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Contrasting Dell and HP (companies doing plenty of mergers) you’ll see a pattern, particularly if you got a look at the internal results.
One of my jobs at IBM was to do clean-up after mergers and my peers and I now believe that integration mergers carry an 80% failure rate. This is in contrast to Dell’s recent mergers, which have all been successful going back to Alienware. This is because Dell generally doesn’t do integration mergers they – like EMC has successfully done with RSA and VMware – do wholly owned subsidiaries, which have a vastly higher success rate.
Palm, and Voodoo PC, two of HP’s more recent mergers, failed largely because of the merger method that was chosen. Rahul Sood, who ran Voodoo PC, has some interesting comments about what is going on, and should go on, at HP that are worth reading. But if you read between the lines, from day one that merger failed. The cultural differences alone killed it.
Let’s talk about integration mergers and the fact they are company killers.
Successful Companies are Fragile Things
One of the things I will always remember about the Sam Palmisano 100 Year IBM anniversary speech a few weeks back is how few companies last even a decade. The failure rate of new companies is astounding, the odds against success overwhelming. This means successful companies are actually very fragile and unique.
Much like you wouldn’t take a masterpiece painting, buy it, and then decide to turn the Mona Lisa into a contemporary picture because it would destroy its value, we shouldn’t be slamming these fragile entities into other companies and expect they will survive. So it should be no surprise that most don’t.
With sick companies it is even more difficult because you may actually infect the parent company with whatever is being done wrong to cripple the purchased company.
If the problem is a bad sales force, well you now own it. Practices and people may spread to yours. If it is dishonest executives they are now your executives and fall within your policy guidelines. If it is poor quality product they become your lines, lowering the perception of quality for the entire company.
In short, much like you wouldn’t do a major operation on a person who is already beyond repair, you shouldn’t even think about an integration merger until the problem with the purchased company are understood and largely addressed. It will need that extra strength to survive the effort.
In addition, you’ll likely need the intimate knowledge about what does and doesn’t work in the acquired firm to do the integration part well.
Wholly Owned Subsidiaries
With the wholly owned subsidiary there is minimal impact initially on the purchased firm. You can take your time learning what works and what doesn’t.
Like Dell did with Alienware, that means you can apply individually processes or efficiencies from the parent, observe the result, and make timely corrections if things aren’t going well. If there is a problem, as EMC had with VMware, you can surgically address it (they replaced the CEO) and the firm gets better.
The cost of the change, both in terms of cost and in terms of collateral damage, is minimized. Going back to Dell, virtually all their recent acquisitions are now more valuable than when Dell bought them, which is clearly a vastly different outcome than HP just had with Palm.
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.
The final advantage is it allows you to develop an internal management consultancy, which can be source of competence inside your own firm. Often firms just don’t take the time to be introspective. If you are overseeing a firm as an investor rather than a line manager, your perspective tends to be broader. It forces you to focus more on why things are done rather than the historical how. Both EMC and Dell are examples of the benefits of this as both have strengthened subtly after moving to this method of acquisition.
Often all the acquiring company wants is a technology or component of the company being acquired. In a recent acquisition BMC showcased that you could do that with far less risk. In their case they just bought the IP they wanted and then interviewed and hired the key people from the project. There was no assumption of debt and no cultural issues because the small number of employees hired had no material impact on the existing culture.
I’ve been part of a lot of companies destroyed by integration mergers. 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.
You’ll note that HP’s latest acquisition, Autonomy, appears to be following the right path (subsidiary not integration) suggesting their new executive team got this memo. HP will discover that Autonomy’s internal systems are crap but they can use their services unit and technology to fix that. Autonomy shouldn’t follow Palm’s path as a result.
It looks like HP may have learned their lesson with Palm. Learning from them would be a vastly cheaper lesson than what we more typically do: repeat the mistake.