Therese Poletti over at MarketWatch was asking whether Larry Ellison should eat crow after announcing a massive layoff at Sun last week. The reason for the question was that back in January, Larry was very critical of those of us that predicted these massive layoffs and had folks wearing "We Are Hiring" buttons. This is like a weatherman being critical of folks predicting a tsunami and then suggesting the beach was where you should be trying to take a post-tsunami interview from a raft after being swept out to sea -- with one exception. That weatherman didn't actually have his hand on the valve that caused the tsunami. Larry does. In other words, Larry did a poor job of predicting the Sun catastrophe that he eventually ordered.
This miss goes well beyond whether Larry was sufficiently psychic to predict his own future actions. It speaks to how difficult the Sun acquisition is proving to be and raises the specter that it might actually visibly fail. In fact, the odds that it will fail exceed the odds that it will succeed, regardless of how well Oracle does mergers -- and it generally does them better than most.
Why Most Mergers Fail
I used to run a post-merger clean-up team for IBM. Even though it was one of the most practiced firms at the time, the majority of acquisitions failed to meet expectations. Because the acquisitions were small, the problems didn't become visible, with some exceptions. Over the years, I've seen the same issues cause most mergers to fail. Let's go through some of the key problems. I'm only going to pick the ones that are most pertinent to this recent news (otherwise, I'd be writing a book).
Due Diligence: In an acquisition, once the initial decision is made, much of the effort goes into closing the deal. The acquiring firm is kept at arm's length from the kind of deep detail it needs to understand the problem. Once the decision to move ahead is made, it can do much deeper analysis, but the effort remains focused on closing the deal on both sides. Problems that otherwise might surface are brushed aside in order to accomplish the task. To be clear, if this wasn't done, few mergers would ever actually be consummated (though I expect, successes as a percentage would be higher). This means that with most acquisitions, while the work makes it look like there has been deep analysis, the result is similar to the justification for going to war in Iraq based on non-existent WMDs -- window dressing rather than real analysis.
Inadequate Merger Plan: Since the due diligence tends to form the foundation of a merger plan and it can't be relied upon, it isn't a huge step to conclude that the merger plan will be initially inadequate. Exacerbating this are any cultural or operational differences between the firms, which lead to assumptions that don't reflect reality and a fatally flawed plan. The bigger the difference between the merging companies, the bigger the likelihood that the merger execution plan is FUBAR.
Image Maintenance: Even if problems are seen during the merger plan, there is a substantial effort to cover them up so the executives who made the decision don't look stupid. Within the organization, issues that likely should make it to the board are contained at relatively low levels until they can no longer be contained. Like the BP oil spill, there is a potential for them to rise to management levels after they have exceeded the authority of those managers to mitigate the damage. This brings us to another military term, SNAFU, which means a big problem that happens repetitively. Part of what makes this particularly difficult is that executive management may place more effort on maintaining the image that no problem exists than on addressing that problem, leading to a CF (first word is "cluster"). And then you get a meltdown. Let's now look at Snorkel, which may be Oracle again before long.
Sun + Oracle: Failing in Steps
Inadequate Diligence: This is hardly a stretch but the lengthy European approval process rendered Sun nearly non-viable. It was bleeding Sun customers at catastrophic rates by the time approval finally occurred. It is likely that, had Oracle known how badly Sun was going to be hit during the merger approval process, it would not have done this deal. Sun had bled so badly that it is likely, had Oracle simply backed out, that it would have failed within weeks. Sun was in trouble at the start of this process, and it was on corporate life support after it was complete.
Inadequate Merger Plan: I'm not sure if it was even possible to create an adequate merger plan under these conditions. This is like a surgeon expecting to come in to do a heart transplant only to find that, due to delays, every other major organ in the patient is now dead or dying. Oracle was faced with a nightmare scenario and the massive layoffs reflect how much worse Sun was than Oracle thought in January.
Excessive Effort on Image: By making that initial January announcement, Larry effectively buried any likelihood that he would find out the depth of the Sun problems in a timely manner. Any large layoff shortly after he said there wouldn't be one would severely damage his credibility and make it look like he had no idea what he was talking about.
The end result is that this layoff announcement and related actions were likely delayed significantly, incurring additional costs to the now combined entity that were otherwise avoidable. If this is happening in one area, it is likely happening in others as well. Layoffs of this scale typically have a lagging impact on the performance of a firm as processes and relationships that depend on these ex-Sun employees degrade across the firm. This suggests that the Sun-Oracle merger is in deep trouble. Even were this merger executed perfectly, Oracle could still lose more revenue than it gains as partners it currently has in the hardware business divert to SAP and Microsoft because they now see Oracle as a growing competitor.
Hard economic times tend to result in a huge rise in merger activity. The mergers that seem to go the best are small ones close to a firm's core competence and between firms that are currently both being well run. The worst are large mergers in areas where the acquiring firm isn't currently competent and between firms where one or the other is in dire financial straits. The Sun-Oracle merger is the latter type. The odds were heavily stacked against it at the outset. This latest news indicates that the odds are getting longer and that this merger probably will not be successful. It hasn't yet put Oracle at risk but the decade is still young.