Weak Companies, Strong Mergers?

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.