Weak Companies, Strong Mergers?

Untangling the Web

"How are we going to make this merger work?"

That's a stressful question even in the best of times. At both companies involved in a merger, just about everyone's job becomes sharply redefined as company missions and corporate cultures change. Cherished goals perish entirely. And every public statement is scrutinized by employees and customers for hidden meanings.

Now take all of those challenges and stir them into the current tumult of the Internet economy. Young companies are in the midst of wrenching reappraisals of their prospects: They know that available cash is burning off at a distressing rate and that the chances of going public with a splash have dwindled to almost nothing. In many crowded markets, Net-based startups face a brutal imperative: Combine or die. "Everywhere you look, 20 or more companies got funded when there really should be only 2 to 4," says Brion Applegate, managing general partner of Spectrum Equity Investors, located in Menlo Park, California. "There's no segment I can think of where there shouldn't be some kind of roll-up or consolidation."

Even when an Internet CEO can't see the arguments in favor of a merger, venture capitalists, other big shareholders, and even customers are more and more likely to press the case for combining resources. None of them want to watch as a host of minor contenders limp along, unable to create anything big or lasting. It makes far more sense, they contend, to create one or two survivors with enough cash, enough talent, and enough customers to have a decent chance of success.

But signing a deal to join forces is only the beginning. The crucial next step requires knowing how to merge fast and well. In the Internet economy, that means more than changing a logo or reconciling two chief executives' egos to the fact that they can't both be boss. A successful merger requires an unflinching commitment to what the new strategy will be, along with a focus on making sure that vital but fragile assets -- customer lists, engineering-talent pools, and so on -- don't get trampled by the deal.

"It's almost always a mistake to do a merger of equals,'' says Charles Conn, 39, chairman of Ticketmaster Online-Citysearch. "You need a dominant culture that's going to survive the merger. If you try to split everything down the middle, you'll never make the hard decisions that you need to make.''

Over the past year and a half, Conn has become an expert of sorts on how to do Internet mergers -- and on how not to do them. His company, based in Pasadena, California, has made five acquisitions over that period, expanding its online urban-guide business to include Net-based ticket-sales and dating services. Last fall, it announced plans for yet another deal, one that links the company with the offline Ticketmaster business and enables it to sell tickets in whatever form consumers want.

Like most merger coaches, Conn focuses on the compatibility of the two companies' cultures. But when he talks about corporate culture, he doesn't emphasize dress codes, office decor, or party habits. Rather, he zeroes in on the basic ways that decisions get made inside each company -- and then figures out how to get those approaches in harmony. "We're comfortable making decisions when we know 80% of what we need to know -- even if that means making a few mistakes,'' he says. "There are other cultures where people don't act until they know 95% of what they need to know. That's a safer approach, and it's probably right for a company like General Electric. But in our industry, you need to lean toward speed.''

If the decision-making cultures of two companies are wildly incompatible, there may not be much hope of their doing a productive deal. More often, though, there's at least the possibility of rallying most people around a single approach. The key issue: Do the most talented people from each company buy into the new vision, and do the merger masterminds at each company recognize who those people are?

"Sorting out talent is always tougher than you think,'' Conn says. "I've learned the hard way that the most articulate people aren't always the best performers. That's especially true on the technical side. Sometimes the quieter people -- the ones who aren't self-promoters -- are the ones you really want to keep. There's no substitute for spending a lot of time talking about substantive issues with people at all levels of an organization.''

Bringing together the business assets of two Internet companies requires an equally delicate touch. "In our world, you aren't buying forests or oil fields," Conn says. "It's all about brands and consumer relationships. You can't make any assumptions about appreciating assets. Everything is a depreciating asset if it isn't handled well."

Each time it has made an acquisition, Ticketmaster Online-Citysearch has worked hard to integrate customer lists as smoothly as possible. One key example involved the acquisition of two online dating services: Match.com and One & Only. Both had big user bases, but both had shown a limited ability to bring in revenue. In order to make those deals thrive, Ticketmaster Online - Citysearch needed to extend its own (much wider) range of offerings to users of the dating services. That kind of work can be grueling. But it's essential if a new, combined company is going to achieve the full benefits of a merger.

For selling companies, the decision to seek out a merger partner is bittersweet at best. The intense pounding of Internet stock prices throughout 2000 translates into big markdowns in deal prices. And if selling shareholders end up with less than 30% of the stock in the combined company, odds are that their business will be absorbed so fully that after a few years, it will be hard to spot its legacy in any form.

But that's reality. "Venture capitalists are not providing a second round of funding for a lot of companies,'' observes Brad Koenig, 42, head of Goldman Sachs's West Coast high-technology group. "The vast majority of private companies that can't go public are going to liquidate or get forced into mergers of necessity. It's a buyer's market.''

Goldman, meanwhile, has kept busy as an Internet matchmaker. Last summer, it helped put together the Webvan-HomeGrocer.com combination, in which two unprofitable online grocers tried to ward off disaster by merging instead of fighting nationwide for market share. And in October, Goldman advised on the $2 billion sale of Cobalt Networks Inc. to Sun Microsystems -- a deal that gave Cobalt a chance to have its Web-hosting server appliances marketed by Sun's much larger global sales force.

When Goldman advises sellers, it works to keep sale negotiations quiet and fast-moving, so that companies don't linger on the block too long and therefore end up looking shopworn. But ultimately, says Koenig, any attempt to fetch a better price depends on one thing: "You need to let the buyer know that you have a second option -- besides a sale. That's the best way to impose some discipline on valuation.''

In some cases, a startup's rescuer turns out to be the offshoot of a big company that is sweeping up many small players. In recent months, Accenture (formerly Andersen Consulting) has developed just such a strategy. Its venture-capital arm, Accenture Technology Ventures, has been considering a roll-up of what its partners call "e-marketing firms'' -- companies that specialize in everything from Web design to online branding.

"There are lots of interesting small players that are running into hard times and that aren't likely to get a big valuation at this point,'' says Joel Friedman, 53, an Accenture partner. "What they're doing is strategic to our consulting practice, and it involves skills that we aren't likely to create in-house. If they become part of something bigger that we control, they can get access to some much bigger clients and develop a more comprehensive relationship with those clients.''

Such a roll-up strategy will work only if Accenture can find topflight companies to buy -- and only if it can establish a culture that satisfies the key employees at those companies. "Ideally, we'd like to keep a wide range of creative talent and still bring in some discipline,'' Friedman says. "If we treat companies as totally autonomous businesses, then there are no synergies. If we push them together badly, then we lose people. We're dealing with professional-services firms, so the most important assets are ambulatory -- and those assets will get up and walk out the door if we don't do this right.''

George Anders (ganders@fastcompany.com), a Fast Company senior editor, is based in Silicon Valley.

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