Lessons learned from last year's M&As

Whether acquiring or merging, cooperating between companies is key

In spite of the economic downturn that has dampened merger and acquisition activity in the communications sector, M&As are still wielding their influence in today's market.

Though a merger tends to grab headlines at the time it's announced, it is after the deal closes that the real work begins, which means the integration process for the mergers announced in 2000 should be well underway.

M&A watch

One of last year's biggest deals was Sycamore Networks' acquisition of Sirocco Systems, announced at Supercomm 2000.

The buy was billed as an opportunity for Sycamore to expand its metro optical switching portfolio with a metro optical access play. But technology alone was not enough to justify acquiring Sirocco, according to Kevin Oye, Sycamore's vice president of business development.

The company, though it would end up in charge of any deal it struck, knew it could not dictate the success of the merger.

In fact, Sycamore considered acquiring other companies in the metro optical access space but found the culture at Sirocco to be the most complementary with its own, having what Oye described as a high brains-to-ego ratio. In environments where that ratio is skewed, “people don't listen,” he said.

Domestic telecom M&A slowdown
	Announced deals	Aggregate value (in millions)
1997	317	$83,006.86
1998	388	$260,925.25
1999	730	$401,621.54
2000	909	$251,350.04
2001*	399	$26,280.29
*Year to date Source: Mergerstat

And because intellectual firepower is one of the main assets of equipment vendors, the need for the people in an acquired company to be enthusiastic is key, Oye said. “You need to make sure that the top people on both sides want to do it. If the desires of the people are different, no matter what you do, it all fails,” he said. In Sirocco's case, the leadership team was enthusiastic about the deal, making integration easier.

While Sycamore needed cooperation from Sirocco's senior leadership, getting the mid-level employees on board was also key. Sycamore accomplished the task by announcing it would retain all of Sirocco's employees, eliminating layoff fears.

Additionally, Oye said, Sycamore Co-founder and Chairman Desh Deshpande made a point of meeting every Sirocco employee in person to make sure they were “equally excited about joining Sycamore as any other people.” It was this enthusiasm that helped fuel the integration of the two vendors' portfolios, he said.

That integration, which Sycamore originally expected to complete in fourth quarter 2000, was pulled off ahead of schedule when the company demonstrated its first integrated product just two weeks after the deal closed.

While the Sirocco integration went smoothly, the project was obviously one in which one company, Sycamore, was in charge. In cases where the deal is closer to a blend of two companies, the integration process requires greater coordination and cooperation.

The EarthLink and MindSpring merger, which closed in February 2000, attempted what is often said but rarely done in the M&A world: a merger of equals.

The merger was accomplished by the formation of an entirely new corporate entity, half owned by EarthLink shareholders and half by MindSpring shareholders. That equality influenced the entire merger integration process — and was also its most significant challenge.

“The biggest headache was that it truly was a 50/50 merger of equals, and senior management was a complete blend of the companies,” said EarthLink President Mike McQuary. “Everything had to be worked out to [satisfy] both sides.”

Details of the merger agreement support that claim. The new entity alternated top management positions between the two companies' executives, took the EarthLink name, and based its headquarters in MindSpring's home city of Atlanta. One factor that was not negotiable on the MindSpring side, however, was the adoption of MindSpring's corporate culture, McQuary said, who was president of MindSpring before the merger.

At the old EarthLink, the business was centered on the idea and the promise of the Internet. At MindSpring, the philosophy was that if you take care of customers and employees, everything else would fall into place.

“Really as a condition of the merger, on the MindSpring side, we knew how important the culture was [to our employees],” McQuary said. “By stating it upfront, that definitely charted the course as to what the culture was going to look like in the new combined company.”

For the merger of two large service providers, combining back-office and billing operations is usually one of the most significant hurdles. When evaluating the two systems, company leaders found certain aspects of both to be desirable. EarthLink's system, McQuary said, was easily scalable, while MindSpring's was flexible.

Taking desires for both features into account, the company pulled off another feat of corporate triangulation: Using functions from the two legacy systems, it built an entirely new billing system from the ground up.

When it came time to integrate employee bases, the two companies simply decided on impartial evaluations. In the end, about half of the new company's managers were from EarthLink and half from MindSpring, McQuary said.

Though such negotiations were necessary in this case, even in deals in which one company is truly in charge such neutrality is the best way to pick managers, said John Bruckman, managing director of Change Management Group. “It depends on picking out the key star players that make the company work. Always ask them, ‘If you put everybody outside the gate, who would you say makes the place go ‘round?’”

In order to hold onto customers, accurate, honest communication is key, McQuary said. The merged company made sure it let customers know what they should expect throughout the transition.

Similarly, communicating honestly with employees is necessary to get them on board with the new company, McQuary said. Simply telling them what their new title may be is not enough.

McQuary, who estimates he has been involved with almost 70 mergers and acquisitions, said senior leadership must communicate frequently, in person and honestly to employees about the coming changes and what is expected of them. The company needs to communicate in this way, not only for the sake of its employees, but for its own success.

“It was a necessity to make both [groups] of legacy employees realize that we were going to have to change ways if we were going to be successful.”

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M&A watch
Acquiring	Acquired	Amount	Closing	Description
TranSwitch	Onex Communications	$89 million	Third quarter	Semiconductor maker acquires integrated circuit developer
Spencer Trask	Neptec	Undisclosed	Early August	Equity firm acquires optical networking vendor
Hewlett Packard	Trinagy	Undisclosed	August	HP acquires network management software provider
Peco II	Assets of JNB Communications	$1.8 million	Early August	Power equipment provider gets assets of equipment installer
ECtel	NetEye	$11.1 million	Early fourth quarter	Network monitoring vendor buys IP fraud management technology provider
Applied Innovations	Badger Technology	Undisclosed	Early August	Network management technology provider gets provider of remote management technology
Compiled by Toby Weber