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High-tech megamergers: Still make sense?

If most big tech combinations fail to deliver, author Steve W. Martin asks, why does management think they'll succeed?

    Fueled by Oracle's acquisition of Siebel Systems, Silicon Valley once again asks itself if megamergers are good for the industry.

    The answer to this philosophical question was inadvertently given by former president Jimmy Carter when he spoke about the nature of war. His comment could also be used to describe the essence of these acquisitions: "War may sometimes be a necessary evil, but no matter how necessary, it is always evil, never good."

    It's common knowledge that most high-tech acquisitions fail to live up to their promises. However, most technology megamergers are made at the wrong time for the wrong reasons. In fact, very few actually create any real value; they actually increase the potential for company failure. In the end, each of these mergers can be labeled as either a destroyer, a loser or a winner.

    The reality is that while I can name 10 less-than-successful mergers off the top of my head, I cannot name a single stunning success.

    Informix Software was flying high in 1996, ending the year at $1 billion in revenue. Its stock had been named by The Wall Street Journal as the top five-year performer, and Phil White, chairman and CEO, received the Nasdaq's Legend in Leadership award. Then the company paid $400 million for Illustra, a "hot" technology company. Informix had high expectations that this acquisition would propel the company past Oracle. The reality of the acquisition would be quite different. It would ignite an incredible series of events that would destroy the company and ultimately land Phil White in jail.

    Hewlett-Packard's acquisition of Compaq Computer was the most controversial merger in Silicon Valley history. It was also a loser that cost HP CEO Carly Fiorina her job. This big bet failed to come close to attaining what Fiorina and HP's board promised. "At bottom," Fortune magazine concluded, "they made a huge error in asserting that the merger of two losing computer operations would produce a financially fit model."

    It takes the passage of time to determine whether a merger can be labeled a true winner. So let's examine the outcomes of some of the largest software mergers.

    In 1994, Sybase purchased Powersoft. The $943 million software merger was the second-largest ever. However, the Powersoft merger interfered with Sybase's focus, and the company floundered financially. A Gartner analyst said at the time: "Sybase has lost focus as a database player. Their major issue is choosing an identity as a database or tools provider."

    In 2003, PeopleSoft paid $1.75 billion for J.D. Edwards. PeopleSoft CEO Craig Conway said of the acquisition, "The powerful combination of PeopleSoft and J.D. Edwards creates the second-largest enterprise applications software company in the world." Now that the dust has settled and PeopleSoft has been acquired by Oracle (Conway was fired in the process), I am sure that many J.D. Edwards customers and employees wish the original acquisition had never occurred.

    The reality is that while I can name 10 less-than-successful mergers off the top of my head, I cannot name a single stunning success. In many mergers, senior management profited while employees suffered layoffs; in others, investors received short-term windfalls while customers experienced long-term hardships. I cannot think of one instance in which investors, customers, employees and senior management all won.

    Only time will tell whether the Oracle-Siebel merger is a destroyer, a loser, or--defying all odds--a winner.