Ensure the rationale behind an acquisition is sound, advises Telkom's Deon Fredericks

The industry in which Telkom operates is competitive; the environment fluid and prone to frequent change, says Deon Fredericks, the company’s group chief financial officer. Because of this, it considered BCX (then known as Business Connexion) twice, the smaller company first catching the eye of the telecoms behemoth in 2006/2007, and then again in 2012/2013. Eventually, the deal proved too good to be ignored: Telkom required an ICT company to provide end-to-end solutions to corporate customers and BCX was a complementary fit. Deon sat down with CFO South Africa to talk about the acquisition – a deal with a R2.7 billion price tag. “We are very focused on what we want to achieve with BCX in the market. We are starting to see some good wins through the venture.”

An opportunity arises
"Boundaries are blurring, with significant moves from telco players and IT players into ICT adjacencies," says Deon, explaining the rationale behind the acquisition. "If you consider the ICT market, you have telecoms in the middle, broadcasting on the right and IT on the left. As convergence takes place, other competitors will move into your space and eat your lunch. We reviewed the value chain and realised that to service our corporate customers better, we required IT capabilities to complement our connectivity. So, this was the strategic reason to expand the service offering to our corporate customers."

"We went through an evaluation process and BCX was one of the various companies we considered. When we made our initial approach to them, they were considering a deal with Orange, although that deal didn't go through. After that they started to engage with us."

According to Deon, the deal took almost two years to conclude. It took this long for several reasons, he says: "We are in the telecoms space, they are in the IT space. We spent a significant amount of time considering fit, synergies, cultures, and ways of doing business, and undertaking due diligence. As we operated differently, we also had to consider how and whether we would be able to align - these were some of the complexities. It took quite some time to get the transaction through the Competition Commission and ICASA, too. This was the biggest delay in the whole process. Competitors are usually the greatest challengers to such a transaction, making cases to the Commission that if you put BCX and Telkom together they would make a so-called 'dominant' competitor, and may have a monopoly as a result of this. We thus had to address all of that first, as well as public interest - to limit the job losses."

Deon, who is responsible for M&A in the organisation, says he got involved in the finalisation of the deal, focusing on ultimate strategic fit, pricing and incentives, and ensuring that this was aligned with what Telkom believed was an acceptable deal. "The challenge with any acquisition is that the other party (sellers), will always negotiate for a higher price than the offer price, which mostly leads to the non-conclusion of transactions," he says. "The additional challenge with a service business is that it's dependent on people, so you have to ask, how key are these people and how do you incentivise them going forward to maintain the value?"

Once the dust settled
In the first few months after the acquisition, there was a lot to get used to, Deon says. "We had combined two very different working cultures, so it was a challenge for people to work together. I think with maturity, the two teams got together and started understanding what we wanted to achieve. It took longer than we would've liked but we have now integrated the businesses."

"There are always people who would disagree or not adapt, and one has to deal with this. We are very focused on what we want to achieve with BCX in the market. We are starting to see some good wins through the venture."

Deon says they had to take a specific approach when bringing the two entities together. "We said, firstly, let's establish a new management team. So, we took the best of BCX and the best of Telkom, and we then brought in some new skills. This is currently a work in progress. There's always the risk, when you change the way people have done business, that things will be difficult." Communication is very important, Deon says, adding that, in hindsight, they could have done better in this regard.

Post-acquisition, the landscape is different to a few years ago. The current economic environment has not helped either. Also, corporates are investing less and want more for their money, Deon says. "They want more for less. The result is that corporates want voice at significant lower prices. If connectivity is your only product, giving significant discount are difficult. But, if you've got a basket of solutions, you have more flexibility with your pricing and can make up the shortfalls on some products with other products - obviously within Competition rules. This makes us more competitive. We are currently the only provider who can provide a one-stop, end-to-end service."

Lessons learnt
Deon's advice is: Make sure the strategic rationale to make an acquisition is sound and that the target company has the capabilities being sought; do not rush a transaction because if you don't undertake a proper due diligence and unpack everything to your satisfaction, you will struggle later on. He says: "As people always say, you can't go into too much detail but the devil is usually in the detail." And, when it comes to expectations, it is important to ensure you align these upfront, he adds: "You will always have disagreements but at least you can agree on the frameworks, how you would manage the business and how the entities would integrate."

When it came to integration, a lot was learnt, Deon says. "Integration is never easy. We could've done much better in change management. People are important and how you manage people is key. Sometimes you think people are with you and that they're accepting of the situation, and doing what you need them to be doing, but because there's not enough communication and detailed report back, they might not be aligned with where the organisation is going. In the current environment, it's important to communicate more regularly with people because of this uncertainty."

"Things are changing fast, people want you to slow down, but the market, the customers and your competitors don't slow down. So, you have to ensure urgent alignment between all the different parts of the merged entities."

It is also important to ensure that you have the right management team to drive the business in line with your strategic intent, he adds.

Looking ahead
With eyes on the future, Deon predicts tough times still to come and says companies will need to adapt to survive and thrive. The question is how. "The business plans approved three months ago are now irrelevant. But how do we get in front of the curve and stay there?" Thankfully, Telkom is "lowly geared", he says: "Our net debt to EBITDA is 0.5 at this stage, which gives us the flexibility to still invest in these difficult times. We delivered some good results in March. We are spending most of our time now on processes and systems, ensuring that we invest in the right initiatives and that we have the right cost structures in place supporting our long-term strategy. We are also focused on how we can retain the current revenue base while growing and attracting new customers. This means reviewing the operating model and environment, budgets and ensuring we can actively participate going forward."

At the end of the day, Deon says everybody is onboard and keen to tackle challenges head on. "Four years ago, if you told people in Telkom to review their budgets they would say, that's the best we can do. Now, people own it and say, let's see what is achievable. I'm confident that our employees, our people, will come to the party. It will be challenging but we are positive that with the plans we've put in place, we will achieve what we've set out to do."

By Toni Muir

This article first appeared in CFO Magazine