Of Mergers, Vertical Stacks and Integration: Is Failure Likely?

Loraine Lawson

Are mergers that rely on integrating two companies a bad idea? My IT Business Edge colleague and IT veteran Rob Enderle says yes, definitely.

 

"I've been part of a lot of companies destroyed by integration mergers," Enderle writes this week at Datamation. "I'm sure a lot of you folks have been as well. Given the failure rate maybe it time we said 'no' more often to this approach."

 

Enderle should know whereof he speaks. After all, he's a long-time analyst of technology vendors and their wheelings and dealings. Plus, he has hands-on experience with this type of deal: He worked at IBM handling "clean-up" after mergers. So when he says he and others now believe these types of deals carry an 80 percent failure rate (ouch!), it's probably wise to listen.

 

The alternative to an integration merger is buying a company out and running it as a wholly owned subsidiary, an approach that Enderle characterized as holding "a vastly higher success rate."

 

He makes a really good case for avoiding acquisitions with an eye toward integrating the company into your company, arguing that you're potentially bringing in a sick company that "may actually infect the parent company with whatever is being done wrong to cripple the purchased company." As evidence, he cites the difference between how HP - specifically with its acquisition of Palm - and Dell have handled acquisitions in past years. Dell tends to focus on subsidiaries, while HP tends to attempt integration. Dell's acquisitions thrived, while Palm ... well, we all know what happened to Palm.


 

This, Enderle summarizes, is what he sees as the key difference in the two approaches thusly:

The big difference, however, between wholly owned subsidiaries and integration mergers is time. With an integration merger you have to get it done very quickly because the greatest exposure is during the transition, much like if you were replacing a lot of organs in a body at once; you have to get the patent to a steady state quickly for any chance of success. With a wholly owned subsidiary you can take all the time you want and be far more methodological in your approach. In short it tends to force management excellence because you have to assess this in the acquired firm constantly.

Okay - that makes sense. And yet ... there are companies throughout tech that do acquire and integrate successfully.

 

There's also a trend right now toward "vertical companies," where big companies buy out smaller companies to create an integrated vertical stack of enterprise technology, and if Enderle's right about the high failure rate of integration-based mergers, you have to wonder how that will impact this integrated-stack trend more companies are taking. IBM certainly plays in this space. Oracle is practically betting on what it calls "vertical integration" of acquired technology and companies.

 

In fact, a column on Venture Beat contends vertical integration is precisely what HP needs to pursue if it's going to survive. It's written by Peter Yared, the VP/GM of social at Webtrends, who suggests that HP merge with SAP in order to compete successfully in the enterprise:

... HP is jumping out of the frying pan and into the fire, as IBM, Oracle and Microsoft have been aggressively building integrated enterprise stacks over the past decade. ... HP should dump its printer business along with its other low margin hardware businesses, merge with SAP to get a full stack, and then go on a shopping spree to shore up the weaker parts of the combined HP-SAP stack such as EAServer, StreamWork and HP-UX.

Yared predicts that large enterprise vendors like IBM, Microsoft and Oracle are about to go on a buying spree to acquire companies at every layer. He specifically lists TIBCO, Teradata, Jive, Salesforce, Red Hat and even his own company, analytics vendor Webtrends, as possible targets.

 

Of course, that doesn't mean any of these deals will be "successful." And it certainly doesn't mean these big plays will be good news for end-user companies. But it is a good question for the tech sector to ponder, particularly when you're investing in technology solutions that may be impacted by an integration merger: Will these vertically integrated stacks work out? Or will they weaken the companies that attempt them?



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