Learning from the Vocus share price plunge
Integrating business units post acquisition is a tough job.
The Australasian telco market has been in a land grab frenzy for years, with some purchases seemingly made more due to a fear of missing out than a reasonable financial assessment.
After the headlines disappear, the far less glamorous work of gaining true value from a purchase commences. And this is where it often all comes apart.
As an example, Vodafone bought TelstraClear in 2012, and while they quickly updated marketing collateral to represent a single brand, the businesses and fibre networks had still not been merged successfully when I last dealt with them in 2016, and in that time they added WorldxChange to their stable.
The practice of buying another company before the value from the last acquisition has been fully realised is not uncommon, but Vocus went above and beyond.
The Vocus story
The Vocus Group share price plunged 28% this week and has gone down 73% in the last year.
Vocus has had an amazing ride to date, growing through acquisition at an astonishing rate. Here is a brief synopsis of those purchases.
NextGen lost a major public sector client in the final stages of the deal being concluded, and while Vocus based most of the value in the fibre assets they were gaining through the acquisition, their ability to capitalise on that fibre would depend on the pace at which network integration took place, and it doesn’t appear to be going well. NextGen has fibre that can be used to connect NBN points of interconnect, but it will be a huge job for Vocus to make that a reality for the entire network.
Geoff Horth, Vocus CEO, has said that NextGen was poorly managed, has had high rates of churn post purchase, and reduced margins for the clients that remain. It is proving to be a tough deal to gain short term value on.
This was always going to be messy. The M2 group in NZ was a mess. Orcon had been bought by Callplus, then shortly after that M2 bought Callplus. Then, before anyone could catch their breath, and certainly before any synergies had been gained, Vocus bought M2.
This is still essentially a separate entity. The fibre provider appears to be working off a standalone network, with staff not understanding how services outside of their portfolio work. I was given a $7,000 build cost into an existing Vocus Brisbane PoP by a NZ based FX/Vocus AM. Systems are clearly not aligned.
So what happens to Vocus now?
With a low share price but plenty of potential, rumours are swirling about a private venture fund takeover, and that rumour wasn’t slowed down with some former Vocus execs being seen in Melbourne this week near a well know investment funds office.
Vocus debt levels are a concern. $1.05 billion of debt on $365 million EBITDA is getting to a multiple that risks breaching covenants it has agreed to abide by.
There will be a flurry of activity by senior management to gain some of the efficiencies that are certainly there to capitalise on, but whether or not it can be done, and whether the success of any such actions can be communicated to the market in such a way that the share price, and therefore the market cap to debt level, will start to recover will be another question.
The opportunities for Vocus are immense, but the execution was always going to be tough. Vocus built its brand on being agile and responsive, it is now bogged down with legacy systems, confused staff, layers of bureaucracy and no coherent offering between business units.
So, what can the industry learn from all of this?
- Make purchasing decisions based off an objective assessment of value and potential synergies, not a fear of missing out.
- Dedicate as much resource to gaining post purchase synergies as possible, and be careful to add a buffer to the anticipated costs of achieving these savings when calculating the cost of a purchase. This process never goes 100% to plan.
- Ideally, bed in one acquisition before launching into another, or at least ensure resource is available to provide required focus to merging both entities post purchase.
- As business leaders we need to realise that acquisitions change our brand, and customer experience shifts as we grow less efficient. Call centres emerge from the dust and once knowledgeable account managers become confused. These patterns need to be seen as a cost of a purchase, however intangible, and sufficient focus given to training and re-skilling staff.