The Analyst's Corner: Fitting in the new pieces

Communications companies keep changing shape.

In 1999, the ultimate matchmaker Cisco Systems acquired 18 companies. In only the first five months of 2000, Cisco accelerated the pace with 10 acquisitions.

Concert was recently born from pieces of AT&T and BT; Verizon emerged from the union of Bell Atlantic (itself a recent merger of Bell Atlantic and Nynex) and GTE.; the Tribune Company acquired Times Mirror in June.

On the Net Related books

Competitive local exchange carriers (CLECs) have been merging into larger companies as part of their strategies for years. In 1999, 9278 mergers occurred, with a total price of $1.42 trillion. But if the performance of past mergers predicts the future, most of those mergers will likely fail to increase the shareholder value of the acquiring company within one year. And one year is all Wall Street allows. One year to succeed or fail.

Even good deals fail. Bringing together two cultures, integrating systems and processes and methodologies, rationalizing disparate compensation and benefit and incentive plans, all while realizing the usually much-touted cost-cutting and revenue-enhancing benefits of the deal within one year overwhelms many.

Because acquisition is now integral to many corporate strategies, the ability to make deals work--over and over again--is critical. Ensuring repetitive success depends on three factors: defining the reason for the merger, following integration best practices associated with the integration driver and maintaining the external focus on customers.

Mergers occur for various reasons. Some companies see the opportunity to turn around a poorly managed company; others seek faster access to new technologies, a more comprehensive product or service line to help provide complete solutions to customers, or access to hard-to-find talent. The driver behind the deal strongly influences which best integration practices a company should follow.

Today's common wisdom touts the need for companies to remain respectfully distant from their newly acquired units. Don't tinker with corporate culture; don't burden the new unit with a lot of requests for information; don't demand that the new member adopt the parent's processes and procedures. 

Good advice--if the driver of the acquisition is the desire to expand into a new business, and if the acquired company is profitable, efficiently run, and growing. In such circumstances the optimal relationship between the parent and the acquired unit is a portfolio management relationship. The new parent might impose some financial objectives and targets, but the operations remain distinct.

After all, the parent was buying what it couldn't build as well or as quickly. Little integration actually occurs. The new unit is the first piece in a new puzzle. Successful acquisitions for new business expansion require that both parties acknowledge long-term value in the relationship, and both agree to structure a portfolio relationship. Failure often occurs because after the initial infusion of cash--or the realization of personal wealth for the key managers--the acquired unit sees little value in the relationship.

Equally dangerous is the parent's inability to remain happily distant.

Intermedia Communications, for instance, has had little success in forging a union with Digex. The cultures are vastly different; Digex has rejected attempts to merge its operations with other Intermedia units, and the two have coexisted uneasily. Intermedia is now considering selling its golden child.

Despite the sometimes tenuous nature of portfolio relationships, when new business expansion motivates the acquisition, a portfolio relationship offers the best chance for success. On the other end of the spectrum, however, are those acquisitions driven by the vision of cost reduction and profit improvement in a similar business. In these instances, assimilation is optimal. While the acquiring company can "take over" respectfully, the maintenance of the culture and norms of the new unit are unlikely to remain.

Indeed, those behaviors most likely contributed to the poor performance.

Management talent, too, is likely to flee, even when the new parent tries to retain employees. The acquired company will change, as it should, and although some talent drain is unfortunate, those managers are also responsible for the former poor operations.

Integration, taking the best from each company and culture, occurs in the middle of the spectrum, when the primary driver of the acquisition is the expansion of products, services, markets or customer segments. In this instance, full assimilation could destroy the unique characteristics that enabled the new unit to build and sustain its business, but selective assimilation will likely provide the short-term benefits that Wall Street demands.

While synergistic revenue enhancement is the long-term goal, first year benefits are more likely to stem from cost reduction opportunities because of scale. Similar processes can be cost-effectively merged; negotiating power with vendors grows; redundant capital costs can be eliminated.

It is critical that managers explicitly identify those areas that will be merged and those that will remain untouched. Which manifestations of the disparate cultures will be maintained? What is the common strategic vision uniting the new partners? What will be given up? These discussions, which should occur throughout the organizations, must be explicit. And the first of the discussions should occur before the deal is signed.

Clearly identifying and articulating the drivers of an acquisition enables the rapid emergence of the new company. The discomfit of assimilation eases when the reasons are clear and shared; the intricacies of integrating are manageable when a strategic imperative and a shared vision exist. Clarity reduces the anxiety and speculation that infect companies following an acquisition. The rapid re-establishment of stability enhances employee productivity, which otherwise often nosedives to as little as one productive hour per day.

Most important, companies are able to maintain, and even enhance, their external customer focus. Assimilating, merging or annexing a new unit ultimately proves successful only if customers perceive added value from the restructured enterprise.
Nancy Kaplan is a vice president at Renaissance Strategy, a Boston-based global strategy consulting firm. Her e-mail address is nancy_kaplan@rens-strategy.com. 
This column originally appeared on the internetTelephony.com website.

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