The Trouble With Mergers

Scope Vs. Size

As you evaluate whether your strategic tech vendors are making the right acquisitions for the right reasons, consider the vision and circumstances of the deals. As a rule of thumb, "scope" acquisitions--moves that enhance or extend a vendor's product portfolio--succeed more often than those undertaken to increase size and consolidate costs.

Take scope specialists Cisco Systems, Microsoft and EMC, market leaders whose numerous acquisitions over the past decade launched them into new businesses and added complementary expertise. Router vendor Cisco, for instance, used scores of acquisitions to expand into switching, voice over IP, wireless, security and storage. Desktop software vendor Microsoft bought Great Plains Software and Navision to move up into enterprise applications, and it has been snapping up small security concerns of late to shore up its desktop products. Storage hardware vendor EMC realized several years ago that its big boxes were becoming commodities, so it bought Legato Systems and Documentum to evolve into system- and content-management software.

The jury is still out on many of those acquisitions. When big companies assimilate technology pioneers, they often extinguish their innovative spark. The vision behind larger scope mergers often fails to develop. Compaq-Tandem, for instance, never did bring OLTP to the desktop, and AOL Time Warner married the Internet to premier content but never created much synergy. Companies can wander too far outside their core expertise, one reason Novell's acquisition of WordPerfect never had a chance but its SuSE purchase looks more promising.

At least those companies made acquisitions for bold, strategic reasons, not to pad their income statements, clean up their balance sheets or chase the market leaders. Outside tech, "bold" and "strategic" hardly describe the Kmart-Sears merger. Kmart, which covets Sears' aging brand name and real estate assets, figures the two companies can realize $300 million in savings by combining their IT spending and supply chains and by aggregating their purchasing power. But it's hardly the dynamic duo needed to take on Wal-Mart, whose single culture and sense of purpose is one of its main strengths. (For a parallel in the auto industry, think DaimlerChrysler taking on Toyota.)Likewise, tech megamergers such as HP-Compaq and Oracle-PeopleSoft don't inspire. The organically grown Dell and SAP continue to extend their market leads as their cross-pollinated challengers do their layoffs, restructure their operations, blend their cultures and rationalize their product lines. It's understandable why HP and Oracle would make these acquisitions; they're sound enough business maneuvers. Just don't be surprised when they fail to deliver much value.

Rob Preston is editor in chief of Network Computing. Write to him at [email protected].