Professional Documents
Culture Documents
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Problem Statement
Deloitte Consulting has been called in to evaluate the potential acquisition, and provide guidance on the integration of these two
companies, should the merger occur.
How should a large organization such as our client evaluate this acquisition opportunity?
What data would you need and what analyses would you conduct to develop a recommendation?
The client does not have a track record of acquiring and successfully integrating small, innovative companies. What cultural
differences will the client have to overcome? How would you advise the client to overcome them?
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Candidate Evaluation
A strong candidate will address:
Fit with existing business. Can a company focused on security and reliability successfully integrate with a start-up focused on peer-to-peer payments,
which are notorious for fraud? How similar are the business models (i.e. both generate revenues as a percentage of transaction amounts)?
Overall business case. Growth in target revenues, possible synergies in external settlements, options for cross-selling with existing business, obtaining
deep consumer behavior insights in a segment of current non-users, organizational synergies.
Qualitative aspects. Can the entrepreneurial spirit of a start-up be combined with the clients behemoth organizational bureaucracy? What will be the
keys to success? (May include holding the company as a separate unit, or giving it complete autonomy for a finite period)
Customer analysis. Will the combined company serve more customers, or the same customers in different ways? The targets customers are typically
younger, but may be in households with the clients existing customers.
Technology considerations. Is the new technology for micro-payment clearing compatible with the Clients payment systems, and can they be settled
profitably on the Clients network given the small size of the transactions (and, hence, small per-transaction revenues)?
An excellent candidate might discuss:
Brand synergies or negative considerations: if, for example, the combined company alienates the core customers of the target company
Developing a presence now will enable learnings that lead to future innovations in eCommerce, enabling disruption of existing technologies once the two
firms are combined.
Longevity of the business model. Is the targets service protected from intellectual property infringement, and what is preventing another company from
copying them? How viable is a second player in the PayPal space?
Alternative strategies, such as investment in several micro-payment companies, to build more strategic flexibility than outright acquisition.
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Problem Statement (A question is typically first discussed with the candidate and then the next question is asked)
Deloitte has been hired to advise the Chief Strategy Officer (CSO) on options to improve the economics and
performance of the video strategy. Specific questions to address include:
1. What are our clients options to quickly gain scale in video services?
2. What are the benefits and deficiencies associated with each option?
3. What is the value of a video subscriber? What is the incremental value of a triple play subscriber?
4. What is the value of scale in video to the client?
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Programming Costs
Clients subscribers
50 Million
Buildout costs
$1500/household
Programming cost
Installation cost
$500/new subscriber
Video ARPU
$75/month
$120/month
90%
50% less
Operator
Comcast
Time Warner
Charter
Cablevision
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Subscribers as of
12/31/05
24.2M
13.4M
5.4M
3.1M
What are our clients options to quickly gain scale in video services?
A good answer should consider both organic and inorganic options with preference to inorganic due to the desire to
acquire scale rapidly. Additional consideration should be given to the geographic coverage of each option with
preference given to national coverage first and the clients wireline geography second.
Inorganic:
Acquire current satellite distribution partner, cable operator (e.g. Comcast), or disruptive competitor (e.g., Vudu, Veoh, etc.)
Organic:
Increase speed of video build out/rollout schedule for client video offering
Offer significantly lower promotional pricing for video services to increase penetration in available markets
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Deficiencies: price, potential loss of distribution from other telcos, integration challenges (not wireline)
Acquire cable operator:
Benefits: expands footprint to new geographies, wireline video offer
Deficiencies: price, potential mismatch in geographic coverage, savings on cost of installation
Acquire disruptive competitor:
Benefits: lower price, national coverage, rapid roll-out
Deficiencies: may not be considered a true substitute to traditional video services, may require higher speed connections
Rollout owned service faster:
Benefits: lower operating costs due to one network / optimal network design
Deficiencies: time to market, proof of success at scale
Lower pricing:
Benefits: increase penetration in target markets, rapid implementation (only in areas where service currently offered)
Deficiencies: margin implications, devaluing service in customer perception, risk of churn when prices rise, competitive response
A great answer might note that getting people to sign up for triple play if they currently have nothing might be even
more expensive than converting the households currently with MVPD.
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Additional assumptions may be made regarding other costs not provided (e.g., cost of sales, cost of care, etc.) that
would alter the lifetime value calculation
3b. What is the incremental value of a triple play subscriber?
In addition to the incremental value from video services, a superior answer Pull
would
mention the incremental voice and
90% from Misc Info Triple Play line
broadband revenue due to expected slowing in access line losses
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A superior answer will identify most of the above value drivers related to scale and provide some quantification:
$5 is difference between estimated $25 programming cost and $20 cost for competition
$45 is the difference between the $120 and $75/month ARPU from the Misc. Info table.
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While the values and specific projects descriptions are fictitious, this situation and strategy work that we performed for
this client is real
Deloitte Consulting was engaged on a project to help the client evaluate strategies to effectively offset access line
losses and compete with cable competitors that ultimately led to the clients investment in network expansion and
video services
We are viewed as a trusted advisor by this client and their executive team. Ultimately, they have continued to rely on
Deloitte to help them evaluate changes in the industry and to help define strategies that will lead to the greatest value
creation for the client and its shareholders
Candidate Evaluation
1.
Was the candidate able to identify reasonable strategic options for the client to gain scale?
2.
Was the candidate able to logically reason through the benefits and deficiencies of each option to gain scale?
3.
Did the candidate provide appropriate quantitative frameworks to derive the customer value and benefits of scale?
4.
Was the candidate successful in making basic financial manipulations and working with data provided in the business
situation and data sheet?
5.
Did the candidate consider indirect benefits that would also be derived from video subscribers and scale?
6.
How successful was the candidate in summarizing their findings / quantitative results?
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