A Smarter Way to Merge

Posted by: Steve Hamm on February 11, 2005

This explosion of mega-mergers in the telecom, insurance, and consumer products industries is exciting, but who knows if any of them will really pay off. In contrast, check out IBM. It has grown into a $96 billion behemoth without a single huge acquisitionever. Instead, it grows organically and by making more a dozen smaller acquisitions each year, mostly in software and services. Its a smart strategy thats delivering ever-richening profits and a host of new market opportunities. Meanwhile, rival Hewlett-Packard is suffering the consequences of its ill-considered $19 billion merger with Compaq.

IBMs software group is the companys most aggressive acquirerwith 40 buys in the past 10 years and 20 in the last four years. The group seems to have this down to a science. It wasnt always this way. When IBM bought Lotus for $3.5 billion in 1995 and Tivoli for $743 million in 1996, it at first kept them independenthoping to foster the entrepreneurial zeal of these fast-growing outfits. The results werent up to snuff, and IBM gradually integrated them with its existing operations. So in 1999, the new head of software, Steve Mills, shifted to a new strategyrapid integration. "We blend them in as quickly as possibleoften on the day we close," says Mills.

IBM analyzes the heck out of potential deals before taking the plunge. It looks for a certain kind of fit: 1) Complimentary products that blend into the IBM portfolio (ThinkDynamics, the datacenter automation company) 2) Consolidation of mature market segments (Candle, the mainframe software maker) 3) Market leaders in important niches (Rational, the software tool leader) and 4) Bold market entry (Lotus, maker of Notes collaboration software). The idea is to push the new products and technologies through IBMs huge sales and distribution networkaccelerating sales.

Since 99, Mills has been using merger integration teams headed often by a high-ranking executive. They spend six months to a year planning and executing the integration of the target company into IBM. The team assigns a "buddy" within IBM for each employee in the acquired companysort of a "personal cultural assistant," says Mills. The teams also focus a lot on making the newcomers feel like theyre a valuable part of IBM, rather than potential cast-offs. Contrast that with Oracles takeover of PeopleSoft. "We think you can have the best of both worlds. You can gain the leverage of combining the companies and at the same time you can get the energy and growth of having it separate without actually keeping it separate," says Mills.

Cisco has long had a similar strategy of buying smaller companies to fill out its portfolio or extendinto new markets. But it often seemed to overpayespecially in the go-go 1990s. IBM hasnt made that mistake. Look at its $3.5 billion acquisition of PriceWaterhouseCoopers Consulting a couple of years ago after an $18 million acquisition by HP had earlier fallen through. PWCC has turned into a key asset for IBM as it drives to become ever more service oriented. Just goes to show: mergers work, but only if youre really smart about them.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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