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Mergers & acquisitions: Marry in haste, repent at leisure

Tags:
J.D. Edwards,
PeopleSoft,
SAP

Published: 14 Jun 2004 16:00 BST

One of the by-products of a maturing industry is consolidation and an increasing reliance on partnering. In 2003, about 22,000 merger and acquisition (M&A) transactions accounting for about $1tn took place. Expertise in developing strategic partnerships and keiretsu -- the extended enterprise -- has become an essential core competency for businesses. However, both M&A events and partnerships often end up failing to deliver value to the three constituencies -- shareholders, customers and employees.

According to Ram Gupta, executive vice president of products and technology at PeopleSoft, more than 50 percent of M&A transactions fail to realise significant shareholder value. Gupta has been through 16 M&A transactions -- most recently the $1.8bn acquisition of J.D. Edwards -- and crafted numerous strategic partnerships.

Speaking at a Stanford Graduate School of Business event this week, Gupta outlined his success formula for M&A. He dismissed the placid notion of "mergers," saying that "there is no merger of equals…there is only one chief executive of the resulting company."

He broke the acquisition process into three phases, similar to the evolution of personal relationships that culminate in marriage and offspring. "Acquisitions are like getting into a relationship…there's dating, mating and creating," Gupta said. "Just like in a relationship, you have to know what you are getting into. Don't rush off to Las Vegas and get married."

He described the dating phase as the "make or break" period, and cautioned that people can become too starry-eyed. "The bankers are telling you how wonderful everything is, the company you are trying to buy is on its best behaviour, the employees seem motivated, the customers seem happy, and analysts that you are paying are giving good feedback."

Clearly defining the reasons for an acquisition and the success metrics, as well as careful due diligence, are critical during the dating phase. "Acquisitions are done for a number of reasons -- you are buying customers, technology, entering a new market or a new country, buying profitability or a combination of all those," Gupta said. "If you are buying profitability, what is the new EPS (earnings per share)? If you are buying to enter a new market, what market share do you expect to have? If you are buying a company for its technology, when will it get to market?" The same could be said for engaging with any partner or service provider in a business relationship.

The primary reason for PeopleSoft's acquisition of J.D. Edwards was to gain a better competitive position versus competitors in the enterprise software business. "In the application software business, there are clearly three companies -- SAP, PeopleSoft and Oracle -- for the large business," Gupta said. "It's becoming like pharmaceutical business; you mostly have the big drug companies and smaller companies that come along with new drugs usually get acquired. You need scale to support large, global, complex business operations in multiple countries."

Now, as the number two player behind SAP, PeopleSoft is in the midst of fighting off Oracle's takeover attempt as the US Department of Justice and Oracle are arguing over what constitutes a competitive marketplace.

Gupta portrayed the acquisition of J.D. Edwards as a market expansion play, gaining new products and 7,000 new accounts in new markets, such as manufacturing and distribution, as well as in some new industries, countries and entrée into the mid-market. Within the two companies, there was also consolidation. As part of a goal to eliminate $167m to $207m in duplicate costs, PeopleSoft is eliminating about 6 percent to 8 percent of the combined headcount.

In terms of retaining employees during the first 100 days, Gupta cited a desire to compete -- a chance to beat SAP -- as the primary reason. "Any employee in any company or business comes to work for three reasons: getting paid, hanging out with people they enjoy, and because the company is doing something exciting and meaningful," Gupta said. "The biggest thing is defining the strategy and vision, becoming the number two [enterprise software] company and a clear challenger to SAP."

However, cultural issues can doom an acquisition or partnership to failure. Gupta recalled that in his former life as a Silicon Graphics (SGI) executive, the acquisition of Cray Computer nearly killed SGI. "[SGI in] Silicon Valley and Cray in Minnesota didn't work."