Acquiring a Company Just Starts the Dance

Deb Alderson, if so inclined, could have scuttled Anteon Corp.'s 1998 acquisition of Techmatics Inc.Alderson was a senior vice president at Techmatics and the company's top operations officer. But what made her even more important to the deal was the fact that Joe Maurelli, Techmatics' chief executive officer, intended to leave soon after the acquisition was completed. Two weeks before the deal was to close, Anteon President and CEO Joseph Kampf called Alderson and told her that, with Maurelli leaving, her support was essential. If a strong leader like Alderson wasn't solidly behind the acquisition, many other Techmatics employees wouldn't be, either.Kampf told her bluntly: "If you aren't coming with the deal, we won't buy Techmatics."Alderson, who had been with Techmatics 13 years and had seen it grow from 25 employees to more than 850, entered the conversation worried about the impact of the deal on the business associates she essentially had grown up with. Kampf described Anteon's benefits and incentive plans, and laid out the career and business opportunities his company would provide Techmatics employees. After a two-hour meeting, Alderson knew she could tell her fellow Techmatics employees the acquisition was the right thing."I wasn't going to mislead people," she said. That conversation, which Alderson and Kampf both recalled in separate interviews more than three years after the May 1998 acquisition, represented more than just a boost to Alderson's ego. It also laid the foundation of trust between buyer and seller that company executives and industry analysts say is the key to making an acquisition a long-term success.In fact, when it comes to making acquisitions work, developing trust and building a relationship are as important as bottom-line financial considerations, especially in people-intensive industries, such as government information technology services. "Essentially, what you are buying is intellectual property, i.e., people," said Richard Knop, managing director of the investment bank, Windsor Group LLC of Middleburg, Va. The issue is an important and growing one in the government marketplace as the number of mergers and acquisitions has risen from nine in 1995 to 65 in 2000, according to the investment bank Houlihan Lokey Howard & Zukin of McLean, Va. "There is no reason to expect this trend won't continue," said Jerry Grossman, managing director of Houlihan Lokey Howard & Zukin. The estimate for deals in 2001 is 70, he said.XXXSPLITXXX-"We've walked away from good companies that wanted us to acquire them but did not want to be integrated into our company. They wanted to stay independent operating units," Kampf said. Anteon has made five acquisitions since it was formed in 1996 and has grown to nearly $700 million in annual revenue. A sixth deal is pending.While many companies allow acquisitions to operate as independent units, the trend is toward more fully integrating acquisitions, according to executives and industry analysts. Leaving acquisitions as independent units is not the best way to get the boost to business ? "the juice," as many executives call it ? that companies look to get out of acquisitions. Independent units continue to operate as they did before and not as part of a larger company, said Nils Ericcson, president of integration for Logicon Inc., Northrop Grumman Corp.'s information technology unit. He is in charge of integrating Litton Industries Inc.'s two IT units, TASC and PRC, that will come under Logicon.With its recent acquisitions, which also include Federal Data Corp., Logicon is now a $4 billion IT services company. It has to integrate TASC and PRC in order to compete as a prime contractor for large IT contracts, he said. Ericcson said he looks at factors such as technical functions, customers and business models to see what parts should be pulled together."We'd have a different philosophy if we let everything stand alone," he said.XXXSPLITXXX-To determine if a potential acquisition is a good fit, executives often look at intangibles such as values and culture. How focused on the bottom line is the company they intend to acquire? How much weight does that company put on long- or short-term considerations? What do its customers think of the company? How are employees treated?During this time, the acquiring company also lets its acquisition target know about itself, what is expected and how the company operates."You can pick up a lot about culture just by interacting with people," said John "Jack" London, chairman and CEO of CACI International Inc. of Arlington, Va. His company makes one to two acquisitions a year and has grown to about $540 million in annual revenue.David Langstaff, president of Veridian Inc. of Arlington, which made three acquisition in 1999 to create a $650 million a year company, calls the process a "cultural audit." Cultures have to be compatible in order for integration to work. "It's naive to think an organization can just change its values because it has been acquired," Langstaff said.The courtship process ? the mutual evaluation of cultures and values can take over a year, and, like a marriage, continues well after consummation of the deal. Many top executives go on road shows to visit their new employees in the first few days after the acquisition is announced.The purpose of these visits and the companion communications campaign is to allay employee anxieties. Employees worry about issues such as who will be their new boss, will their benefits change, will they still work for the same customers and whether their company's name will be changed.The key to overcoming fears is to focus on the future, executives and industry analysts said. All the changes that come with integrating a company don't need to be made right away, but the road map needs to be clearly laid out for employees so they know what is coming."You have to get them out of the present and share the vision of the company with them," Langstaff said.XXXSPLITXXX-In the months and years following an acquisition, Wall Street analysts will scour company earnings reports, press releases and other documents to evaluate whether a company is successfully absorbing a new acquisition. They look for hard and fast facts, such as employee retention rates, promotions and contract wins.One of the surest signs of a good cultural fit is what happens to the senior managers of the acquired companies, said Bill Loomis with the investment firm Legg Mason Inc. of Baltimore. As managing director, he tracks merger and acquisition activities among the top technology companies."If you see unit heads and group managers moving up, that's a great sign," he said.A case in point is Alderson and her experience at Anteon since the acquisition of Techmatics. A month after the deal closed, Alderson took over Anteon's systems engineering group, which is mostly comprised of what had been Techmatics, and was named a senior vice president of Anteon. Kampf said he considers Alderson one of his top two operations executives.Growth opportunities, both financial and professional, were what Alderson said she used to pitch the Anteon acquisition to fellow Techmatics employees. And the juice is being delivered.Revenue for the engineering group has grown from about $65 million in 1998 to $140 million in 2000, with none of the revenue growth coming from other acquisitions. Margins for the unit have gone from 6.5 percent at the time of the acquisition to 8.5 percent, Alderson said. "I knew the acquisition was going to take us up a notch," she said.