When start-ups merge

Big merger-and-acquisition deals inevitably get attention. Anyone who glances at headlines is familiar with their names: AOL and Time Warner, General Electric and Honeywell, Exxon and Mobil. The whole phenomenon resembles the mating of elephants. To most of us, the participants seem just a little too outsized for reality. Still, they're real.

Economies and efficiencies of scale are what many such deals are based on. Only one corporate staff and headquarters is required. Lots of duplication can be eliminated. That appears to be the motivation that cemented the GE/Honeywell deal.

Observing the mating of smaller companies, especially those that have IT at their core, also offers some interesting lessons. Because there isn't as much fur flying around, there may be more to see.

Many technology start-ups -- including the dot-coms -- have found that it takes a lot longer to reach profitability than they anticipated. These companies' ability to spend cash is astounding -- often millions of dollars per month. And now, money is coming more slowly from capital markets. Many technology start-ups have no option other than to sell or merge.

Increasingly, technology-based start-ups will eye one another. After all, their cultures are often similar: entrepreneurial, hard-driving and passionate. If these companies can come together, good ideas will be saved and new opportunities created. For established companies, this means technology choices will increase and stronger potential business partners will be created.

But merging smaller companies can be challenging. The first rule for success is that the two companies and their people must like each other. That means they must have similar or complementary cultures, an advantage that smaller start-ups often enjoy. It's the only way for two companies to work well together.

But putting two struggling start-ups together also requires a precise approach. Just hoping for the best won't work. Careful scrutiny must be focused on customers; on potentially differing points of view, especially about markets; and on technology itself.

At all costs, the customer base must be preserved. Most start-ups have usually expended a large portion of their resources on whatever customers they have. That's certainly true of most dot-coms. For some, in fact, customers are their biggest asset. Other than its flashy image, the failed Boo.com, just acquired by Fashionmall.com, had mostly customers to offer.

Another rule of a successful merger is to pay as much -- if not more -- attention to taking care of customers as to internal battles, which often deal with such sensitive issues as who stays and who goes or whose name survives.

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