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Case Interview Fundamentals: Lesson 13 [Drill: Telco Merger Synergies] — Transcript

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0:00You know, one thing that happens a lot
0:02in case interviews and that no one talks
0:04about is when you drop one of those
0:07strategic high-level concepts. You could
0:10call them a buzzword.
0:12And the interviewer asks you to go into
0:14depth into that.
0:16Usually by brainstorming. So, for
0:18example, you're doing a case on a
0:21telecom company that's trying to acquire
0:24or merge with another one.
0:27And you mention synergies.
0:29And your interviewer goes into depth
0:31into that. They say, "Well, well, what
0:32do you think are the synergies here? And
0:34how would you calculate them?" And so
0:36on. And
0:37the vast majority of candidates get lost
0:40into that. Some because they don't
0:42really know what synergies mean. Th-
0:45These are the minority, but it happens a
0:47lot and it's a really uh bad mistake you
0:51can make because you're using a word, a
0:54concept, and
0:56you're using it out of context. But, for
0:58most candidates, because they know what
1:01it means, they've read about it, they've
1:04studied in business school maybe, but
1:08they don't know how to work with the
1:10concept. And that's what is being
1:12tested. And a lot of cases do that with
1:14synergies, barriers to entry, uh
1:17purchasing power, negotiation leverage,
1:21uh pricing power,
1:24bargaining power,
1:25uh economies of scale, concepts like
1:27that. So, in this brainstorming drill,
1:30I'm going to go through a brainstorming
1:33on synergies. And
1:36uh hopefully you get some ideas on how
1:38to deal with these. There's a lot more
1:41concepts that you can uh work with in
1:44brainstorming. And you need to kno- know
1:47how to do this well because one thing
1:49consultants from top firms don't want to
1:52be uh known for is to over abuse these
1:58buzzwords without knowing how to work
2:01with them. So, let's do this
2:03brainstorming drill on synergies. And
2:06suppose that the
2:08uh the case is about a telecom company
2:11that is trying to merge with another one
2:15or is considering if they should merge
2:17with another telecom company, and you
2:20you say during the case that you want to
2:23see what are the synergies that could
2:25come from the merger.
2:27And then the interviewer comes back to
2:29you and say, "Well, what are the
2:31potential synergies
2:33when two telecom companies merge?" And
2:36most candidates here would just start
2:39saying a list of synergies or list of
2:42ideas of what could happen, but you know
2:44better than that. You know that you
2:46should brainstorm with structure. So,
2:49let's generate these ideas with
2:51structure, with prioritization,
2:54which is how you should brainstorm any
2:56question in a case interview. And let's
2:59go back here. How do you know that this
3:02is a brainstorming question? And the
3:05answer is you need a list of things, a
3:08list of hypothesis or ideas. So, in this
3:11case, a list of synergies between
3:14telecom companies. Right? So,
3:17let's break down merger synergies. And
3:20I'm defining synergies as the profit
3:23difference from the combined company
3:26versus the sum of profits of the
3:28separate company. So, let's say that
3:31company A profits 10,
3:3410 billion, 10 million, I don't know,
3:36and company B profits 15. So, combined
3:40it's 25. Anything that they will profit
3:43after the merger
3:45or due to the merger
3:47extra than 25 is a synergy. And a note
3:51for the financial people uh watching
3:54this video, this is not the theoretical
3:56or the very precise definition of
3:59synergies.
4:00Uh the precise definition of synergies
4:02is
4:03the difference between the sum of the
4:05value of the two companies and
4:09the value of the new company. So, it's
4:11more regarding valuation. But because
4:14profits are a good
4:17proxy for the valuation,
4:20especially because these are the same
4:22companies in the same industry, then
4:24let's do it profit because it's easier.
4:26And the way I break down this is there
4:29are revenue synergies. So, things that
4:32will make the combined revenue be larger
4:36when you combine these two companies,
4:38and there are cost synergies. So, things
4:40that will make the combined cost be
4:43lower because it's the combined profit
4:45in the series I can do this.
4:47And
4:48within revenue synergies, we can break
4:50down into more customers with the
4:52company combined and a higher average
4:56spend per customer. So,
4:58if by combining these two companies you
5:01get more customers, you get synergies.
5:03And if by combining these two companies
5:05you get a higher average spend per
5:07customer, you get higher synergies.
5:10The cost synergies, I'm going to break
5:12down into direct and indirect costs. And
5:15the reason is most of the costs in in
5:19the telecom space are fixed. So, if I
5:22had fixed and variable, there wouldn't
5:24be a lot of variable costs.
5:26So, we're doing direct and indirect
5:28because it's a better way to separate
5:31costs in this industry, at least from
5:33from my perspective. I mean, it's my my
5:35opinion here. So, this is how I break
5:37down. And
5:39to generate ideas within this structure,
5:42what I'm going to do is I'm going to
5:44prioritize costs. And the reason is
5:47there's a lot of fixed costs in in this
5:50industry.
5:51And we can probably eliminate a lot of
5:54those. Now,
5:55I think it's harder to think of revenue
5:58ideas or revenue synergies. There are
6:00some.
6:01We're going to go into those, but I
6:02think costs because there are so many
6:04fixed costs,
6:06we can probably offer
6:08uh
6:09a lot of the service we offer nowadays
6:12to the
6:13customers of the two companies with the
6:15same infrastructure of one company. Not
6:18everything, but a lot. So, let's start
6:20with costs. There are three main direct
6:22costs that I want to look at.
6:24Infrastructure, maintenance, and
6:27installation.
6:29Now, what could be
6:30synergies in infrastructure costs,
6:33maintenance costs, or installation
6:35costs? Let's start with the
6:36infrastructure. I imagine that the
6:39infrastructure is mainly cables
6:42uh and antennas, and perhaps satellites.
6:46But, mainly cables and antennas.
6:48Everything that covers a fixed and a
6:51mobile telecom infrastructure.
6:53And I imagine that these two companies
6:56serve at least
6:59uh some of the same areas. So, they have
7:00some geographical overlap.
7:03And if there is geographical overlap,
7:06let's say we have cables to city, I
7:09don't know, to some specific city.
7:11And the other company also has these
7:13cables. Now, we could, if there's excess
7:16capacity combining these cables,
7:19uh we could divest some of this
7:22infrastructure. Because now we have the
7:25same company with doubled
7:27infrastructure. Same with antennas. So,
7:30let's say there's a mobile antenna
7:31serving internet or
7:34uh mobile uh networks to a specific area
7:38for the two companies. And these
7:39antennas have excess capacity. We can
7:42divest some of them. We can sell some of
7:44them. Now, I don't know if we can
7:45actually sell them.
7:48Uh I hope we can. And I don't know if
7:50there's excess capacity. If there's not,
7:52then this is not a synergy,
7:53unfortunately. But,
7:56if there is excess capacity and we can
7:58sell it, the there are some synergies
8:00here. Either by selling it, and if we
8:02can't sell it, there are still synergies
8:04because we won't have to reinvest once
8:07these assets depreciate.
8:09Now, regarding maintenance, one synergy
8:12I can think of is
8:14uh imagine you have a tower with two
8:17antennas, and
8:19there are some maintenance in those,
8:21probably periodic. So, you have to send
8:23a guy once a month there
8:25uh to to do maintenance.
8:28And nowadays, there are two guys going
8:31to the same tower, to the same antenna
8:34location,
8:35because one is from each company. And
8:39perhaps in the future, once we merge, we
8:41can send the same guy and we save the
8:43cost of the trip. For the cables, for
8:46the fixed infrastructure, we have to dig
8:48holes, and the cables are probably in
8:50the same place. So, if we combine the
8:52maintenance of those, then we can get
8:55some synergies here as well. Now, I'm
8:58assuming that they don't outsource
9:00maintenance
9:01to other companies. If they do outsource
9:04maintenance, these companies are
9:05probably doing this bundling of of
9:08maintenance already. But then,
9:11if they do, we can uh try to negotiate a
9:14lower price with with that company
9:16because we dominate so much of the
9:18market now.
9:20And the third direct cost is
9:21installation. So, new customers from
9:24each uh telco are going to need some
9:27installation services for the fixed
9:29infrastructure. And here,
9:32uh I think the main driver is
9:35we're going to probably have less churn
9:39rate, so less customers leaving each
9:41company. Why? Well, because nowadays,
9:44let's say there are company A and
9:46company B. Nowadays, some customers
9:49leave company A to go to company B or
9:52leave company B to go to company A.
9:55And of course, there are customers who
9:57also leave these companies to go to
9:58company C, to company D, to the other
10:01competitors. But every customer that
10:03leaves each company to go to the other
10:06company, now that they're the same
10:08company, they're not going to leave them
10:09anymore. So, there's less churn rates,
10:12less customers leaving, which causes
10:15less installation events per dollar of
10:19revenue, if you will. So, these are the
10:21direct uh cost synergies that I can see.
10:25And now there's indirect costs, and I
10:27see three main ones. Sales, both sales
10:30people and retail stores, so sales
10:32people to B2B businesses, to companies
10:36that hire telco services, and retail
10:38stores to the customers, to the regular
10:40customers. There's marketing. Telecom
10:43companies spend a lot of marketing. And
10:46there's call centers. Now, there's also
10:49a fourth indirect cost that uh I can
10:52think of, which is the administrative
10:54personnel, the executives,
10:57uh all the people in corporate, in HQ,
11:01that might be doubled after this merger.
11:03And sure, this is a synergy.
11:05It's not specific to the telecom sector.
11:07I mean, it would happen in every
11:10corporation that merges with another.
11:13And I'm not going to list here, but
11:14anyway, these are synergies as well. But
11:16let's start with these three because I
11:18think these three costs are higher.
11:20So, within sales, I think there
11:23especially with the retail stores, there
11:25are synergies in geographical store
11:27overlap. So,
11:29uh think of of
11:30and this mall has
11:33uh
11:34retail stores for both companies.
11:37And likely next to each other, they're
11:39competing, right?
11:41Now, once we merge, we can shut down
11:44some of these stores because
11:46uh some of them are there because there
11:48is demand, but some of them are there
11:50just because
11:52uh they need to be close to their
11:54competitors nowadays and after the
11:57merger, they you you just need one store
12:00per
12:01uh shopping location or or
12:05a premium location. Uh not two of them.
12:08Regarding marketing, I see two major
12:11synergies. I see the increase in
12:14bargaining power with ad placement. So,
12:17if you're going to buy ads on TV or on
12:20magazines or social media, now we're
12:23buying twice as many ads, so we can pay
12:26less. I don't know if that actually
12:28happens, but it's a hypothesis. And the
12:30second one is we because we're merging,
12:34we're going to have less competition.
12:36And because we're going to have less
12:38competition, we might be able to get
12:40away with doing less marketing, less
12:43advertising.
12:44So, this is another synergy. And the
12:47third one within indirect costs are call
12:50centers. And I think here there is the
12:53increased efficiencies because of scale
12:56and also the
12:58uh increased bargaining power at call
13:00centers, which I think is limited
13:02because they have a lot of labor costs.
13:06But I think the main thing here is if we
13:08do have less churn rates, as we've
13:10talked in the installation part, then
13:14we'll also have to make less calls
13:16because every time a customer leaves one
13:19telco to another,
13:21the first telco is going to probably
13:23call them to try to do customer
13:25retention. And the other Telco has
13:28probably called them to offer new plan
13:32and to do customer acquisition. So,
13:34we're probably going to save on those
13:36costs in call centers.
13:39And then, let's go on to revenues. I
13:41think there are some synergies in
13:43revenue. So, I see one in customers,
13:45which is that
13:47by combining the two companies, we'll
13:49probably have better coverage.
13:52And this better coverage might increase
13:55market share. So, what I'm talking here
13:58is suppose one of these companies is
14:00really strong in city X
14:03and the other company is really strong
14:05in city Y in terms of coverage.
14:09And a certain customer wants coverage in
14:11both city X and city Y.
14:14Maybe because they have family in both
14:16cities, maybe because it's a corporate
14:18customer
14:19that has business in those two cities.
14:24So, nowadays, perhaps it's hard for them
14:27to choose between these two companies
14:30because one is strong in one and the
14:32other is strong in the other one, but
14:34there's a third competitor which is
14:35strong in both cities. So, they have
14:38chosen the other competitor, which they
14:40don't like really much, but it's the
14:41only one that has good coverage in these
14:44two cities. Now, once you merge, you
14:46have good coverage in both cities. So,
14:49maybe after the merger, we become the
14:51obvious option for them. This synergy is
14:54going to be huge if one of the companies
14:56is really strong in one area of the
14:58country and the other is really strong
15:00in the other area of the country and
15:02there's lots of traveling between these
15:04two areas.
15:05Uh not so much if there's a lot of
15:07overlap, geographical overlap between
15:09these two companies.
15:12And finally, higher average spend per
15:15customer. I see two levers, increased
15:17pricing power and cross sales from
15:20different product types. So, increased
15:22pricing power comes due to reduced
15:25competition. So, let's suppose that
15:27company A and company B are the highest
15:29quality or the highest coverage or the
15:32better companies in whatever metric the
15:34customer cares. And once they compete
15:38nowadays, once we merge, we leave the
15:40the customer no option. So, we can raise
15:43prices. And regarding cross-sales from
15:46different product types, if one company
15:48has certain product types and the other
15:50company has other product types, we can
15:53sell
15:54each company's products to the other
15:57company's customers once we merge.
16:01Right? So, these are the main
16:06synergies that I see in the telecom
16:08sector. And I think the most important
16:11ones are the cost synergies,
16:13specifically the ones related to reduced
16:16churn rate.
16:18So, the call centers and installation
16:21because if churn rate really reduces
16:24once we merge, if there's a lot of
16:27customers leaving company A to company B
16:29and company B to company A, we eliminate
16:32all the costs related to those switches.
16:36Now, let me debrief this a bit. There's
16:39a bunch of things that I did here and I
16:41want to talk through each of them. So,
16:43the first one is I've defined synergies
16:46as a difference in profits between the
16:49combined company versus the sum of the
16:51two other companies, of the two
16:54separated companies. And this allows me
16:56to use a profit tree, which is much
16:59easier than structuring any other way
17:02and almost perfect. So,
17:04for you guys who didn't get the
17:06evaluation thing that I talked earlier.
17:09So, the right definition of synergies is
17:11regarding to the value of the companies.
17:13The value of the combined company is
17:16larger than the sum of the value of the
17:20isolated companies. And the difference
17:23between profit and value
17:25is
17:27uh three things. So,
17:29uh
17:30value concerns cash flow, not profits,
17:33which in the long run is the kind of the
17:35same,
17:37but not exactly. Also, you need to take
17:40into account leverage and risk for the
17:43value, which uh is not accounted on the
17:46profit. And finally, the value is the
17:49sum of the all the cash flows in the
17:51future, while profit we're looking at
17:53the present. So, there are some
17:55differences, but from a value-creating
17:58perspective,
18:00uh it's almost the same. Not from a
18:02financial perspective, but consultants
18:04look a lot into value creation.
18:07So, if these two companies be- become
18:09more profitable, we can call those
18:11synergies.
18:13Now, I used a specific profit tree that
18:16is customized to the telecom industry.
18:19So, instead of doing price and quantity,
18:21I did more customers, higher average
18:23spend.
18:24Uh there's a video
18:26on YouTube, which you can search on
18:29YouTube for our channel Crafting Cases,
18:32and then for better profitability cases,
18:36uh three alternative ways to structure
18:38revenues, you can look into that there.
18:40And
18:41this the key point here is try to create
18:44a customized profit tree that makes
18:46sense to the business model of your
18:48client. It makes a big, big
18:51difference.
18:52Also, some candidates try to go with a
18:55qualitative framework here. So, they'll
18:57talk about efficiency
18:59uh synergies, process synergies, brand
19:02synergies, culture synergies. This is
19:05very hard to make it miss. It's much
19:07easier to go with revenue and cost
19:09synergies.
19:10And also, it's almost impossible to
19:12quantify if you use those qualitative
19:15things.
19:16Clients want to quantify synergies to
19:19decide if they should merge or not
19:22because
19:23uh
19:24they want to know if it's worth it,
19:26right? From a financial numbers
19:28perspective. Of course, the quality
19:30stuff is important
19:32because
19:33you need to know if the synergies are
19:35going to be captured or
19:37not or just going to live in Excel, all
19:40right? In your Excel sheet that predicts
19:42synergies, but they never happen in real
19:44life. But
19:46you first need to quantify, you first
19:48need to find the numbers because if they
19:51don't even exist in an Excel sheet, then
19:53how can you expect them to exist in real
19:55life? Right? So, these are just some
19:58things related to how I structured. And
20:01then there are three things that I want
20:02to talk about related to the process.
20:05The first is that I used a lot of
20:06prioritization and some synthesis. Uh
20:10so, I prioritized costs. I talked about
20:13direct cost servers, and then I always
20:15mention which ones are more important.
20:17And I also synthesized, so the reducing
20:19churn rate is really important. So, we
20:21need to look into that and know that it
20:24exists. Now, this is important and it's
20:28useful because in this case, there are
20:30so many directions you can go. There's
20:31so much stuff you can talk about. And
20:35just by
20:36prioritizing and synthesizing, you're
20:39able to cover all the important things.
20:42And if you miss some of them, it's no
20:43big deal as long as you tell your
20:45interviewer that you're prioritizing.
20:48The second thing I want to talk about
20:50that I did is that I went very specific
20:53in the idea. So, I didn't say
20:55infrastructure synergies.
20:58Instead, I showed that I know that the
21:00antennas and the cables
21:02um
21:04that are duplicate and
21:07and you can eliminate some of those. I
21:08didn't just say marketing, but I said,
21:11you know, you can buy ad slots for
21:13cheaper because you're buying more ad
21:14slots because now you represent two
21:16companies.
21:18Uh so, you need to go really, really
21:20specific. And third, related to that,
21:24I've explained the mechanics of how
21:26things will unfold. So, you should
21:29always do this with whenever you have
21:31high-level concepts such as synergies,
21:34barriers to entry, economies of scale,
21:36things like that. So, just to give you
21:38an example, instead of saying
21:40uh we're getting synergies from
21:42maintenance, efficiency, optimization.
21:45Uh what I did instead was to show, you
21:48know, the same guy who goes to the tower
21:50or who digs the hole to reach the cable
21:52can do both maintenances at the same
21:55time, instead of digging two holes or
21:57traveling two times to the same tower.
22:01And why you need to do this is first you
22:04assured interviewer that you understand
22:06the concept of synergy,
22:08that you can apply it, you're not just
22:10saying buzzwords. And second, you showed
22:13the interviewer that you're able to
22:14quantify it. And quantifying it is
22:18really important because it's the whole
22:20point, right? If you're talking about
22:21synergies, well, what's the number? How
22:23much more profit will these companies
22:26make? If you're talking about economies
22:28of scale, well,
22:31what are the economies? How many
22:32dollars? If you're talking about
22:34barriers to entry, well, how hard are
22:37these barriers? Are they monetary? If
22:39so, how much will they cost?
22:42Uh and where do they come from? So, by
22:44explaining the mechanics is how you show
22:46business sense, not just by knowing
22:48buzzwords. And this is where a lot of
22:50people get business sense wrong. It's
22:53not knowing the name of the concept,
22:55it's knowing how it applies to a
22:56specific case.
22:58Okay? So, I I you've liked this drill,
23:01and try to practice more synergies from
23:04different industries. It's definitely
23:06helpful and I'll see you in the next
23:08case.

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