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The Fine Art Of Tech Mergers


When EMC Corp. (EMC) Chief Executive Joseph M. Tucci revealed in late 2002 that he planned to overhaul the down-on-its-luck data storage leader by acquiring software companies, most analysts were skeptical. After all, EMC was known for one thing only: building expensive cabinets packed with disk drives. And Tucci himself was a cipher. He had spent chunks of his career working for two of tech's mediocrities, Unisys Corp. (UIS) and Wang Global Inc. So in 2003, Wall Streeters scratched their heads when Tucci bought Documentum, a document management company, and VMware, a pioneer in the arcane software that manages computers. They asked: What does this have to do with storage?

Not much, but that was the point. Now, three years, 17 deals, and $4.7 billion into an ambitious diversification drive, Tucci has quietly put together one of the most successful mergers and acquisitions records in the tech industry. All the while, EMC has hit earnings targets 13 quarters in a row. Software now makes up 37% of revenues, which grew to $9.6 billion last year, helping to land EMC the No. 20 spot on the BusinessWeek 50 list of top corporate performers. "Investors point to tech acquisitions and say it's unclear if they really work," says analyst A.M. "Toni" Sacconaghi Jr. of Sanford C. Bernstein & Co. "EMC has been fairly unique in being able to do them successfully."

To refocus EMC as a company that manages information rather than just stores it, Tucci aggressively acquired small niche leaders, many for under $100 million. The most he paid was $1.7 billion, for Documentum. "We go for the string-of-pearls approach as opposed to the big, game-changing acquisitions," he says. Tucci is also after talent. It's a testament to the Hopkinton (Mass.) company's merger skills that 15 of the 17 chief executives of the EMC acquisitions have remained with the company -- typically to run units within the software division.

In 2003, Tucci dubbed Joseph F. Walton, then head of EMC's services unit, the "integration czar" and gave him a warning: "Don't mess it up. I'm going to spend a lot of money, and I don't want you to crush their DNA." With a little help from McKinsey & Co. consultants, Walton came up with a process that's part art, part science.

The science comes easier. Walton set up an integration team, which, once it had a couple of deals under its belt, created a playbook of processes for the preclose period, the day of closing, and the 100 days thereafter. It lays out procedures for transitions in leadership, business processes, computer systems, and sales. The performance of each acquisition is tracked for six quarters to make sure it makes steady progress. Walton uses Six Sigma techniques to constantly improve the process. "This is a best practice," says Robert F. Bruner, dean of the Darden Graduate School of Business Administration at the University of Virginia. "You learn from every deal, record what you learn, and disseminate. Then on successive deals you do better."

MENTORING CEOs

The art, for EMC, is keeping people happy and engaged. As soon as a deal is done, Walton's team and the leaders of the acquired company customize a plan for integrating into EMC. Usually after several months, the company is folded in with other acquisitions to create new business units, though VMware continues to be run independently. To help the former CEOs thrive in a new organization, Walton assigns an executive mentor to each of them. He also conducts cultural awareness sessions with the employees of the acquired companies. "I'm the Kofi Annan of EMC," he jokes.

It helps that the newcomers get opportunities they never would have had if they hadn't sold their companies. Take Larry A. Zulch, former CEO of Dantz Development Corp., which was a $20 million-a-year maker of data-backup software for smaller businesses when EMC bought it in late 2004. Within weeks, Zulch was asked to craft an EMC-wide strategy for the entire small- and medium-size business market. He proposed a full array of hardware and software for this segment. Tucci gave him a quick go-ahead. Within 10 months, he drew products from five other EMC business units, and last February he launched EMC's Insignia line -- whose sales are off to a promising start.

Insignia is just one of many seeds Tucci has planted. Often, the software companies he buys are so young that they have scant revenues. (One had just $1 million in annual sales.) The idea is that once their products are combined with other EMC software in substantial packages that get marketing help from the company's 2,000-strong sales force, revenues will grow rapidly. Even Documentum, which had $300 million in annual revenues, has benefited from EMC's brawn. Its customer roster has doubled since its acquisition, and revenues have grown 60%.

If Tucci appears to have figured out how to get tech M&A right, he has yet to see that success heralded by investors. Like most other technology stocks, the company's shares have languished since 2003, rising but 5%. UBS (UBS) analyst Ben Reitzes believes VMware alone could be worth more than $6 billion in a public offering -- roughly 10 times what EMC paid for it. But when Reitzes raised the issue at an analyst conference on June 7, Tucci abruptly closed the discussion. "It's not a great idea to say: 'Here are my best assets. I'll get rid of them,"' Tucci told the crowd. Asked if she'd like to see the company spun off with an IPO, VMware President Diane Greene diplomatically ducked the question. "It's up to Joe," she said, shrugging. For now, Joe says no. But if EMC stock continues to stagnate, Tucci may be forced to make up a new playbook.

By Steve Hamm


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