Use GIS to Deliver the Promised Value of Mergers and Acquisitions

by   |   May 28, 2014 5:30 am   |   0 Comments

Randall Frantz, Director, Esri, Telecommunication Solutions, left, and Simon Thompson, Director, Esri, Commercial Solutions

Randall Frantz, Director, Esri, Telecommunication Solutions, left, and Simon Thompson, Director, Esri, Commercial Solutions

When companies plan a merger, significant due diligence is required to determine whether the merger will deliver the synergy that will make the value or market opportunity of the combined company greater than the sum of its two parts. This often takes two forms: a new company growing revenue and/or profitability as the result of synergies, combined customer base, or market presence; and eliminating redundancy and the cost of competition that limits growth and market potential.

Geographic information system (GIS) technology is a powerful tool for evaluating a company’s merger and acquisition activities, allowing both market potential and competitive impact to be analyzed spatially. Because all assets and potential customers have a location and move through a competitive landscape of service offers and counteroffers, companies can maximize the effectiveness of their merger when using GIS as an essential part of the decision-making process.

Companies execute mergers and acquisitions fully expecting that the result will be financially beneficial for both parties. However, not all deals are successful. Two prominent examples are the AOL-Time Warner merger in 2001 and the 1998 marriage of Daimler-Benz, maker of Mercedes, and U.S.-based Chrysler. These two ill-fated unions demonstrate that a merger that does not deliver the expected synergy can be costly.

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Communications and retail are two industries in which mergers are fairly common and provide good examples of how GIS-based location analytics can help evaluate the financial benefits of a merger. Both industries serve customers in specific geographic areas, using company assets that are not easily relocated without incurring substantial costs. In both business sectors, understanding the competition plays a very important role. Companies will defend their market share with operations that are not necessarily profitable but need to be available in those locations to provide services to existing customers or to thwart the competition. Territory management and market planning can occur for both offensive (profit) and defensive (competition) reasons. Markets and service areas may have similar characteristics because the customer base and the service area of the newly merged company could have considerable overlap in both geographic extent and customer segmentation. If they overlap, there is redundancy. If they are contiguous, there could be opportunities for developing economies of scale and potential to expand overall market reach and reduce overhead costs – in the case of retail, by closing stores, or for telcos, optimizing the network. Each scenario provides a different set of challenges and opportunities, and it is important to understand them early in the merger process. In both cases, using what-if models and testing different merger strategies via location analytics can play a big part in a successful merger.

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GIS technology can help in three phases of a merger: evaluation, planning, and execution. Mergers can be disruptive to the market as well as to the employees of the affected companies. For this reason, mergers are not usually announced until the process is well under way and most of the evaluation and some of the planning has been completed. Prior to announcing the merger, companies need to identify the synergistic benefits that will be created with the new company. The investors, financial markets, consumers, regulators, and employees need assurance not only that the merger will add value, but also how much value will be created and by what means. Of equal concern in many situations is the loss of competition or the dominance of one brand in a geographic market or consumer segment.

Evaluation

Consider what would be involved in a merger between two telecommunications companies, such as the recently announced plans for Comcast to acquire Time Warner Cable. By the very nature of franchise cable agreements, there would seem to be very little overlapping service territory, but mapping the service territories can verify this assumption. The next question concerns the combined number of customers and growth potential. Are there regulatory issues regarding the size of the new company, and will there be enough new opportunities to grow the business? Are some existing service areas contiguous? Consolidation of operations and management staff can eliminate redundancy and reduce overhead costs without impacting service. There might even be an opportunity to integrate the networks and reduce the number of headends (master video transmission facilities). This assumes that network technologies are compatible and can be integrated. Using spatial modeling techniques, GIS can evaluate the feasibility of this consolidation and also estimate cost savings.

In retail and banking, multiple brands often compete in the same area, and while there are usually designated franchise territories for fast food and casual dining in the food industry, competitors will share that area. Essentially, most retail outlets are competing for market share and customer base. When companies merge, there might be redundancies in the store footprint or redundant/competitive product offerings, such as in the recent Office Depot-OfficeMax merger. Identifying those parts of the business that no longer fit into the new business model or cannibalize sales and revenue from other parts of the business is a critical consideration. Mergers often involve divesting parts of the business. In retail, analysis of GIS data is used to evaluate competition, the potential cannibalization of stores, and the degree of competition. Market analysis will identify the best location strategy for the combined company. It might make sense to close a store, remodel or expand the remaining store, or develop a new site that can better accommodate the increased market potential and combined customer needs. Retailers are able to use GIS data to evaluate a range of scenarios at multiple scales, from an individual geographic market to regional territories or the entire real estate portfolio.

According to the Bank Administration Institute, more than 16,000 bank branches faced closure during the recent recession. After bank mergers and market consolidation, many areas of redundancy and duplication across business lines and operations were identified. Often, newly merged bank branches and their respective ATMs were drawing on the same customers or were poorly placed to begin with. Under the newly merged corporate structures, most financial organizations implemented GIS to review and optimize their branch offices and ATM networks. This resulted in the closure of thousands of poorly sited banks, the creation of thousands more branches, and tens of thousands of more conveniently placed ATMs. Through this entire procedure, there was relatively little impact on the consumer and customer accounts.

Once a GIS analysis is complete, the existing companies have an estimate of the increased value they can deliver through the new company and are ready to announce the merger to the public. This new valuation is supported through the models developed in the GIS. The maps and financial statements provide authoritative documentation of market position and potential. Investor statements and forward projects are based on cold, hard facts derived from scientific and statistical models that are repeatable and defensible. As a result, the existing companies can assure investors and the financial markets that management has conducted thorough due diligence on the effect of its merger.

Planning

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Click to enlarge

GIS also serves a vital role in the planning phase. In the evaluation phase, areas for consolidation are identified, but now the detailed plans regarding which specific facilities, sites, or stores should be consolidated and/or where they should be relocated must be determined. This involves specific facility closures and possible staff relocation. In the Market Cannibalization map, a retailer has defined a five-mile catchment area for each of its sites in the Phoenix, Arizona, metro area. Unfortunately, the Guadalupe store, shown in yellow, is highly cannibalized by stores to both the north and south. Closing the store might appear to be the best option, but upon close inspection and location analysis, it is apparent that the northernmost store, shown in green, is serving commuters and the freeway traffic, while the Guadalupe store provides neighborhood shopping. Cannibalization might seem to occur between these two stores, but they are serving different market segments and consumer types. Losing customers can be avoided by understanding the demographics data of each store alongside customer distribution and draw. Location-based marketing campaigns, geofenced coupons, and other customer awareness efforts can also dramatically reduce the impact of the potential and real territory overlap of stores and brands. Location data analysis plays an important role in quantifying the impact and validating the final decision regarding store mergers and closures. The ability to automate data analysis, test multiple scenarios, and model different approaches to revitalizing the store network can have a dramatic impact on the long-term success of the merged company and the response of customers to changes in their stores and merchandise.

Telecommunications companies face the challenge of determining whether the existing network technology and service capabilities can be harmonized. Today’s telecommunications service portfolio is diverse and complex. Managing two distinct systems can easily overwhelm the newly integrated marketing, sales, and customer care organizations. GIS analysis helps decision makers better understand the capital costs and expense for standardized products and services, and for improving the conversion time through simple maps and visual displays. This ensures that the entire organization understands the challenges and timelines and can effectively manage customer expectations. As soon as the company name changes, customers in poorly served areas will expect immediate service improvements because better service is assumed from a larger company. Marketing will need to integrate new areas into sales campaigns, and there may be a need to increase call center staff to deal with new customers and changing needs. GIS can identify areas where additional marketing is needed and determine the cost and scale of customer service upgrades.

Execution

Even the most thorough merger plans can go awry without a system to monitor the execution phase. Business is about moves and countermoves, and mergers often inadvertently promote new innovations from once-dormant competitors or create new competition altogether. In order to successfully complete a merger without unforeseen consequences, a newly merged company must carefully implement its business plan and monitor the response of its customers and competition. Spatial analysis, often visualized as hot spots and trend maps via operational dashboards, can help companies understand the actual results as compared to expectations. Comprehending what is driving hot spots and trends is critical to identifying and remedying deviations early, before they can affect customers and impact both short- and long-term business performance. Mergers often result in the expansion into new markets, territories, and geographic areas where the company and customers are unfamiliar with one another or the new and expanded services. Expertise regarding local market conditions and familiar local service territories are useless when workgroups are consolidated and transferred to centralized but remote locations. Too often, management assumes that the pre-existing tools and business processes will effectively support the newly restructured organization. Unfortunately, that assumption is often wrong. GIS-based, location-focused data analysis and business modeling will identify the expectations, needs, and costs to support new customers in a new service territory. Independent of what changes on the ground, mergers increase the complexity of doing business. Left unaddressed, these new challenges could overwhelm the organization and undermine any benefits identified prior to the merger.

GIS and the powerful location analytics at its heart enables organizations to identify, quantify, and work through the inevitably unforeseen issues that mergers can create. Mapping, visualization, and spatial analysis are powerful business tools that help ensure a smooth and necessary transition from initial business evaluation to planning and final execution.

Randy Frantz has more than 30 years of domestic and international experience in the telecommunications industry including senior positions at Verizon and Cox Communications. Randy began his career in the U.S. Air Force as an aircraft commander before transitioning into the telecommunications industry. He served in the public sector through the fellowship program at Brookings Institution and on the staff of the U.S. House of Representatives Foreign Affairs Asia Pacific Subcommittee. Currently, he is helping the global telecommunications industry solve business problems using geospatial technology.

Simon Thompson has more than 20 years of experience in apply location analysis and geographic data to solve business, industry, and social issues. He has wide ranging business experience from retail and media to insurance. Simon began his career in the private sector as a systems architect and management consultant before holding senior positions in enterprise GIS and IT companies in Europe and Asia. Today, he’s applying his knowledge and experience to answering complex problems with inventive solutions.






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