being more important to a single vendor.
For both small and large companies, the survey revealed the elements technology executives believed most likely to drive their individual companies to pursue a specific acquisition, merger or even partnership alliance:
- The ability of the combined companies to create/deliver enhanced products;
- The ability to gain access to new customers and markets;
- The ability to gain market share/critical mass; and
- Access to new technology.
Our research shows that a merger or acquisition carries profound implications for corporate structures, business models and strategies. Areas significantly affected by a merger or acquisition include: product development and portfolio, overall business model and structure, research and development, customer relationships and strategies, and technological footprint.
In addition to the need to align these processes and functions, corporate transactions create the need to address a number of additional issues. The greatest financial challenges following a merger or acquisition include:
- Attaining a post-deal share valuation that accurately reflects the value of the combined companies;
- Integrating/optimising financing and treasury operations; and
- Standardising accounting policies.
Melding divergent operating philosophies, management practices, administrative procedures and communication styles are post-deal hurdles. As firms acquire businesses from different sectors, the challenges expand.
When executives were asked the one thing they regretted most from their last deal, more cited not moving fast enough. Companies that make fast transitions report better financial performance, morale, productivity and time-to-market, along with fewer systems and management integration problems. Reconciling differences in operating philosophies as soon as possible is pivotal to improving post-deal financial performance. Successful acquisitions quickly get beyond the ''my practices are better than your practices'' debate.
Market statistics suggest that the growth in the number of total transactions may have slowed in 2005. But at the same time, the average size of each deal is increasing. There can be no doubt that in technology, media and telecommunications, the driving force behind today's rapid pace of acquisition and mergers is digital convergence.
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