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The frenzy of mergers and acquisitions in the UK telecoms sector shows no sign of abating. Private equity group Carlyle is now moving in for its own slice of the telecoms M&A action, with a £11.5 billion offer for Virgin Media this week, only a year after Virgin acquired NTL-Telewest. But there could be hidden ‘value destroyers' lying in wait for the Carlyle Group that are common to telecoms buyouts.

According to Stephen Cunningham, Hay Group's consultant on technology and media , there are a number of issues that any potential buyer would need to address in the event of a Virgin Media takeover, in order to deliver returns on the deal. Hay research suggests that 90 per cent of business leaders have overlooked critical but intangible aspects of media companies' culture and organisational structure during the due diligence phase of previous mergers.

In the case of Virgin Media, its merger with NTL is only a year old and the cultures of the two companies remain very different. The company is still dealing with strategic issues related to partners and content, most obviously its dispute with Sky, and operational issues in terms of customer service and brand identity, as it deals with the legacy of the brands that have been merged under the Virgin name.

Carlyle will inherit the challenge facing all telecoms companies of convergence: trying to maximise value from broadband, mobile, fixed line and entertainment content.

Cunningham points to five areas that Carlyle would need to address in the event of a takeover:

* Historic operating models prevent collaborative efforts necessary to innovate and create simple solutions for consumers

* Realigning functions alone will not deliver shareholder value. Barriers to leaders collaborating effectively beyond specific projects will have to be removed

* Company-wide restructuring will be required to deal with the legacy of rapid expansion that has left in place inefficient decision-making and management

* Boundaries between technology and media in the telecoms sector are becoming increasingly blurred, which is profoundly affecting the nature of pay and reward among staff. Retention of key players in a fast-changing ownership environment is already difficult, and is likely to get worse before it gets better, with high-skill employees able to call the shots and define their own roles and value in the digital age

* Leadership is playing catch-up; the qualities needed to lead in the era of convergence are not clearly understood. Hay has seen leadership in the telecom sector struggling with the changes seen over the last decade

Ultimately, says Cunningham, creating value for private equity buyers in the telecoms sector will depend on making the right decisions around operating models and recruiting and retaining the right talent

Source:

Virgin Media: is private equity biting off more than it can chew?

Stephen Cunningham
Hay Group 2007

Review by Joe Gill