Growth Companies

The Morning After

How to prevent a post-acquisition hangover.
Stephen BarrJuly 1, 1997

Mark King remembers vividly the corporate hangover that set in the morning after one big acquisition. In 1988, he was assistant controller of MTech Corp., a data-processing provider to banks, when it was swallowed up by Electronic Data Systems Corp. King was swallowed up, too: demoted by EDS, stripped of most of his staff, denied business cards, and assigned to a cramped cubicle. As King saw it, much of what can go wrong in the aftermath of a deal did go wrong– including EDS’s initial failure to get MTech executives to buy into the combination. Friction increased between the two employee groups, traditional foes. To make things worse, a deteriorating economy caused financial problems at MTech’s largest bank customer, zapping revenues and throwing sand in the gears of the integration process.

“That experience is as fresh in my mind as if it happened yesterday,” says King, who after six months joined more than a dozen MTech defectors who had just started Affiliated Computer Services Inc. Now CFO of Affiliated, a Dallas-based information-technology firm with revenues of $560 million, he helps run a successful–and acquisition-minded–EDS challenger. Indeed, the competition is yet more unexpected fallout for EDS. (A spokesman for EDS notes that “from an historical context,” its objectives in acquiring MTech now “have all been realized,” and that the deal helped support EDS’s “global push into financial services today.”)

The psychic scars that the deal left on King, though, have toughened his ability to shape acquisition plans. “If anything, we might go overboard to avoid surprises and to try not to make disruptive changes,” he says of the 33 purchases Affiliated has made. While he generally likes to complete integration activities swiftly, he once kept accounting operations separate for five years after an acquisition, despite potential savings of $100,000 through consolidation. “We could have saved a half percent on the margin, but it would have been worse if key people who understood that business got ticked off and quit.”

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With acquisitions occurring at such a dizzying pace–the $648 billion total value of them in 1996 was nearly double what it was two years earlier–the breathless media coverage generally offers little analysis of what happens after the ink dries. Still, experts long have argued that most acquisitions fail to create value for shareholders. A recent Mercer Management Consulting study of 300-plus deals of over $500 million found that after three years, for example, only 43 percent of merged companies outperform their peer groups in total shareholder return. Mercer’s data show that in acquisitions of companies near the buyer’s size, the deal falls short three times out of four. The study’s best news: there were at least more above-average deals in the 1990s (52 percent) than in the 1980s (37 percent).

Why do so many dream deals disappoint or, worse, deteriorate into financial nightmares? “The key is not flawed strategy or overpaying,” says Susan E. Hershman, co-author of the Mercer report. “Most major deals are won or lost after they’re done”–in an integration process that may get short shrift compared with the acquisition itself.


Stanley Hubbard, president of DeltaPath Inc., a management consultancy in Greenville, South Carolina, agrees. “Everybody pays attention to the glory of the deal. People get swept away by the adrenaline high of negotiations and lavish signing dinners,” says Hubbard, a veteran of nine acquisitions while working for a financial-services conglomerate. “But if I were a CFO, I’d be gripped by cold, raw fear. Instead of drinking champagne, I’d brew a pot of black coffee.”

A hit of java certainly was called for after Adobe Systems Inc. acquired Frame Technology Inc., in October 1995. Like most troubled deals, that one didn’t erupt in a blaze of embarrassment and a fire sale of assets–as Quaker Oats Co.’s disastrous experience with Snapple did this year. Rather, the problems at San Jose, California-based Adobe escalated gradually, hobbling operations, running up costs, eating up returns, and destroying shareholder value.

Much of why the corporate wedding led to an unpleasant honeymoon could be laid to unrealistic expectations during courtship. Adobe was on a hot streak when it decided to acquire Frame. Less than a year before, it had bought Aldus Corp., in a $440 million deal hailed as an unqualified success, largely because the two sales and distribution groups had been so effectively merged. In buying Frame, though, Adobe didn’t pay enough attention to the relative complexity of the product-selling effort required for Frame’s more esoteric software products, says one executive involved with the deal. (Adobe’s boxed publishing-industry products are shipped to retailers and sold on the shelves.) And what sales-related questions did arise were scuttled by senior Adobe executives bent on seeing the deal go through anyway. That led to a critical postpurchase mistake: firing most of Frame’s direct-sales force, after which Adobe staffers couldn’t pick up the slack.

Another insider familiar with the Frame deal says that Adobe managers were blinded by their belief that they could replicate their success with Aldus–even as the Adobe organization was still “exhausted” from Aldus’s integration. Adobe’s due diligence wasn’t supplemented by preacquisition integration studies of back- office finance systems, customer service, or other Frame systems. “They underestimated the magnitude of the task,” the insider says. Finally, Adobe learned too late that Frame had drained its backlog to enhance its attractiveness as an acquisition candidate. The surprise of a revenue decline forced Adobe into a $31.5 million restructuring charge and a large quarterly loss. Within months, Adobe stock had lost half its value, and–while the company has turned strongly profitable again– Adobe’s stock price is still roughly 30 percent lower than it was before it acquired Frame. (Adobe CFO Jack Bell declined to comment on the problems with Frame.)


M&Aexperts insist that many of the land mines Adobe touched off can be defused by a smarter acquisition approach. While each soured deal has its unique set of causes, postmortems reveal some recurring themes. The acquirer fails to resolve operational conflicts, such as differing sales or product-distribution styles, or it doesn’t respond sufficiently to customer or employee resistance to the combination. Sometimes, the acquiring management is simply too inflexible and is unable to address the unexpected problems that inevitably crop up. Among other typical trouble spots cited by Mercer: overemphasis on cost-cutting at the expense of revenue-driving initiatives; failure to push for synergies; an integration process dragged out longer than necessary; and, of course, failure to appreciate cultural differences.

Conflicting cultures can create any number of integration challenges, from the seemingly trivial–such as melding varying workplace dress styles and attitudes about long lunches– to bridging the deeper chasms that result from entrepreneurial-versus-rigid management techniques and compensation arrangements.

If culture clashes aren’t recognized, however, morale can suffer badly. Such is the case when, for example, the acquirer insensitively assumes there’s nothing to be learned from the outfit being bought. David Farber, now CFO of Magic Cinemas LLC, recalls that after an office-machine company he co-owned was taken over, the buyer replaced a modern, sophisticated operating style–under which Farber’s finance crew also functioned–with a backward and less-efficient system.

“They paid a lot of money for the right to do what they did,” recalls Farber, “but they took a smooth-functioning, exciting, forward- looking company and said, ‘We don’t care how good you are; we run it our way.’” The result: rampant turnover–more than half of the 100 finance and administration employees left– along with a loss of customers and declining profits.

To Mercer’s litany of acquisition gaffes, add the failure to launch integration preparations early–a process that amounts to inoculating yourself against postmerger trauma. “Postacquisition is always the piece least attended to,” says Myron Beard, an M&A consultant in the Denver office of RHR International Co. “Planning is the exception, not the rule, and a huge number of acquisitions fail because companies don’t plan [as part of] their hunt for the deal.” Like many other consulting firms, RHR now offers predeal planning services to acquirers.

“Staying focused is the most important goal,” adds Bruce Broussard, CFO of Regency Health Services Inc., in Tustin, California. “What can happen once the deal is done is that people lose sight of the objectives. They think the game has been won.” On January 1, when Regency completed the $80 million acquisition of the 10 former Horizon/CMS facilities in California, Broussard’s integration team had already identified who would run the new operations, which employees would lose their jobs, and what their severance packages would be. That allowed for a swift integration that, experts say, in most cases is ideal.

“The quicker you can get in and eliminate the uncertainties, the better off you will be,” says Jeffrey Rich, Affiliated Computer’s president, and a predecessor of Mark King as CFO. “The biggest thing a merger introduces is change–different financial reporting schemes, different policies and practices–and change introduces uncertainty.” Looming mergers create employee fears, and “a lot of unproductive time spent in the hall wondering what will happen.” The main risk, though, belongs to the acquirer, Rich says, and “if you don’t plan what the organization will look like until after the close, you make the risk that much bigger.”


William Montague (pronounced Mon-TAYG) knows the thrill of the chase and the pleasure of the conquest–and professes to find it all kind of boring. In his 25 years with Mark IV Industries Inc., including a stint as CFO, and as its president since March 1995, he’s helped put together dozens of deals that have transformed a $30 million mobile-home manufacturer into a $2.1 billion industrial conglomerate. “There’s a certain amount of excitement and bravado that goes along with being an acquirer, but the real work begins after the deal is done,” Montague says. “That’s the real challenge. It may be more mundane, but it is more rewarding if you do it well.”

Is speed always the best acquisition prescription? No, not if operational requirements suggest a slower course. That’s where the need for flexibility is felt, says John Byrne, who succeeded Montague as CFO of Mark IV, and has worked with him at the company for more than 20 years. “We always have a high level of understanding of what we want to do, but not always a complete plan,” he says, because success is often built on being open to the unexpected. “We do not take a cookie-cutter approach.” Removing duplication in corporate functions and achieving manufacturing and distribution efficiencies are “like motherhood and apple pie” in an acquisition, “but you can’t always assess what needs to be done until you do the postmerger work.”

Mark IV’s largest deal in recent years was its $450 million purchase of Purolator Inc., in 1994. Both Purolator and Mark IV’s Dayco subsidiary sold aftermarket auto products and industrial products to similar customers, which meant that the strongest synergies would be in consolidating sales and distribution. “Leveraging off the common markets was the true juice in the deal,” says Byrne.

While only six months were spent melding redundant corporate functions after the deal closed, Mark IV’s flexible approach led it to a decision to move deliberately on its more critical objectives. It set up planning teams with members from both companies, to address combined sales and distribution needs, and determined that a restructuring of Mark IV into separate automotive and industrial products groups was needed. The sales and marketing organization for the auto group was located at Purolator’s headquarters, in Tulsa.

“We took a methodical look at the strengths of each organization, and we concluded that moving our people to Tulsa would better serve our common aftermarket customers,” says Byrne. The greatest risk to the acquisition, Mark IV felt, was alienating large customers and upsetting the best salespeople.

“Mark IV has done a very good job with their integration of Purolator,” says Lehman Brothers Inc. analyst Harriet Baldwin. “Often acquisitions are measured by how quickly they are done. Mark IV took more time and looked for ways to optimize their sales and distribution networks. They haven’t felt pressured to declare that they’re done.”

After The Deal Comes The “Real Work”

At this conglomerate, the emphasis is on flexibility.Mark King’s bitter memories of the EDS acquisition nine years ago (see page 27) don’t keep King from taking bold steps to prune the operations that Affiliated Computer buys. On the day that its biggest deal was announced, on June 21, 1996, for example, the company gave notice to 30 of the approximately 500 employees of target Genix Group Inc. Such action, though, is grounded in premerger research.

The Genix layoffs came only after three months of Affiliated meetings with Genix’s top 20 customers and talking to Genix employees below the senior management ranks to learn the intricacies of their operations. Sellers and their investment bankers tend to paint their companies only in rosy hues, and King has walked away from more than a dozen deals in which he’s been denied the access he wants. “When someone tries to limit who we talk to, that’s when the red flags go up,” he says. “We back off, because we don’t want to set ourselves up for failure.”

But the relationship with the target works both ways. Affiliated presented detailed explanations of its acquisition assumptions and financial plans to the Genix executives who were staying on. The familiarity it established with Genix people helped Affiliated identify the Genix sales manager, Cecil Sexton, for the top sales post at the combined entity, instead of his Affiliated counterpart.

“A large part of what makes an acquisition successful after you make it, is what you do before you make it,” King says. “Fifty percent of success is premerger planning, and 50 percent is carrying out that plan.”

Tip Solomon, a former Genix executive who is now an Affiliated senior vice president, was impressed by the spadework. “Our customers already knew the owner,” he says. “This is a service business. Had that familiarity not been there, there would have been anxiety among customers, and some might have walked away.” As far as Genix’s own employees, Solomon adds, Affiliated was “up front in telling us what they wanted from us as part of [the company], and they incentivized us with stock options to grow the business.” Indeed, he adds, after the acquisition “we hit the ground running, because nothing changed at all in supporting the customer.”

But taking time to do the integration right may be a merger-minded company’s hardest challenge–in part because of the continuing sensitivities of the acquired company’s employees. In the case of Affiliated and Genix, the companies had been competitors, though their core customers were from different regions. Concerns about culture were an important issue for King; right away, Affiliated held a series of employee meetings to answer questions and discuss benefits. To minimize the disruptions, though, King did not immediately begin to integrate systems. Instead, he assigned an Affiliated executive to develop a more detailed plan.

“A lot of CFOs think that moving the acquired company onto their systems is important,” says King. “But it’s not worth doing something that could irritate people and send the message that your way of doing things is better. I’d rather spend 4 hours developing an interface than 400 hours converting Genix to our general ledger system.”

Likewise, Affiliated waited almost six months before cutting Genix perks like country-club memberships and personal cars. By that time, Genix employees were more accustomed to Affiliated’s style. Then Affiliated made changes person by person, taking care to increase an employee’s salary to cover the cost of the perks. “We don’t give those kinds of perks, but if [people] are made whole, that’s what they care about. The theme is not to be penny wise and pound foolish,” says King.

Quicker changes for Affiliated included consolidating banking relationships and increasing receivables collection, which it did simply by stressing to Genix’s finance group the importance of driving down their days outstanding. Then, four task forces studied operational synergies in areas like vendor relations and telecommunications costs. One task force also examined how to consolidate Affiliated’s six data centers.

“Taking advantage of the SG&A synergies is critical when you have scale, but the operational synergies are the heart of the business,” says Bear, Stearns & Co. analyst Jim Kissane. The full benefits of merging the two companies’ outsourcing businesses are still to come, he says. Affiliated’s deliberate approach has allowed it to avoid the biggest risk: customer resistance. “In this acquisition, they’re buying a new customer base, and renewal rates are over 90 percent,” he says. “That’s a very important number.”

Houston-based Prime Service Inc. has pursued an aggressive acquisition strategy for two years, making about five purchases annually. The nation’s second-largest construction- equipment sales and rental company, Prime attributes its acquisition success to a state- of-the-art management information system that allows early, centralized tracking of operations in 122 stores. About two weeks before a deal closes, says CFO Brian Fontana, MIS staffers wire the new stores, input the stores’ equipment inventory, and train the store personnel so that the new stores are using Prime’s system on day one.

“Systems are absolutely essential to creating value,” says Fontana, whose first exposure to executing an acquisition was as a vice president at NationsBank in the 1980s. As part of a transition team, he would spend as long as two weeks at a branch of the acquired bank to answer employee questions and address “the anxiety factor.” Today, he assigns a Prime Service manager to each new rental outlet to provide additional training and make the new employees feel comfortable.

While most skilled acquirers like to act quickly in the integration process–when circumstances allow it–Prime Service puts an unusually high premium on speed. On March 18, Prime announced a $13.3 million purchase that added new outlets in Virginia. By the next day, Fontana was able to pull up revenues for the eight additional rental yards. “It’s exciting to have that information that quickly and monitor how our new stores are performing,” he says.

The celerity reflects extra preparation. “We spend a lot of time and money on the front end to get the operations we want, so we want to make sure we don’t do anything that creates an adverse effect,” says Fontana. Among the other benefits of fast action, according to M&A experts, is that it creates a sense of immediacy that keeps employees focused on the deal. “Most people say ‘move quickly’ because of the time value of money,” observes Kenneth W. Smith, of Mitchell Madison Group, a strategy consulting group based in New York. “I say ‘move quickly’ because of the time value of enthusiasm.”

Soon, Prime Service will get a chance to help speed up and smoothe out the process from the other side of the deal. In recent weeks it has agreed to be acquired by Sweden’s Atlas Copco AB in a $900 million transaction. Among the reasons Atlas paid a premium for Prime Service was its growth strategy; the new owner–itself hungry to build up its U.S. operations–plans to let the new wholly-owned subsidiary keep acquiring when this deal is completed.