The Rocky Road to Growth Through Mergers & Acquisitions

Not only in the industry but between organisations with heavy investments in IT M&As can be difficult.

Professor Michael Earl sketched out some of the problems with acquisitions: “I had always been involved, interested in mergers and acquisitions. At GEC, I had the job of crushing together IT departments every time GEC took over somebody It wasn’t the most sophisticated approach, but I learnt a lot. And then I did this merger in Oxford. And, so, so IT and mergers and acquisitions was attractive. Now why?

“I mean what we know from financial economics, that at best 70 per cent of mergers fail. And what we then know is, the major cause, I mean, is that, it’s the post-merger integration. I mean, it may be you’ve got the wrong partner, so scanning can go wrong. You may have paid the wrong price, that’s easily done…But it’s the post-merger integration that’s the killer. And as you say, nowadays IT is quite often at the heart of that, and the IT and process integration. And there’s been no really solid advice of how to do it.

“It’s a difficult area to research. You can find quite a lot of business school academics who say, ‘Yeah, I’ve looked at that, and I had to give up.’ Why? ‘Because, companies are very nervous about talking about it.’ And I have got data on some of our famous companies in this country which I cannot use. I had to agree that we couldn’t disclose it. But we got enough to come out with a framework for deciding what to do, and once you decide what to do, what are the success factors of getting that? So, once you think about the framework, it’s pretty obvious. So the question is really, is the synergy, assuming you’ve identified a synergy, of the two businesses coming together, is it highly IT-dependent or not? That gives you two opposites on an axis. And the other question is, when you come together, what’s the state of the infrastructure? Is it crummy, or is it new, if you like. And you’ve then got, you know, four different strategies. And it’s worth asking those questions, it’s not quite as simple as that, but, but each one, you know, they’ll look at has got different imperatives for management. Do you need heavy-duty programmers or not? Do you need the board to be involved or not? Do you need to take time over it or not? And so on. So that’s, that’s what, what we did. And, it, you know, as you know, mergers and acquisitions keep happening, and, I fear that quite a lot of mistakes therefore keep happening.”

Victor Basta has worked as a venture capitalist and an M&A expert for over 30 years.  He told the Archive:  “A lot of people talk about, well we need to align cultures. Cultures are never aligned. There are no two organisations where cultures are aligned. It’s, how you, it’s the process of alignment. So, if you’re going to acquire a business, and it’s going to, and you want to be successful, you can’t be outside of a certain range of behaviour. They, companies can’t have totally different cultures, but they always will have different. So it’s not about that. It’s about how you align them over a period of time. So it’s the process you put in place, for how you bring that together. Or more importantly, how you bring the target company’s culture closer to your own. Assuming yours is a good one…

 “Well, to be honest, the single most important thing is who you fire. So, just focus on who you’re going to fire, and be clear exactly why, and understand what the messages are internally that that’s going to send. Most people make decisions about firing senior execs, if they do, at companies they acquire, based on functional spec. You know, we don’t need X. Right? But, you are sending a signal to an organisation what is an important set of characteristics, because that’s how they view that person. They don’t view that person as a redundant functional X; they view them as a person who embodies Y, good or bad. Get rid of Y, and you’ve sent a message. So, if you focus on terminations based on the cultural dimension, not just the functional dimension, then, you can make an enormous difference. When you say firing the right people, it just is a different definition what the right people are.

Basta ges on to say “[Timing] is also overrated. You can only say you got your timing right in hindsight, so it’s not a helpful… It’s overrated because it’s unhelpful. What are you going to do when you say, get your timing right?  The reason I do a deal is not because I think I’ve got the timing right. The reason I do a deal is because, something’s wrong in my business, something’s going very well, somebody told me to do something, a board member. There are 45 reasons. I may or may not, in retrospect, have gotten my timing right, but it has no bearing on my decision-making, really, at the margin. It certainly is not something I can take into account, other than the most vague way.”

Surely price presumably is pretty vital?

“The price is too high, the price is too low. Well, OK. I mean, you know, London property ten years ago, you said, oh my God, I’m never going to go any higher than that. Who knows? Honestly. There are times when you look at it and say, that’s impossible, not sustainable. Sure. But that’s not about timing. That’s just saying, that space, that type of company, that whole thing is not good. But, you know, that’s not about, I’m going to finesse the timing by three months and I’ll do a much better deal. Occasionally. I’d say, you know, there’s probably ten, 20 per cent of the deals where timing, you could probably get a clear sense on, and you, you really should factor that in as a major consideration. But it’s very rare that it actually is, really informs your decision. So, when you’re saying, what are the things you look for? I look at things that would, you could either measure, or, get your arms around, and that can inform or change your decision. Rather than, an ex-post re-hash.”

And does due diligence matter?  “There is an enormous difference between, for example, the due diligence that Oracle does, and the due diligence some other companies do. I mean Oracle is better than almost, I mean, any investor, anybody in the world. It’s the best in the world, as far as we can see. So, there is nothing that they will leave unturned, is one example.

 “Because it’s entirely systematic. When you go through due diligence with Oracle, they’ll send you a set of Excel sheets to fill in, right, that’s how they do due diligence. Fill all of this in, give you all of these numbers, and then we’ll look at all of it. Rather than, what a lot of companies do, is, they will say, ‘Well, send me what you have,’ and then they have to decode it. Well, if I send you what I’ve got, I’ve already spun it a certain way. Data is data, you can analyse it. But you can make it hard for you to analyse. And most people who do due diligence, don’t get paid any more to be more diligent. So, they’re kind of diligent enough, and then it’s somebody else’s problem. Plus some of these people are lazy most of the time, as we all know. But, so when you have a tool, a set of tools, that enforce a degree of granularity in due diligence, then you really leave no stone unturned. Apple also has world class due diligence; other companies, which I won’t name, is, send me what you’ve got.”

 Sometimes you have to sell an IT business, although you might want to keep it. Sir Peter Rigby built up Byte, a retail pc and peripheral chain, from the mid 1990s.  “ [Byte] was a pretty significant investment we were making, and, it wasn’t working because Dixons were in a different league. So, I sold it to Dixons, which stuck in my craw, but I sold it to Dixons. And I remember years later sitting next to Stanley Kalms at a luncheon, and, he didn’t know me, and I didn’t really know him, and I said, ‘You put me out of business. And I ended up selling my business to you.’ He said, ‘Yes, I know.’ I said, ‘Well why did you buy it?’ He said, ‘Well, you were better than we were, and I knew I had to take you out.’ And that was it. So we came out of retail.  Yes, I think I did [wash] my face with the deal] . I didn’t sort of, you know, we didn’t make any great money I have to say, but we didn’t, I don’t think we lost on it.”

Sir Peter also built his business with acquisitions: “over the years I have done 75 acquisitions of companies.

“And in some cases the acquisitions we made were to bulk out the business, new territories, new customers. I mean when you make an acquisition, in my view you’re doing two things fundamentally: you are acquiring customers, and you are acquiring people, and skills.   [We Bought a company called] TW2, which was about that Internet period when everybody wanted a website, and websites were costing £50,000 to put a simple website together, I didn’t so much acquire the company as I bought an interest in the company, and it was a couple of developers in Birmingham with fancy ideas. And their business skills were poor, fundamentally. We didn’t run the company; we financed it, we introduced it to customers. And, I should have sold it, because, the value of that company rocketed. And I said, no, you know, we’ll stick with it for the long run. And then subsequently it was worthless at the end of the day, because it wasn’t successful, it wasn’t delivering on the technology, and there were lots of competitors springing up all over the place of bright young things, you know, doing, doing websites and so on. But, you know, you don’t get everything right, of course you don’t. And, in the early days I would buy businesses which were distressed. Why? Because that’s what we could afford. And, the effort to turn businesses round is real, it’s very substantial. And then, what you should do with businesses is integrate them. So to answer your question, fundamentally, a lot of acquisitions are never integrated. They’re left alone, often stranded, or they’ve extracted the guts of the thing out. But they haven’t basically put the thing together the way perhaps it was initially conceived it would be put together.

“The one thing I’ve learnt is that, the more successful businesses I acquired, and not necessarily just in IT, are businesses which have been part of a substantial organisation, and for whatever reason they don’t fit any more. The business that is the mom and pop business, or has been the brainchild of somebody who, they’ve loved the business to death and then for some reason it’s either in trouble or they decide they’re going to get out, they are difficult to bring on board, because, there is always that either interference factor or that, ‘Well it never used to be like this when so-and-so ran the business.’ And, they are, in my experience, much more difficult to integrate than the business which has been part of a corporation, it’s done OK, but it doesn’t have a future, so let’s get rid of it. And the people probably come with it in that case.”

Baroness Martha Lane-Fox from lastminute.com used the shares from its IPO in March 2000 to buy other companies:  “Yeah, well we definitely realised that one of the huge benefits to being public was being able to buy companies with speed and of scale. We bought a huge French travel business called Degriftour, and we bought a bunch of smaller travel websites. I think we did about thirteen acquisitions in about four months, five months, which is extremely time-consuming, and we definitely didn’t integrate them effectively enough into our business. But I mean, initially, sorry, we weren’t well planned enough. But we, it gave us scale, and that’s what you need in travel, and it made us much more resilient, so it was a huge benefit to going public.”

 Did they take the acquisitions into the lastminute.com  brand or keep the old brand?  “We did both. So Holiday Autos, car rental site we bought, had its own brand. Degriftour had its own brand for a bit, then became lastminute.com. So we just, we picked a strategy for each of the ones we bought, but again, we didn’t do it as well as I think we could have done, or as well as we probably would do it now, being older and wiser and uglier.

 [“We could have] Just planned, I mean integration is a whole process in itself and I think it, I think we just were moving too fast, really.

 “I can’t really remember the volume [of people coming to be bought] but it was dramatic, it was kind of twenty-seven different companies, I think at one point, we had on our books, all over the place. Well, they wanted our paper. We didn’t give them cash. So they wanted part of the stock price and I think a lot of the companies, post dot.com boom, they didn’t have any other opportunity for exit, really, so we were able to become a hub for all those travel businesses.”

So not all acquisitions are failures, some are a great success.  Thus Roger Graham, OBE, told the archive about the history of BIS Banking Systems.  “My colleague, Ronnie Yearsley, had called on Samuel Montagu, the investment merchant bank; they had a business which was involved in software, and they really wanted to dispose of their interest in it. So, we agreed that we would buy it, and negotiated with Kingsley-Smith, the individual who had founded the business, and eventually agreed that we should purchase it. They had some very capable people who were getting more and more experience in the banking arena…

“After a very few months of looking at all the various things they did, we decided we would focus on international banking. International banking had become a very interesting, growing business. Prior to the early Seventies exchange rates were fixed, but went floating at about that time, so that the merchant banks had a role – not the merchant banks, sorry, the conventional commercial banks, had a role in conducting transactions on behalf of investors, major corporations, all the people who need foreign currency, and doing that all over the world. And so the big banks, which had never operated outside their own country, many of them, decided they needed operations in many locations. And a typical number was about fourteen locations. So we set up, having started the business we started to develop software.

“Our first client was ANZ Bank, funnily enough, a British bank with an Australian name, with operations principally in Australia and New Zealand, but we actually put the first piece of software into America, running on a small IBM computer, a System/32. And, this, you will understand, was not like retail banking. They would have, in America, about six or eight people, that’s all, and they were there simply to use computers, to facilitate the deals, the processing of the deals, and the payment of the deals, the completion of the deals, in foreign exchange. Now, after we set that up, we then started getting some really big beasts of clients, of which Chemical Bank was the most important, because they entered into an agreement for us to materially advance the software product, which we began to call MIDAS, Modular International Dealing and Accounting System. So it did stand for something real as well as gold. And, we entered into a contract which went for some two to three years to develop a system for them which we then took and sold to many others. We opened branches in fourteen locations all over the world, branches where we had our own staff, and over the next ten years we installed our software in 700 bank locations. There are about, or there were about, and I’m talking 20 years ago, about 2,000 international bank locations, focus on the word international, two words, international bank. That changed, because a lot of those banks now have moved into retail banking as well. And we started, before we sold the business finally, to do some retail banking work, because that came with the business. If you are an Australian coming to work in London you wanted one house to deal both with your foreign exchange, your commercial loans, and some retail banking as well.”

Mergers were at the heart of the formation of ICL, the UK national champion formed in 1968 until its rebranding by its new owner Fujitsu in 2002.  In its 34 years it survived with frequent blood infusions of tax-payer’s money holding the ring against IBM and others: quite a feat.  See https://archivesit.org.uk/contributions/icl/.  It absorbed the computer interests of English Electric, Leo and Marconi, among others.  As Campbell-Kelly says of the merger: “Perhaps the most striking feature of the computer merger [forming ICL] was the very small amount of money the government put in, in relation to the rationalisation it achieved.  In fact, although the Treasury may have rubbed its hands over its financial prudence, its mean mindedness meant that ICL was financial hobbled from the day it began operations.”   ICL a business and technical history Oxford 1989.  That and the heavy task of integrating such a diverse range of products and cultures make it surprising it lasted so long.  The moral of that story is back such a venture with enough finance.

As for the morals of the five stories from our archive contributors they could be this.  From Michael Earl there comes the issues of IT dependence and the infrastructures of the merger or acquired operations.  Again a surprise that ICL lasted so long.  From Martha Lane-Fox comes the need to focus on integration.  By all means use the share value of an IPO to buy up others, but make sure they fit.  This is also the message of Sir Peter Rigby: buy to expand customer bases and geographies. Roger Graham’s experience is the same: acquire to get into a new market: software products for  international trading banks.  As for Victor Basta’s   experience it shows us you have to juggle cultures, prices, timing and a lot else to navigate the rocky road of M&A in the IT industry.