Protecting Enterprise Customers - Assignment Example

M&A is an arena where one might expect wide consensus about what defines success: incremental cash flow returned in the form of increased shareholdervalue (Ravi Chanmugam, Walter E. Shill and David Mann). However, a recent survey on mergers and acquisitions revealed that only 9% of the senior executives defined "success" as an increase in the free cash flow over the premium paid. According to the Accenture specialists, ‘the more successful, integrated approach treats the M&A transaction as a lifecycle that begins with pre-deal strategy (goals, target identification, valuation), progresses through deal execution, and continues with post-merger integration.’ M & A is an important strategic option for companies that look to reposition themselves. The merger of Cingular wireless with AT & T has been in the news for quite some time and finally in November 2005 the merger has taken place. These are not easy decisions and definitely are based on certain expectations and apprehensions. We shall examine here the motives behind this merger and assess the difficulties ahead in achieving its goals. When AT & T put itself on the auction block and Cingular made the first offer, they did not know how many more bids would be forthcoming and whether the bids would exceed that of Cingular. Cingular and Vodaphone, on their part expected that AT & T would choose the best bid by the deadline that it had set, which turned out to be incorrect. AT & T was unsure whether Cingular or Vodaphone would increase their bids to an amount it considered sufficient. AT&T Wireless was uncertain of the time between the bids that would be offered. For months, rumors were widespread that Cingular would finally purchase AT & T so it came as no surprise when they announced the take over at a bid of $41 billion dollars. Many in the industry were surprised at the speed at which the takeover was approved by the FCC and the DOJ. The skeptics were also taken aback at the relative ease with which the company completed its sales processes with AT & T. They went in for a completely new advertising and marketing campaign to educate the customers about the merger. Literally overnight, they could transform thousands of AT & T stores to Cingular stores. It is yet to be seen who has won or who has lost in this merger but the CEO of AT & T definitely obtained a superior premium for the company and its stockholders. The merger on paper makes Cingular the number one wireless companies in the U.S. today but speculations are that it has overpaid for the merger. During the process of regulatory review, AT & T already started losing customers as competitors exploit the regulatory uncertainty. This gave rise to further apprehensions of how costly the merger would be based on the assets remaining once the merger was consummated. Merging two highly powerful and competitive companies to form one single unit with a customer base of 49.1 million is no mean feat. Moreover, the speed at which Cingular acted was very impressive. Their target was to capture the sales for the 2004 holiday buying season hence they speeded up the merger process. They simultaneously worked on fulfilling the government demands as well as planned their advertising campaigns. Very tactfully, they incorporated elements from both Cingulars identity (the Jack logo) and AT&T Wireless "Raising the Bar" message. They tried to keep in close contact with the customer and keep the impact on them to the minimum. As soon as the deal was closed in October 2004, training programs were launched, call centers were equipped to handle the spike in inquiries, and the two companies’ IT systems were combined. All this happened before the close of the first post-merger day of business. Exceptional planning and execution was the cause. The new identity was meticulously designed. Accenture was entrusted with the responsibility of the merger and they employed the Intelligent Clean Room pre-merger planning. If the post merger integration took time, it would result on customer defection. With this is mind all the fronts were simultaneously tackled and all the problems were addressed on a daily or weekly basis. In February 2004 Stan Sigman, President, and CEO of Cingular Wireless announced, "by combining the strengths of these two companies we expect to accelerate the availability of advanced wireless services for consumers”. The merger expected to achieve better customer benefits, growth, better coverage, improved reliability, which neither company could achieve on its own. Sigman felt that ‘with the acquisition of AT&T Wireless, we believe no other company will be better positioned than Cingular to grow with the markets continued expansion’. The merger was “a triple win for AT&T Wireless shareowners, customers and employees," said John D. Zeglis, AT&T Wireless Chairman, and CEO. The cultures of the two companies – Cingular and AT & T were entirely different. What was the initial motive in the acquisition and why did Cingular move at such a pace? Why would they over pay for the bid? This gives rise to certain speculations and apprehensions. Telecom industry consolidation was under way with the Sprint-Nextel alliance and Verizon-MCI merger. The consumer long distance market has become unconcentrated with the growth of the wireless industry (Hank Levine and David Rohde    2005). AT&T was in trouble and got a very good bid at the auction, which the CEO calls a ‘triple win’. Cingular gained because they would immediately get the benefit of the customer base of AT&T. Three-fourths of AT & T’s revenue came from big businesses and government customers. AT & T controlled the ‘long distance phone service’. It was facing stiff competition from companies, which offered bundled service including wireless, Internet, and cable television. The merger eclipsed the long-standing number-one Verizon Wireless. The only big player in the market now is Verizon and unless a third competitor comes in the picture, Cingular remains at the top position. The possibility of a third strong competitor at the moment seems remote as companies like Broadwing and Global Crossing are in debts and have less cash at disposal. Telecom regulation is intensely political and with the disappearance of AT&T, Cingular has the market power to exploit the power at the cost of the customer. Consolidation in the telecom industry was only leading to loss in the potential competition rather than actual competition, observed Levine and Rhode. The merger is also expected to adversely affect Bellsouth although the CEO feels the growth in revenue of Cingular is good for them too. GSM is the world’s most widely used wireless technology and is available in more than 200 countries. Both Cingular and AT & T use the same technology. Cingular’s motive in the merger was to improve the coverage and the call quality. Both companies have been leaders in rolling out high-speed wireless data offerings, including GPRS (General Packet Radio Services), EDGE (Enhanced Data rates for GSM Evolution) and trialing next generation UMTS (Universal Mobile Telecommunications System). The new combined unit could now provide high-speed wireless connectivity for PCs and wireless e-mail devices such as Blackberry for mobile executives. Cingular expected significant operating synergies through this acquisition by consolidating networks, billing, procurement, marketing, and advertising. In 2004, the company envisioned that they would be able to generate more than $1 billion in operating expense and capital expenditure savings in 2006, and in excess of $2 billion in annual savings beginning in 2007. SBC communications ($25) and BellSouth ($16) funded the $41 billion merger deal. These are what the CEOs anticipated but the analysts, economists and the customers react differently. Analysts had estimated that the company’s fourth-quarter churn would be 3% but it was 2.6 percent. This includes the reseller disconnects without which it would have been 2.4 percent (Sue Marek 2005). Not only was churn down, they even added 1.8 million net subscribers during this period. According to analyst, John Bryne whether this translates into growing cash flow is yet to be seen. Generally, merger means less competition and hence less choice and higher prices. Post merger the company has positioned itself comfortable especially against Verizon wireless. Verizon had been banking upon its exclusive mobile-to-mobile calling service but Cingular not just added to to its existing subscribers, but also surpassed Verizon in no time. The merger has also made Verizon feel threatened and they have been trying to match their rate plans with those of Cingular’s. They even dropped their roaming charges. Apart from rate plans, Cingular has generated competitive pressure even in the area of handsets and requires that its vendors have a strong presence in the U.S. The company may have innovative device and advantage with vendors but they are behind competition when it comes to high-speed data development. Verizon and Sprint are fast moving in the EV-DO technology in several top markets. According to the CEO Sigman feels that due to the merger it now has the spectrum necessary to upgrade its GSM/GPRS and EDGE network to UMTS with high-speed downlink packet access (HSDPA). The company is confident that for the 2005 season, they would be able to launch the network and the devices too would be available. With this, they could launch new service like the mobile video. The UMTS and HSPDA technology would go a long way in enhancing the Video services, video-on-demand services and live video services are much better quality than what is out there today. In November 2004, Dagan Josephson had anticipated that the merger would affect consumers and play a role in the industry’s pricing structure and the quality of service. The signal quality would improve. This is the largest acquisition in the US wireless industry. The merger was expected to offer more plans and features. The new Cingular has the largest voice and data network in the country. Cingular believed that the merger would attract new customers and expand its existing customer base. According to Josephson customers advocates feared that merger would not benefit customers. Their apprehension was based on the surmise that merger would lead to layoffs to cut down on costs. Besides, lesser competition would result in higher prices so the customer would not benefit. The students were very quick to notice change and migration as also reported. They reported better reception due to improved network coverage. AT & T name would eventually phase out and billing and stores would all carry only Cingular’s name. The main challenge that lied ahead of them was to educate the AT & T customers about Cingular and its services. While the company claims and reports also conform that widespread marketing and advertising has been undertaken to educate the customers, confusion still prevails in the minds of the customers. According to Chris Shipley (Cingular confusion, 2005) AT& T keeps the rights to the AT&T Wireless brand and plans to launch a new wireless service under that name. Speculations are that Cingular wants to move AT&T Wireless customers to Cingular plans before AT&T Wireless is re-launched. A fee is also being demanded to migrate from AT & T to Cingular. This means effectively the customer bears the cost of integrating the two customer bases. The lower price for the phone was for the existing Cingular customers. This means there is discrimination for those who wish to migrate and can adversely affect the market in the due course if remedial steps are not taken. This gives the customer a feel that as far as network is concerned, they are Cingular customers, but when it comes to service, they remain AT & T customers. This has caused a lot of confusion in the market. Customers even in August 2005 continue to be unsure whether they are AT & T customers or Cingular customers. Customer service seems to be in jeopardy as Shipley was informed that one ‘overlook your Cingular bill for months without consequence’. This gives rise to apprehensions about the future. The merger may have cause Cingular to become the largest carrier in the country but it has left the 26 million customers of AT & T confused and disenfranchised. Leslie Cauley reports that Ed Whitacre, the Chairman and CEO of the combined company, has confirmed that SBC plans to sell Cingular Wireless under the fabled AT&T name. Speculations were on as to what would happen to the Cingular brand name once the merger deal closed with AT & T, and the speculation was put to rest when the new Chairman confirmed that they planned to drop the name Cingular. He said they might still use the name Cingular in some markets but overall they plan to market local, long-distance, wireless, data and video under the name of AT & T. This would definitely strain the AT & T’s relations with Bellsouth. The two carriers were together responsible to promote Cingular as a national brand while the Bellsouth Chairman said this was not worrying them because anything that boosts Cingular revenue is good for them. Whitacre speculates that Bellsouth would also benefit if the name AT & T could attract and increase the customer base. AT & T’s logo too has been redesigned to give it a 3-D effect. This would help freshening up the brand. The merged company will start trading on the New York Stock exchange on 1 December. Todd R.Weiss reported in November 2004 that Cingular wireless is preparing to layoff about 10% of its 68,000 workers over a 12-18 month period starting next year. Which jobs will be affected was not known but staffing evaluations are being done. Analyst Chip Mahla of Econ One states that the merger has not resulted in any marked increase in rates (cited by Peter J. Howe, 2005). Besides, in many markets Cingular has managed to get rid of AT & T rates that were higher to bring uniformity in its rates. The widespread advertising to educate the customer seems to have fallen short of expectations as confusion still prevails. The new management team cannot concentrate on global services as they are under pressure from the Wall Street to meet the financial goals. Cingular may look at layoffs but if they replace the key personnel service may be affected which might ultimately cause them the loss of their bid customers. Installation, repairs, and restoration times have to be adhered to and failure in meeting these targets can hamper business. Larger customer base calls for better handling of service and personnel. Uniformity in tariff has to be introduced immediately and AT&T customers should not be charged for migration. These would immediately lead to reduction in the customer base. Following mergers, the cost cutting threatens project implementation and optimization. The new management has to tread cautiously to make the merger a success. Reference: Cingular To Acquire AT&T Wireless, http://www.cingular.com/about/latest_news/04_02_17 Marek S, 2005, Cingular Wireless: Supercarrier Impresses with Merger Gains, http://www.wirelessweek.com/article/CA510471.html?spacedesc=Special+Section Howe J Peter, 2005, The Boston Globe, http://www.boston.com/business/articles/2005/02/01/mergers_can_help_consumers_analysts_say/ Josephson D, 2004, Daily Bruin, http://www.dailybruin.ucla.edu/news/articles.asp?ID=30923 Shipley C, 2005, Wisconsin Technology Network, http://wistechnology.com/article.php?id=1547 Levine H, Rohde D, 2005, Protecting Enterprise Customers AfterThe Telecom Mega-Mergers, http://www.voiploop.com/features/protecting-enterprise-customers-after-the-telecom-mega-mergers-2.htm   Bergman M, Feltovich N, Lawless F W, The control of Multi-Agent Systems (MAS), http://www.dodccrp.org/events/2004/ICCRTS_Denmark/CD/papers/038.pdf Read More