M&A; Marry in haste, repent at leisure

commentary One of the by-products of a maturing industry is consolidation and an increasing reliance on partnering. In 2003, about 22,000 merger and acquisition (M&A) transactions accounting for about US$1 trillion took place.
Written by Dan Farber, Inactive on
commentary One of the by-products of a maturing industry is consolidation and an increasing reliance on partnering.

In 2003, about 22,000 merger and acquisition (M&A) transactions accounting for about US$1 trillion took place. Expertise in developing strategic partnerships and keiretsu -- the extended enterprise -- has become an essential core competency for businesses. However, both M&A events and partnerships often end up failing to deliver value to the three constituencies -- shareholders, customers and employees.

According to Ram Gupta, executive vice president of products and technology at PeopleSoft, more than 50 percent of M&A transactions fail to realise significant shareholder value. Gupta has been through 16 M&A transactions -- most recently the US$1.8 billion acquisition of J.D. Edwards -- and crafted numerous strategic partnerships.

Speaking at a Stanford Graduate School of Business event, Gupta outlined his success formula for M&A. He dismissed the placid notion of "mergers," saying that "there is no merger of equals...there is only one chief executive of the resulting company."

He broke the acquisition process into three phases, similar to the evolution of personal relationships that culminate in marriage and offspring. "Acquisitions are like getting into a relationship...there's dating, mating and creating," Gupta said. "Just like in a relationship, you have to know what you are getting into. Don't rush off to Las Vegas and get married."

He described the dating phase as the "make or break" period, and cautioned that people can become too starry-eyed. "The bankers are telling you how wonderful everything is, the company you are trying to buy is on its best behaviour, the employees seem motivated, the customers seem happy, and analysts that you are paying are giving good feedback."

Clearly defining the reasons for an acquisition and the success metrics, as well as careful due diligence, are critical during the dating phase. "Acquisitions are done for a number of reasons -- you are buying customers, technology, entering a new market or a new country, buying profitability or a combination of all those," Gupta said. "If you are buying profitability, what is the new EPS (earnings per share)? If you are buying to enter a new market, what market share do you expect to have? If you are buying a company for its technology, when will it get to market?" The same could be said for engaging with any partner or service provider in a business relationship.

The primary reason for PeopleSoft's acquisition of J.D. Edwards was to gain a better competitive position versus competitors in the enterprise software business. "In the application software business, there are clearly three companies -- SAP, PeopleSoft and Oracle -- for the large business," Gupta said. "It's becoming like pharmaceutical business; you mostly have the big drug companies and smaller companies that come along with new drugs usually get acquired. You need scale to support large, global, complex business operations in multiple countries."

Now, as the number two player behind SAP, PeopleSoft is in the midst of fighting off Oracle's takeover attempt as the US Department of Justice and Oracle are arguing over what constitutes a competitive marketplace.

Gupta portrayed the acquisition of J.D. Edwards as a market expansion play, gaining new products and 7,000 new accounts in new markets, such as manufacturing and distribution, as well as in some new industries, countries and entrée into the mid-market. Within the two companies, there was also consolidation. As part of a goal to eliminate US$167 million to US$207 million in duplicate costs, PeopleSoft is eliminating about 6 percent to 8 percent of the combined headcount.

In terms of retaining employees during the first 100 days, Gupta cited a desire to compete -- a chance to beat SAP -- as the primary reason. "Any employee in any company or business comes to work for three reasons: getting paid, hanging out with people they enjoy, and because the company is doing something exciting and meaningful," Gupta said. "The biggest thing is defining the strategy and vision, becoming the number two [enterprise software] company and a clear challenger to SAP."

However, cultural issues can doom an acquisition or partnership to failure. Gupta recalled that in his former life as a Silicon Graphics (SGI) executive, the acquisition of Cray Computer nearly killed SGI. "[SGI in] Silicon Valley and Cray in Minnesota didn't work."

The mating phase
Success in the mating phase, according to Gupta, is about execution, with proof points based on the success metrics to show stakeholders, customers and employees. "The first thing you must have is a roadmap for the next three years. It's the time to make cold, hard decisions, such as which products would survive, which field operations would get consolidated and which partners would not make it," Gupta said.

Setting up the organisation and communicating to various constituencies also plays a prominent role in the mating phase. "You have to know who is driving. You can have the best road map and strategy, but without an organisation in place it doesn't matter," Gupta explained. "We lined up our people from both J.D. Edwards and PeopleSoft against the jobs we had, and picked the best people."

On the communications front, J.D. Edwards had scheduled a user conference less than a week after the acquisition was announced, which forced the team to quickly come up with a clear articulation of how employees and customers would benefit from the union. "We worked days and nights to come up with a concise message that fit on a 4-by-3-inch card," Gupta said. The message was distilled into four points:

  • Large Enterprise & Mid-market Solutions - Scalable solutions designed for YOUR company's needs

  • Solutions & Expertise for YOUR Industry - Services - Government - Real Estate/Const. - M&D & Asset Intensive

  • Extended Products Lines for YOUR Business - Offer PeopleSoft's strong products to J.D. Edwards' customers and visa versa

  • "1+1 = 3" Two Customer-Focused Companies - YOUR business needs drive our combined actions

Gupta also said that executives met in small group sessions with many of the more than 13,000 employees and sent weekly e-mail updates. Nonetheless, fear of job loss and organisation changes, as well as uncertainly about Oracle's hostile bid, still take their toll on company morale.

"In any mating, some hating is going on," Gupta said. "The only way out is to validate and measure each decision against the reference frame of success metrics that were set up in the dating phase, and those decisions have to be communicated constantly."

The final phase of Gupta's matrimonial M&A formula for success is about extracting the value from the combination of companies. "In a relationship, it's about what the two people can do together that is more than they could do separately. In acquisitions, it's the same way. You must combine unique assets and create new assets," Gupta said.

In the first 300 days, PeopleSoft launched two new product initiatives from the combined assets: demand-driven manufacturing and solutions for small businesses. Demand-driven manufacturing leveraged J.D. Edward's manufacturing expertise and PeopleSoft's platform to allow manufacturers to pull materials from suppliers rather than relying on pushing them based on prearranged, long-term forecasts. A Supplier Self Service portal allows the suppliers and manufacturers to collaborate more easily.

For smaller businesses, J.D. Edwards brought more than 2,000 customers with less than US$50 million in revenue. PeopleSoft worked with IBM to prepackage an iSeries server and a bundle of enterprise ERP software, primarily from J.D. Edwards, for less than US$100,000.

In addition, 24 deals in the first quarter of this year included both PeopleSoft Enterprise and PeopleSoft Enterprise One (J.D. Edwards' renamed products), doubling from the last quarter of 2003, according to PeopleSoft. Involuntary turnover during the first 300 days was less than 3 percent, Gupta said, crediting the decision to maintain the J.D. Edwards Denver location as a major contributor to the retention rate.

With trillions of dollars at stake as companies partner and go through the acquisition gauntlet, there are thousands of articles, checklists and best practices to help with the process. You can read about the trials and tribulations of HP's acquisition of Compaq or Cisco's M&A methodology or about the dotcom mergers that went awry, such as America Online buying Time-Warner. There are dozens of software programs for the dating, mating and creating phases of partnering and acquisition.

But, as Gupta intones, it all starts with the dating phase. If you have picked the right partner for the right reasons, then you at least have a chance to succeed. The hardest work is in identifying the need and the partner who can live up to your dreams. Otherwise, you'll end up unhappy, divorced and broke. Take Gupta's advice -- no quick trips to Las Vegas.

Whether PeopleSoft can meet or exceed its success metrics for the J.D. Edwards acquisition longer term, and stay in the ring with SAP and out of Oracle's clutches, remains to be seen. The notion of an SAP/Microsoft merger can't be comforting to Oracle or PeopleSoft. Who knows? Maybe they will be driven together by mutual need rather than by a shotgun wedding.

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