By Neil S. Ende, Eric P. Evans and Daniel A. Sferra
The telecommunications channel is ripe for consolidation. Master agents and subagents are confronted by price and margin pressures from upstream providers as well as the need to reduce costs and to take advantage of the greater efficiency that comes with scale. Whether on the buy-side or sell-side of a transaction, agents need to focus on all aspects of their operations including their carrier relationships, human resources, geographic and service scope and operational efficiency to improve their value proposition.
In response to these growing pressures, an increasing number of agents are investigating their options for organic and inorganic growth. Where possible, agents may elect to take measures to enhance their organic growth by addressing these aspects of their operations, either as an initial step toward a merger or acquisition or as a standalone strategy. In pursuing these alternative strategies, it is essential that agents have a clear understanding of the business and legal issues that must be considered and the procedures for doing so in an efficient and effective manner.
Successful growth is a byproduct of a careful analysis and understanding of your human, corporate, business and operational assets as well as the opportunities and methodologies for enhancing those assets to achieve your business objectives. Organic growth is possible where the entity has or can readily obtain the required human, financial and technological elements. Inorganic growth is, in many instances, a more complicated process as it not only requires the self-analysis described above, but also an analysis of other participants in your markets. The following are some of the more critical issues that need to be considered.
The Diversity of Your Revenue Streams. While most agents offer a variety of services, a careful growth strategy is particularly important where the agent has a lopsided revenue streams, focused in one or two services. Combining with an acquisition partner can create a more diversified revenue stream and cross-pollination opportunities.
Carrier Relationships. In todays competitive channel, it is essential that agents have access to a number of carrier relationships. Where the diversity of the carrier relationship is not adequate, it is often possible to improve this circumstance through an acquisition.
Information Systems. Strong management of information, and the systems used to store and access that information, have become a key component of successful relationship management, both with providers and customers. Where an acquisition is contemplated, careful attention must be paid to determine whether the MIS infrastructures are compatible or whether one party’s MIS is sufficiently superior to justify the transition of all customers and products to that system.
Cultural Considerations. A firms culture defines the philosophy through which accounts are managed, internal issues are remedied and business is gained or lost. Strong company cultures produce strong human capital resources which are key assets in the relationship driven environment of the channel. An acquisition partner should present a compatible culture and approach to sales, operations and customer service that can be readily and seamlessly integrated.
A successful acquisition is a combination of tenacity to get a deal done and tactical agility to make it work for the long-term benefit of all parties involved. Yet, defining, preparing and executing an acquisition strategy is never an easy task. Assembling a team of outside advisors to assist in considering, building and managing this process will alleviate the risk of damaging current operations by ensuring that the management team maintains its primary focus on day-to-day business.
Retain Experienced Legal Counsel. Unique legal issues arise in the combination of parties in the channel. For example, are carrier and customer agreements assignable? Are there non-compete or non-disclosure agreements in place that might limit your teaming options? Are the corporate structures compatible, and who will be the surviving entity? What, if any, employment issues, including employee and consulting agreements, need to be considered?
Engage a Specialized Financial Advisor. An M&A advisor with strong knowledge and understanding of your industry, business goals and business drivers is essential to this process. Engaging a financial advisor ensures that all strategic alternatives are taken into account from an objective, value-based frame of reference. The advisor can provide assistance or hands-on management of important tasks such as calculating a preliminary business valuation, securing an appropriate financing source to execute the transaction, conducting thorough due diligence and valuation analysis on various targets in preparation to make preliminary offers, negotiating the terms of the transaction with prospective suitors and closing the transaction in an expedient fashion.
Secure Appropriate Financing. Different firms have different capital structures and costs of capital which need to be taken into account when deciding how to finance an acquisition. A financial advisor can weigh these considerations and provide recommendations as to the best means of financing an acquisition, as well as the contacts and relationships to negotiate and secure the agreed upon method for financing the deal.
Thorough Due Diligence. Things are not always as they seem at first blush so its important that each acquisition partner be thoroughly analyzed in an effort to kick the tires” and understand the details behind the information presented in financial statements and managements qualitative statements. A rigorous due diligence checklist and sensitivity analysis is essential to ensure that a combination will result in positive outcomes for both buyer and seller.
Financing Structure. There are a variety of structures to consider which include: working with a traditional lender; partnering with a financial sponsor; conducting a reverse merger, wherein a private company acquires a public company so that the private company can bypass the lengthy and complex process of going public and then raise capital in the public markets with which to execute the acquisition strategy; or through a special-purpose acquisition company (SPAC), a company that has no operations but goes public with the intention of merging with or acquiring a company with the proceeds of the SPAC’s initial public offering, after gaining the approval of the shareholders.
Merger Integration Management. Once the transaction has been structured, financed and closed the work is not over. The final and arguably the most important phase of the process involves integrating the two firms together carefully to ensure that the original intended benefits of the transaction remain intact and increase over time. This involves clearly defining goals in the form of a socialized road map and an open dialogue around how these can be best achieved.
The channel is ripe for consolidation and those firms that take the initiative to contemplate and prepare strategically and tactically for this ensuing industry trend will find themselves in improved competitive positions as the landscape begins to change. As target firms are folded into the stronger and more aggressive players in the market, the survivors mentality will encompass an open mind to consolidation and the many advantages that can be realized through defined action in taking the necessary steps to prepare and consider a solid acquisition strategy, whether seeking to buy or hoping to sell.
Neil S. Ende is the founder and managing partner for
Technology Law Group
, a Washington, D.C.-based telecommunications law firm specializing in transactional, litigation, regulatory and intellectual property (trademark and copyright) issues faced by telecommunications and technology companies.
Eric P. Evans is the founding partner and senior managing director for
Evans Hagen & Co
, located in Westport, Conn. Daniel A. Sferra is a senior associate for Evans Hagen & Co.
Find out more in the workshop, “Strategies for Growth and Exit: Merger, Acquisition & Sale,” at the Spring 2012 Channel Partners Conference & Expo, March 26-29, in Las Vegas.
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