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.

Watch for fundamentally different views that may not show up during the first waltz. For instance, start-ups may have very different presumptions about adoption rates of their respective products or services. There may also be very different views about how to market and sell. Also, be sure to get early agreement on the underlying assumptions of a joint strategy.

Finally, avoid the fierce religious wars that often arise over competing technologies. If two companies with different technology platforms (like SAP and Oracle) come together, apply rational analysis and decision-making. If two companies that have built their own technology platforms come together, the battle can worsen. No one wants to give up a personal investment of work and energy.

The truth is that one technology will usually outperform the other; it will offer a better platform on which to get to market faster, require less of an investment or cost less to maintain.

Making the right decisions about which technology to use is critical to success, especially if expenditures are at issue.

Most small technology companies have great ideas. They just may not have the capital or the business form to make them work. But if companies follow these rules, a merger may offer a second chance.

Underestimating Acquisitions

In a survey of 125 companies worldwide that have completed acquisitions in the past two years, PricewaterhouseCoopers found that three out of four reported problems with integrating IT, which caused delays and missed opportunities. Nearly 80% said that if they had moved faster on their IT integration, it would have gone smoother, according to the New York-based consulting company's online publication, re: Business.

"Typically, companies underestimate the amount of effort required to integrate systems," says Kurt Frers, national leader of transactions services at PricewaterhouseCoopers in Toronto.

Also, for the first time in the three years the survey has been conducted, acquiring management and technical talent was one of the top five reasons for approving an acquisition -- 47% this year vs. 33% last year.

Successful integration

A successful merger in any industry 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?

Advice on these issues

• Don't fall into the trap of accommodation, like choosing one technology, person or facility from each side.
• Don't be lulled into believing that the sole objective of a merger is to gain market share or economies of scale.
• Don't get into a holy war about whose technology architecture is superior.

• If this is your first merger, don't assume that the CIO who brilliantly ran a dependable IT operation is the one to handle either the transition or the merged entity.

Who's to stay?

The rule of thumb for a merger is to end up with 70% of the combined staffs, according to Doug LaBoda, vice president of information systems and CIO of the claims services organization at Travelers Property Casualty Corp. in Hartford, Conn.