The
Urge To Merge: When
Does It Work?
You may be having difficulty keeping
track of it all. Every
week, it seems, someone is buying someone else.
This ongoing activity has taken on enough durability and
high-profile to be readily identified as an important trend.
Sometimes it’s referred to as “Industry Convergence.”
At other times, it’s been referred to less elegantly as a
“software rummage sale.”
(Some of this action has, in fact, been in the hardware or
services market, but most of our remarks will be about the software
market.)
In fact, several different things are
going on and it’s useful to notice that.
-
The combination of the dot.com bust,
which cut off most venture capital funding to software firms
(especially to early and mid-stage firms) and a down economy,
made a lot of companies with good ideas very short of cash.
Unable to raise cash through new investment rounds in
either the venture or the IPO markets, they have been forced to
seek partners with deeper pockets.
-
Companies in financial distress, however
good their ideas, products, or customer lists, go for much lower
prices than companies can command in good times.
So some very fine companies are available for a fraction
of their valuation just a few years ago.
This makes them particularly attractive to deep pocket
buyers.
-
Mature companies are finding that
customers of every size, but especially large customers, prefer
doing business with a smaller number of larger vendors. It’s
cheaper and easier to manage.
Perhaps more important, it feels less risky.
So these larger companies (who typically have cash
reserves or can acquire buying power for acquisitions through
stock value or credit) have taken advantage of this buyers’
market to broaden and deepen their software portfolios, putting
themselves in a better position to fulfill customers’ demands.
This is what’s behind many of the
mergers we’ve seen recently, from IBM’s purchase of Rational to
Microsoft’s acquisitions of Great Plains and Navision to the
PeopleSoft proposed acquisition of J.D. Edwards. It’s also why Oracle would like to interrupt the J.D.
Edwards acquisition and buy PeopleSoft itself.
(See separate story below.)
Mergers Don’t Always Make Sense
But mergers have to make sense, not just
financially, but also technically, marketing-wise, and culturally.
That isn’t easy.
Many mergers fail because the merged
company is too hard to rationalize; that is, the pieces just don’t
fit together in any sensible way – customers, markets, products,
employee skills, business models.
There’s a long list of failed mergers
from the past that acts as a cautionary tale.
Often, very large mergers are the least likely ones to work.
Fingers point, for example, to the AT&T attempt to merger
with NCR or IBM’s attempt to join with Rolm.
Compaq’s more recent acquisition of DEC was generally
viewed as a failure, too.
Based on this history, many analysts
predicted that the Compaq/HP deal was unlikely to succeed.
However, with enormous amounts of pre-merger planning, an
emphasis on integration and product-line rationalization, and a
willingness to cut both products and people, where required, this
merger seems to be successful, even ahead of schedule.
Perhaps it required the secret sauce of an outside CEO like
Carly Fiorina who would not have a long history with either side and
could make tough decisions.
Growth By Acquisition
A few companies have made a business of
growing by merger or acquisition.
They have a very specific way of doing that and as long as
they stick to their model, it usually works.
Computer Associates (until they started making very large
deals) and Symantec jump to mind as successful buyers and
integrators.
Judging Mergers:
Our Rules Of Thumb
We have some rules of thumb by which we
judge proposed mergers or acquisitions:
-
Size matters. It helps if one company is clearly much bigger than the
other, so there’s no question of who’s in charge and who’s
going to have to change.
-
There are no perfect matches, but some
matches are much better than others.
The best matches, we’ve noticed, are those where both
companies have a lot to gain – they can each sell their
products to the other’s customers, for example, because there
is little product or customer overlap.
-
On the other hand, it helps if there are
the makings of a common culture because everything is eventually
going to have to be rationalized – business models, sales
models, service and support philosophies, attitude toward
customers, organizational culture, and so forth. If everything
is a mismatch and will need to change, the cost of integration
and rationalization will be high, take long, and produce many
casualties in lost customers and staff.
-
It’s easier to accomplish a merger if
the head of the merged company isn’t going to run it as an
autonomous division or unit, particularly if he was its founder.
If so, he’ll continue to think of himself as
independent and potentially fight every overarching company
policy. If he’s
good at something – product development, business
relationships, vision –sign him up – but place him in an
appropriate role.
-
Make sure you know WHY you’re buying
another company. Will
it give you access to new markets?
Increase your customer base in a sustainable way?
Provide you with durable new technology that you need?
You will make significant investments, not just in buying
the company, but in integrating it and in compromising; those
investments need to be justified by reasonably large pay-offs.
-
Don’t let an available acquisition
divert you into an unsustainable strategy or away from a
successful one. Too
many companies just can’t pass up a good merger or acquisition
opportunity. Opportunities
are only good if they take you somewhere you want to go.
We’re
going to see lots more mergers and acquisitions this year.
I’d suggest we’ll see at least four or five more big ones
and dozens of small ones, many beneath the radar.
At least half of them will turn out to have no or negative
value. That will be
because they broke these rules or the merger was poorly managed.
That doesn’t mean resist the urge to
merge. It means think,
plan, decide, assign adequate resources, and above all, manage to
your goals.
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