The urge to merge

Mergers and acquisitions have proved a tricky prospect for many technology companies in the last few years. Now Alcatel-Lucent has admitted it too is having a difficult time of it. IT Weekly looks at what firms need to do to make such deals work

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By  Administrator Published  February 1, 2007

When Alcatel-Lucent announced last week that its profits had fallen from just under US$740million to nothing in the space of a year, CEO Patricia Russo (pictured, right, with former Lucent CEO Serge Tchuruk) said the "uncertainty" that last year's merger of Alcatel and Lucent had created for its customer base and its own staff had played a major part in the profits drop, saying that this "together with the work required to close the merger" had significantly impacted its business.

This can be counted as a rare show of honesty about the many problems that can arise in the wake of a merger or acquisition. Whilst companies are generally only too happy to trumpet the perceived synergies of the match when they first announce the union, they are noticeably much less forthcoming when the alliance starts to run into difficulties.

And yet in fact it is far from unusual for mergers and acquisitions to run into trouble. Well over 50% of merger deals fail to create value for the buyer, according to research cited by Andy Morgan, technology sector leader at professional services giant PriceWaterhouseCoopers (PwC).

This statistic doesn't seem to be putting firms off however. According to PwC's own figures, global mergers and acquisitions (M&A) in the technology sector exceeded US$130 billion in 2006, their highest level since the height of the dot.com boom in 2000. PwC expects M&A activity to continue at strong levels for at least the first half of this year. So firms are clearly still ready to engage in mergers, despite the difficulties in implementing them (PwC is itself of course the result of a merger between two large firms in its own sector).

How then to make sure you get it right? The key to a successful merger, Morgan tells IT Weekly, is implementation.

"We see far too many deals - particularly merger-type transactions rather than straight-forward acquisitions - where actually there is too much compromise in the initial six or 12 month period following the transaction," he says. "What tends to happen then is the synergies you thought you were going to be able to drive out of that business don't actually happen or don't happen quickly enough, whether those be at a cost level or at a revenue or at a customer level."

Teething problems tend to fall into three main areas, according to Morgan: customer service; people management and cultural fit; and focused delivery.

As Alcatel-Lucent has found, keeping the customers happy during the integration period can be tricky, but it is vital to the long-term success of the deal.

"The amount of time that needs to go into managing the customer interface during that period is very significant and having a clear plan and executing rigorously against it is pretty fundamental," Morgan comments.

He says this is particularly important where software companies are concerned. "If you look in the software arena one of the big challenges and uncertainties amongst customers is if it is a consolidation play, what platforms are you going to standardise on? How is customer support going to work? And [in] that transition you can lose a lot of customer support or see projects that get deferred because people want to see how it settles down before they commit to an upgrade," he explains.

Deals are less likely to prove problematic if they are a straightforward acquisition rather than a merger, Morgan adds.

"It is easier if it is an outright acquisition because it is clear who has the power to start with and the issues becomes more why are you buying it, how are you going to integrate it and preserve the value, and what you've bought. Where you have more of a merger situation you have a bigger risk of a power struggle going on and that can have an impact on the ability to drive value out," he says.

Meanwhile, though exciting, multiple acquisitions - such as IBM's buying spree last summer - have their own complications.

"Integrating one transaction is challenging enough, when you have multiple deals it can be a management distraction. If you are looking at integrating a number of transactions very quickly, it does make it even more important that you have a plan of how [you are] going to do that at the outset," Morgan says, although he adds the extent to which this is a problem depends on the size of the company.

Mergers also need time to see how they will perform; although the first six months are a good indicator, a merger or acquisition really needs a two-year time span to establish how it will turn out, Morgan points out.

Another determining factor is how much previous experience the buyer has of such deals. The characteristics of successful players tend to be that they are experienced deal-doers who have an established process and methodology for integration, Morgan says. "If you are less experienced... and it is the first one you've done, the casualty rate tends to be significantly higher," he notes.

Selecting the right merger partner is another obvious but not always observed factor for success.

"One of the challenges for management has been getting the balance right between being strategic and being opportunistic. There is definitely a risk for management that they can get distracted by a transaction because it happens to be on the market even if the strategic fit is not ideal," Morgan says.

"The key thing is be clear what you're going to do with it, what your plan is, understanding the value to you of the business, understanding what the value to you is of the business, and not being sidetracked by what the value is to someone else," he says.

Meanwhile, the potential damage of an ill-fated match goes beyond mere financial repercussions. A less than successful merger or acquisition can have an immeasurable impact on the cultural and motivational side of the business and on shareholder or investor confidence. "The markets can be very unforgiving," Morgan notes.

Going forward, there are no signs of merger activity slowing down, although deals, particularly in the software and IT services segments, are likely to be on a smaller scale, according to PwC.

Asia and particularly India, which had what some are describing as a watershed year in 2006 in terms of M&A, will continue to rise in importance on the global technology M&A stage, PwC predicts.

The firm also expects deals involving environmental technology companies to prove a key driver of M&A activity over the next year as the level of investment in more environmentally friendly and energy efficient solutions increases.

Top tech deals of 2006:

1

Alcatel-Lucent Technologies

French telecom equipment maker Alcatel purchased its US counterpart Lucent for US$14.3 billion in November.

2

Investor Group-Philips Semiconductors

In September a private equity consortium paid US$7.4 billion for an 80.1% stake in the semiconductor division of Philips Electronics.

3

Oracle-Siebel Systems

Enterprise software giant Oracle acquired rival Siebel for US$6.1 billion in February.

4

AMD-ATI Technologies

Chipmaker AMD purchased graphics processor manufacturer ATI for US$5.4 billion in October in a bid to better compete against rival Intel.

5

De Agostini SpA-GTECH Holdings

Privately-held Italian holding group De Agostini SpA bought lottery technology and services firm GTECH for US$4.7 billion in August.

6

HP-Mercury Interactive

HP broadened its software offering in July with the purchase of Mercury for US$4.61 billion.

7

FIS-Certegy

In February Fidelity National Information Services (FIS) paid US$4.55 billion for fellow banking software firm Certegy.

8

Investor Group-Reynolds and Reynolds

Private equity investors financed the merger of automotive retail solution firms Universal Computer Systems (UCS) and Reynolds and Reynolds at a cost of US$2.59 billion in October.

9

General Dynamics-Anteon International

Defense contractor General Dynamics picked up IT services firm Anteon for around US$2.25 billion in June.

10

EMC-RSA Security

Storage giant EMC capped off a buying spree with the purchase of RSA, one of the biggest names in the security software industry, for US$2.17 billion in September.

“Where you have more of a merger situation you have a bigger risk of a power struggle going on and that can have an impact on the ability to drive value out.”

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