Advice to merger makers

Mergers always look good on paper. Making them work is another story, and the management of information technology is increasingly central to a merger's success. Wall Street is alert to this reality. Look at the high premiums going to the telecommunications megacompanies vs. the relatively low margins accorded the megabanks formed during 1999's rush to amass market share. Both are information-intensive businesses, but the particulars differ considerably. Let's look at each in turn.
Organic growth in the telecommunications industry, driven mainly by cellular technology and the Internet, is almost assured. The reasoning behind the urge to merge is clear: Consolidate and build massive networks and computing capacity. So the Street rewarded the merger of WorldCom and MCI with a considerable stock-price appreciation this year. In the end, the merger of telecom is more a merger of technology infrastructures than of people. The principle risk is that the acquiring company could pay too much for the infrastructure of the acquired.

Putting two banks together is riskier. Three factors govern success or failure: First, the banks' technology operations must be consolidated to produce the cost savings that most mergers are expected to produce. Second, customer service mustn't erode during the transition, or market share will be lost. Third, the newly formed bank must move to the future of electronic banking. I believe that the modest appreciation of the shares of the NationsBank/Bank of America merger reflects the Street's concerns with these risks.

A successful combination in any industry, though, means addressing four IT issues early in the process:

1. Whose strategy will predominate?
2. Whose technology will survive?
3. Whose organization will persevere?
4. Whose leadership will endure?

Here's my advice on these issues.

Don't fall into the trap of accommodation, like choosing one technology, one person and one facility from each side. This approach can make people feel good temporarily, but it often leads to disaster. Given the pace of technological change, it's highly likely that neither company has what the newly formed company needs. That has been my experience with the mergers of many insurance companies and health care providers.

Don't be lulled into believing that the sole objective of a merger is to gain market share or economies of scale. That's just Act 1. Industries like telecommunications and banking mainly involve commodities. Winning will take more than scale and low costs. IT -- especially digital marketplaces -- may eventually provide the answer. So begin working on this immediately.

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