Infotech Mergers On a High Roll
The number and dollar value of corporate marriages is climbing, though some analysts estimate the failure rate at 80 percent
The intensity and frequency of mergers and acquisitions will reach a high point this year, further driving up the already staggering 80 percent failure rate of these corporate maneuvers, analysts said.
Although deals such as IBM Corp.'s $3.3 billion purchase of Lotus Development Corp. will continue to steal the limelight, they represent the tip of the iceberg. Industry analysts predict more activity among mid-sized companies, acquisitions between $500 million and $1 billion.
Last year alone, the value of transactions more than doubled to $58.5 billion from $28 billion in 1993, according to Broadview Associates, an investment banking firm specializing in infotech mergers and acquisitions. The number of deals in 1994 increased only 4 percent to 741, but the 10 largest transactions that year, such as the consolidation of top defense contractors Lockheed Corp. and Martin Marietta Corp., constituted more than 50 percent of the $58.5 billion total value.
The heightened intensity of mergers and acquisitions has touched every aspect of the infotech industry, from hardware providers to professional services companies to systems integrators. According to Broadview, more than 400 professional services and system integration transactions occurred during the last six years.
Keane Inc. of Boston, Mass., a software services company, saw its 1994 revenues increase 96 percent to $345 million, with $300 million coming from external development, according to Broadview estimates.
In the last two years, the company made two significant acquisitions. It purchased NYNEX AGS Information Services for $170 million and GE Consulting for $90 million. Keane has had a compound annual growth rate of 35 percent, founder John Keane noted, despite the acquisition write-offs.
"We are not mortgaging our future," he said. "Acquisitions require a lot of energy. A lot of companies don't do it successfully. When you're out buying companies, you're not out just to buy a company. You're looking to combine cultures," Keane explained.
Keane's understanding has made the company's acquisition success rate the envy of other infotech firms. Steve O'Leary, a Broadview principal, said Keane maintains a clear profile of the company that fits his strategic focus and knows when to walk away from an opportunity.
Keane ensures that within hours employees learn of an acquisition, they know exactly what their roles will be. "Keane has succeeded not so much by the cleverness of its strategy as by its brilliant execution," O'Leary said.
Federal integrator Computer Sciences Corp. also has a highly successful acquisition strategy, which has built the company's commercial business from ground zero. "CSC is a wizard in acquisitions," said Dataquest's Allie Young.
"They have great skill in letting the acquired company keep its own culture. The strike the right balance of control. CSC has a very decentralized management style, but it works very well," she explained.
The two forces fueling the number of mergers are convergence, the fusion of disparate technologies to meet new user demands, and concentration, the rapid growth of large companies over their smaller counterparts.
"These trends, which we expect to continue through 1995 and beyond, are resulting in a greater number of megadeals," said Charlie Federman, managing director at Broadview.
He predicted more merger activity to hit the digital entertainment and online service areas, an example of convergence. "We believe that digital information providers and Internet access companies will partner with online service providers to establish dominance in the electronic commerce arena," he explained.
The infotech industry also should experience more consolidation as defense giants merge or acquire commercial professional services operations and enterprise networking hardware providers merge and retool to provide higher value-added products, higher software content and asynchronous transfer mode technology, Federman added.
Still, mergers may make sense on paper, but pulling them off in practice is rarely the norm. In fact, about 80 percent of all mergers fail. Mike Braude, chief research officer for Gartner Group, defined a failed merger or acquisition as one where one of the two companies involved essentially becomes defunct.
Why? Dataquest's Young said, "The challenge is to keep key employees during the transition. When it gets down to it, it's still about people."
Analysts, consultants and investment banking firms agree on the importance of a sound business plan that addresses specific objectives of an acquisition and a transition plan, but ultimately, the infotech industry's biggest asset is its people.
Jon Kutler, president of Quarterdeck Investment Partners, said, "Not surprisingly, success or failure tends to deal less with underlying business goals and programs and more with how people issues are handled."
If 80 percent of mergers and acquisitions fail, the historically conservative IBM faces tough times incorporating the entrepreneurial likes of Lotus. Analysts suggested the potential culture clash led Lou Gerstner, IBM's CEO, to let Lotus top gun Jim Manzi remain and run his company as a subsidiary.
Nevertheless, Braude does not think IBM will keep its hands off Lotus. "IBM needed a desktop software strategy to confront Microsoft, but many of us are skeptical that it can reach that potential. IBM has a long history of screwing up acquisitions," he noted.
But with $10 billion in cash at the end of its fiscal 1994 though, IBM faces a no-lose situation with the Lotus acquisition. "The point is IBM tried," Braude said.
Young, however, disagreed with Braude's pessimistic projections. "Gerstner is too smart to not let it be a successful acquisition. That's reflected in the decision to let Manzi stay in place. I think IBM today is very different running under Gerstner. The clash of cultures is not as critical as it would've been.
"These days, you don't necessarily have to own and run an acquired company to make it successful," she said.
But, noted Braude, "although these arrangements work, history says that integrating acquired companies generally works better."