"Most mergers and acquisitions end up as failures," said Tor Braham, an M&A specialist with US law firm Wilson Sonsini Goorich and Rosati, as he opened the Second Annual Software Mergers and Acquisitions Forum in San Francisco this week.
His warning was aimed at an audience made up of chief executives, finance directors and business development managers from hi-tech companies and investment banks, the majority of whom professed to be potential buyers of other companies.
M&A is a growth business in the IT sector. According to figures released from research firm Broadview Associates, which tracks these deals, earlier this year, some 72 per cent of US hi-tech firms plan to pursue an M&A strategy during 1997, continuing a trend that saw $650 billion dollars spent on such activities in 1996.
According to Braham, there are several significant drivers behind what the failure rate suggests is a highly risky venture. "There is a perception that interest in raising capital by means of an IPO (initial public offering) is eclipsing M&A," he said. "That?s not true. For the seller, a merger or acquisition provides an immediate liquidity that an IPO cannot."
Market demographics have also altered in favour of an M&A approach as software start-ups find themselves competing with Microsoft and Oracle. The best future for many companies with innovative technology is to merge with a larger firm in the hope of making some impact.
Thomas Marcus, vice president of business development and general counsel for Broderbund Software, argued that there is a new rationale for M&A in the 1990s. "It?s really a second wave," he noted. "In the 1980s, mergers and acquisitions were really done for financial reasons; in the 1990s, they?re more strategic. As such they?re being driven by chief executives, not investment bankers. There?s less emphasis on share valuation and more on technology contribution."
Despite Braham?s initial grim remarks, there are some notable success stories among companies that have followed a growth by acquisition strategy. For every high profile failure, like Novell?s acquisition of Wordperfect, there is a Cisco or a Computer Associates (CA) successfully concluding transactions.
Symantec, which has added 25 products to its portfolio through buying up other companies, is one such success. Mark Bailey, Symantec?s vice president for business development, explained that his company?s policy is driven by the fundamental question of how to sustain high growth when time to market is becoming so tight as to make it almost impossible to develop everything inhouse.
He cited an instance when Symantec?s product development people estimated it would take at least a year to get a crash recovery product onto the market. That was too long for the company to wait, so it looked for an alternative option it could purchase. Within 80 days, Norton Crash Card was available on the Symantec Web site, where it has become the most downloaded product in the portfolio.
Bailey offered up some advice to delegates about how to go about completing a successful M&A transaction, beginning with one fundamental prerequisite. "All M&A must start with a thorough analysis of the needs of the customer," he said. "When that?s done, ask yourself if you have the internal resources to meet that need. If not, then look outside."
With its accumulated experience, Symantec has turned completing a merger into a disciplined process that involves diverse people on both side. This is crucial to the ?buy-in? factor, he explained. "You don?t want to have a merger done by a small group of people and then dumped on the rest of the company to try to work out what they?re supposed to do with it," he said.
Symantec identifies four main stages in the acquisition process: prospecting for potential deals; scrubbing or due digligence to make sure you know what you are buying; announcing your intentions to the market; and integration of the acquired company, products and personnel into your own portfolio. Prospecting for new deals is not difficult, said Bailey. Symantec, in common with most major software houses, receives unsolicited approaches from companies wishing to be acquired every day. Bailey estimated that Symantec receives up to 80 suggested takeover possibilities a month. "About 50 per cent of our deals were initiated by the company being acquired," he added.
But what do companies on the acquisition trail look for in a deal? That depends on what sort of company you are, explained Bill Jordan, vice president for strategic sales at InterTrust Technologies. "Some companies are professional buyers, others have a ?not invented here? attitude. But there are three words that explain why you buy: sustained competitive advantage."
The recent merger of Apple and Next Software was initiated by a cold call from Next middle managers to Apple chief technology officer Ellen Hancock, which then led to talks between more senior management. This doesn?t always work. IBM?s acquisition of Lotus Development began with a phone call from IBM chief executive Lou Gerstner to Lotus? then chief executive Jim Manzi, but did not initially smooth the way for the takeover.
When proceedings move on to the more formal due diligence phase, then outside help from auditors and lawyers is likely to be needed, although Jordan counseled that internal commitment at this stage is just as important. ?This is your company,? he said. "No-one?s stake is as high as your own in making the merger work. You can never do enough due diligence and there will always be surprises waiting, some good and some bad."
Employees at both companies need to be kept up to date on developments to counter the fear, uncertainty and doubt that will result from the merger announcement. "Everyone?s going to be worried," said Jordan. "There has to be a credible story to tell people. The main thought in everyone?s mind when a merger or acquisition is announced is: what happens to me? That preoccupies people and can have a slowdown effect on day to day business."
This was the case when CA launched its 1990 takeover of Ask Group. Alarmed by the reputation CA had acquired as the carrion crow of the software industry and by the redundancies that typically followed a CA takeover, ASK employees leaked internal emails to press and analysts revealing a climate of fear inside the company.
Externally, the two parties need to tell the wider market what is about to happen. The IBM-Lotus takeover is an excellent example of making good use of communications and marketing to ensure a smooth takeover. With Lotus management initially reluctant to accept IBM?s offer, a hostile takeover was set in play. IBM used its Web site as a propoganda tool, publishing information and documentation, including correspondence between Gerstner and Manzi, to sway the opinion of shareholders and the market.
Assuming all goes well, the final stage is reached: integration of the two companies. Symantec?s Bailey stressed the importance of focusing attention on this stage. "We?ve put a lot of work into integration," he said. "You have to remember that for one party, a merger means giving up control of your company. That has to be managed carefully."
It was lack of an effective integration policy that irreparably damaged Ask's takeover of Ingres in 1990. The presumed technological synergy of their product lines was dubious enough, but the clash of corporate cultures was more dramatic. Ask's management were unable to decide whether to absorb the Ingres operation or allow it to stand alone and thus failed to address the issue, paving the way for CA to step in later.
Integration looks set to be a major issue in the Apple-Next merger, with Apple chief executive Gil Amelio already promoting two Next managers to take charge of operating systems strategy at the apparent expense of his own technology officer Ellen Hancock. With a round of redundancies imminent, internal eyes will be focused on the ratio of Apple to Next personnel who are asked to leave.
Once the merger is successfully completed, it is important to continue to analyse its impact on your business, continued Bailey. "We conduct performance appraisals," he explained. "They are qualitative analyses of the M&A. We look at whether certain things met our expectations. In the short term, did it meet our forecasts? In the long term, which of our deals are likely to contribute most to the health of our company?"
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