February 10, 2005
A Sector Where 'Merger' Can Mean the Start of Something Ugly
aving trouble naming a big merger among technology companies that ended well?
Well, there aren't many.
Remember when AT&T swallowed the venerable National Cash Register Corporation in a $7.4 billion hostile takeover in 1991? Or Compaq's $9.6 billion acquisition of the Digital Equipment Corporation in 1998? Or how about America Online's $4 billion acquisition of the Netscape Communications Corporation in 1998? All duds.
More than half of mergers and acquisitions in all industries fail to live up to expectations, but when it comes to big mergers in the technology industry, it seems the success rate is worse.
"There have been very few mergers that have succeeded in maturing technology sectors," said Pip Coburn, technology strategist for UBS Warburg. "Large companies have very established cultures and merging them in a fast-moving business like information technology is very hard."
The problem facing big technology deals like Hewlett-Packard and Compaq is that they often combine two struggling businesses rather than thriving ones, said Krishna G. Palepu, senior associate dean and director of research at the Harvard Business School, who wrote a case study on that merger.
"Putting two businesses that aren't doing well together doesn't help in any industry unless there are economies of scale to produce savings," Dr. Palepu said. In the case of Hewlett-Packard and Compaq, the savings would have had to be huge to help it beat Dell Computer in the fiercely competitive personal computer market. "Getting as big as Dell doesn't help if you aren't as good as Dell, " she said.
The same situation befell one of the original technology deals, when Sperry and Burroughs merged into Unisys in 1986, in an attempt to make two larger also-rans in the mainframe computer business into a credible alternative to I.B.M. The stock rose initially but lost as much as 94 percent of its value at one point.
Dr. Palepu also said that a significant amount of the value in information technology companies lies in the people who work for the acquired company, many of whom quickly leave after a merger. That differs significantly from a commercial banking merger, for example, which can survive an exodus of employees because the value lies much more in the assets and the potential for cost cuts. Despite the history of less-than-successful deals, technology companies continue to press ahead with big mergers.
In December, Symantec, the maker of the Norton line of computer security software, announced an agreement to buy Veritas Software, a producer of data storage programs, for about $13.5 billion. Shareholders have derided the deal and its value has dropped more than 30 percent, to $10.6 billion, based on Symantec's closing price yesterday.
"They felt they had to buy into the enterprise market when they got the chance," Mr. Coburn said of Symantec's strategy in bidding for Veritas. One reason Symantec felt compelled to take the risk of making such a big deal and diversifying its business was that it faced competition from Microsoft, which has acquired several small security companies in recent months, and is quickly moving in on Symantec's core business. Nevertheless, Wall Street investors smell another loser.
In December, Oracle finally concluded a deal to acquire PeopleSoft for $10.3 billion. Oracle's stock, which initially spiked $1.35 a share to close at $14.63 when the deal was announced, has since fallen to $13.17 a share.
Of course, not all technology deals turn sour. While the biggest seem to disappoint, smaller ones that do not make for big headlines have been quite successful.
A.M. Sacconaghi, an analyst at Sanford C. Bernstein & Company, said that I.B.M.'s purchase of Tivoli Systems in 1996 for $783 million "was a very good acquisition." Tivoli, which had more flexible systems management software and tools than I.B.M.'s internally developed products, helped vault I.B.M. into a leadership position in that field.
Mr. Coburn also said that some smaller transactions had been runaway hits, citing dozens of small deals in the mid-1990's that laid the foundation for Cisco Systems' dominance in the electronic-switching market, like its acquisition of Kalpana, a privately held company, in a stock swap valued around $204 million, or its acquisition of Combinet Inc. for $114 million.
"The deals that work well involve larger companies buying research and development," Mr. Coburn said. That may be true. But defenders of some of the biggest dud deals can always counter their critics with one unanswerable question: Would things have been any better if the deal never happened?