A Smarter Way to Merge

Steve Hamm

This explosion of mega-mergers in the telecom, insurance, and consumer products industries is exciting, but who knows if any of them will really pay off. In contrast, check out IBM. It has grown into a $96 billion behemoth without a single huge acquisition—ever. Instead, it grows organically and by making more a dozen smaller acquisitions each year, mostly in software and services. It’s a smart strategy that’s delivering ever-richening profits and a host of new market opportunities. Meanwhile, rival Hewlett-Packard is suffering the consequences of its ill-considered $19 billion merger with Compaq.

IBM’s software group is the company’s most aggressive acquirer—with 40 buys in the past 10 years and 20 in the last four years. The group seems to have this down to a science. It wasn’t always this way. When IBM bought Lotus for $3.5 billion in 1995 and Tivoli for $743 million in 1996, it at first kept them independent—hoping to foster the entrepreneurial zeal of these fast-growing outfits. The results weren’t up to snuff, and IBM gradually integrated them with its existing operations. So in 1999, the new head of software, Steve Mills, shifted to a new strategy—rapid integration. "We blend them in as quickly as possible—often on the day we close," says Mills.

IBM analyzes the heck out of potential deals before taking the plunge. It looks for a certain kind of fit: 1) Complimentary products that blend into the IBM portfolio (ThinkDynamics, the datacenter automation company) 2) Consolidation of mature market segments (Candle, the mainframe software maker) 3) Market leaders in important niches (Rational, the software tool leader) and 4) Bold market entry (Lotus, maker of Notes collaboration software). The idea is to push the new products and technologies through IBM’s huge sales and distribution network—accelerating sales.

Since ’99, Mills has been using merger integration teams headed often by a high-ranking executive. They spend six months to a year planning and executing the integration of the target company into IBM. The team assigns a "buddy" within IBM for each employee in the acquired company—sort of a "personal cultural assistant," says Mills. The teams also focus a lot on making the newcomers feel like they’re a valuable part of IBM, rather than potential cast-offs. Contrast that with Oracle’s takeover of PeopleSoft. "We think you can have the best of both worlds. You can gain the leverage of combining the companies and at the same time you can get the energy and growth of having it separate without actually keeping it separate," says Mills.

Cisco has long had a similar strategy of buying smaller companies to fill out its portfolio or extendinto new markets. But it often seemed to overpay—especially in the go-go 1990s. IBM hasn’t made that mistake. Look at its $3.5 billion acquisition of PriceWaterhouseCoopers Consulting a couple of years ago after an $18 million acquisition by HP had earlier fallen through. PWCC has turned into a key asset for IBM as it drives to become ever more service oriented. Just goes to show: mergers work, but only if you’re really smart about them.