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Backhaul

M&A Realities

6:30 AM -- Cisco Systems Inc. (Nasdaq: CSCO) is famous for having a swift post-acquisition integration model that sweeps through the operational hassles of integrating new members of the family within 30 days of the ink drying on the contract.

Not every company can deploy such a model, though, especially network operators engaging in M&A activities that include infrastructure assets. Vodafone Group plc (NYSE: VOD) is a case in point, as its timetable for integrating Cable & Wireless Worldwide plc (London: CW), unveiled to investors and analysts at a presentation in London Thursday morning, shows.

Vodafone acquired C&WW (following a somewhat prolonged process) for £1.044 billion (US$1.7 billion) in July and quickly appointed a new management team. (See Vodafone Appoints C&WW Execs and Vodafone Offers £1B for C&W Worldwide.)

Now the really hard work is starting. C&WW has 20,500 kilometers of fiber in the U.K. and 425,000 kilometers internationally, with 127 global points of presence in 35 countries outside the U.K., so, along with all the staff, the management systems and the agreements with partners and customers globally, there's a lot to understand and integrate.

As a result, Vodafone expects the integration process (which includes investment in linking up Vodafone base stations to C&WW fiber in the U.K.) to cost about £500 million ($810 million) between now and March 2016, the time by which the process is expected to be complete. The integration process is expected to deliver what Vodafone calls "cash flow synergies" of up to £200 million ($324 million) per year by March 2016, much of which will come from "clearly quantifiable cost savings and network integration benefits." A large chunk of those savings will come from Vodafone having its own extensive backhaul network capabilities in the U.K., where more than 33 percent of Vodafone base stations are within 100 meters of C&WW fiber. Having its own backhaul connections, which it can manage as and when it wishes, is going to make a big difference as mobile data traffic volumes go wild.

Initially, though, Vodafone says its "immediate goal is to stabilize the CWW business."

Physical network integration is only part of it, though. During the first two months of owning C&WW, the mobile giant has identified a number of areas that have proved to be better than expected (including the quality of the C&WW staff, the customer relationships and the potential synergies). But in the "worse than expected" category comes "customer service" and "organizational complexity" (among other things).

These problems are going to take a while to fix: For example, Vodafone doesn't expect to have a combined customer service team until the second calendar quarter of 2014, by which time C&WW is expected to have switched to the Vodafone brand and the sales channels are set to be integrated.

So there's three-and-a-half years of ongoing change to come in Vodafone's international, wholesale and enterprise-focused operations but the plan is out in the open, includes recognition of the negatives as well as the positives and appears to be realistic. That can only be good for Vodafone, its new C&WW family members, customers and partners.

And investors clearly aren't finding anything surprising in Vodafone's plans as the operator's share price is up slightly Thursday morning to 177.55 pence on the London Stock Exchange.

— Ray Le Maistre, International Managing Editor, Light Reading

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