News that WellPoint Inc. acquired Amerigroup Corp. recently sent health insurer shares soaring. When done well, aquisitions result in positive outcomes for involved parties. When executed poorly, however, the end result is often catastrophic.
Sprint Nextel
Sprint acquired Nextel in 2005. At the time of this $36 billion acquisition, the stock price was $24/share. Sprint was the #3 wireless vendor and Nextel was the highest quality wireless operator with industry-leading customer retention. Since the two wireless networks used different technologies, the decision was made to not merge them immediately. On the other hand, Nextel users knew it was inevitable and began defecting.
Sprint’s CEO at the time, Gary Forsee, had a lofty vision to be “the leader in wireless capabilities and customer service.” He told Wall Street that he promised to get $14.5 billion of synergistic savings, up from $12 billion originally planned. Surprisingly, Forsee ignored the vision altogether and made cost reduction his sole priority; probably due to his promise to Wall Street. For example, he set up the call centers as cost centers and set very high goals for the number of calls handled per hour per operator. Even the bathroom times of the operators were monitored!
Another blunder was providing big bonuses to customer service agents for getting a customer who calls in with a service issue to extend his or her contract, enabling an agent to earn an extra $1000- $2000 per month. Not surprisingly, customers begin to complain that their contract was being extended without knowing it when they had made a service call. This led to a large class action suit.
By 2007 the churn rate (the percent of customers that leave each month) hit 2.4%, the highest in the industry and 3 times that of Nextel’s historical level. This led to a loss of $3.0 billion in 2007 on revenue of $35 billion and the stock price was down to $13.50/share. This led to the replacement of the CEO.
The new CEO faced huge problems. The Nextel network was still operated separately from Sprint but its technology was becoming quite outdated, leading to a steady exit of Nextel users. For perspective, at the time of the merger there were 16 million Nextel users and by 2009 that number was down to 10 million. In 2009 Sprint Nextel took a $29.7 billion write-down of the acquisition, a clear admission of how bad things turned out.
As noted above, Sprint is just now making it official to Nextel users that the end of the Nextel network is going to happen. Sprint Nextel as a company continues to lose subscribes and money, losing $3.5 billion in 2010 and $3.3 billion in 2011. The stock price today is in the $3.25 range.
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What can we learn from this sad Sprint Nextel saga?
1.) Acquisitions of any size are a major undertaking for both the acquirer and the target. Therefore, it’s imperative the acquirer get to the new business model immediately and merge the networks as quickly as possilbe. Get that behind you. In this case, they completely underestimated the magnitude and customer impact of this task. Their logic was faulty and had they been completely objective, they probably never would have done this merger in the first place.
One of the best acquisitions I have witnessed recently was that of Agilent Technologies acquiring Varian. Literally on day one of getting final government clearance, the CEO announced the detailed plans for merging systems, closing plants, re-organizing, and releasing personnel.
2.) During an aquisition it’s crucial to make sure that existing customers not be inconvenienced. In this case, Sprint went from a very strong customer service reputation to a complete focus on costs. Sticking customers with contracts they didn’t agree to, of course, made matters much worse for the company.
In implementing the Varian acquisition, Agilent had detailed plans for regular contact with customers to reassure them of no change in service or capabilities.It doesn’t take an MBA to understand the value of a single customer. Without customers, you obviously have no business.
3.) Don’t tell the troops one thing and demand another. The CEO’s vision for the company of “the leader in wireless capabilities and customer service” was a joke to the employees, and they knew it, especially those whose bathroom time was being measured!
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Let’s face it, acquisitions are hard and are rarely successful. Seamless integration is a tough job! It is easy for the leader to get distracted (e.g., Wall Street cost pressure) or be reluctant to make necessary personnel cuts, plant closings, etc. By acting quickly, keeping the customer first and sticking to your overall vision, the transition will be far less painful for all involved parties.
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Image: “Mergers and acquisitions by corporate Takeover and hostile or frieindly shareholder agreement for a big company to buy a small business for strategic financial planning and growth./Shutterstock“
