% fortune -ae paul murphy

Why IT mergers fail

Last week HP announced a plan to layoff about 24,600 people, mostly from among the 137,000 employees acquired with their $14 billion dollar EDS acquisition.

That may sound like only about 18%, but in fact EDS had about 47,000 U.S. employees and because that's where most of the layoffs are going to happen the real cull is closer to 50%.

Although Novell probably has the worst record in our industry of destroying merger partners - from Cambridge Partners to Platespin what they touch is soon gone or, like SuSe, demoted from leading edge to trailing edge - the general trend in IT suggests that larger mergers and acquisitions other than those driven by the technology developers generally precede financial and market losses.

When HP acquired Compaq, HP disappeared; When IBM acquired Monday (aka PriceWaterhouseCoopers Consulting) four billion dollars and roughly 80% of PWCC's 30,000 people disappeared; when Sun's acquisition stripped StorageTek of its faux IBM label, four billion dollars in shareholder equity disappeared and its customers threw the corporate remnants under the bus.

And the current layoffs announcement from HP? The start of that process for the people who work at EDS - the squeal of brakes you hear just before two garbage trucks collide.

But why?

It seems to me that there are three critical sets of reasons these things fail:

1. M&A work is inherently exciting and the free flow of money and flattery can become so addictive that senior people in companies with more cash than ideas often volunteer themselves for the role of sucker - and the secrecy with which the process is executed both adds to the allure and excludes people who might offer contrary counsel from a process that just naturally leads to one bad decision after another.

2. the people who buy and sell the strategic visions behind most of these mergers usually don't know much about the technologies, the players, and the customer needs supporting the two merger principals. Thus the people at IBM who decided to buy companies like Rolm, PWCC, Filenet, and Cognos didn't have the first clue that all of these companies supported business models and client bases orthogonal to their own - just as no one in on the decisions at Sun understood how different Cobalt was or that StorageTek's market access depended on their customer's perception of them as an acceptable divergence from buying all blue.

3. there's a thousand cuts effect that kicks in when big organizations merge. Joe's loyalties (as a customer or an employee) to the company being acquired simply doesn't extend to the acquirer; middle managers at the acquiring company see their new colleagues as both competitors and usurpers; middle managers at the acquired company move on - and so the rumor mill grinds, frictions build, and whatever strategic potential the merger may have had gets dissipated in a cloud of mutual antagonisms and minor resentments.

In the end it comes down, I think, to a sad reality: big acquisitions are like big out sourcing deals: characteristic of executives who don't know how to run what they've got and who will double down, as the glow of money, wine, flattery, and hot press releases surrounding the takeover battle fades away, on strategies they should have dropped years earlier.

HP, for example, appears to be betting on the nineties - planning, to turn American EDS survivors into sales people for new hires overseas while laying off their own future customers and implicitly betting against the dollar, against an American economic recovery, and ultimately against their own shareholders.