Is Y2K readiness an issue in megamergers?

In the wake of the announcement of the largest merger in Wall Street's history between fuel giants Exxon and Mobil, information technology analysts agree that companies should be addressing Y2K at the negotiating table before they merge. But few believe the so-called millennium bug is ever discussed before business deals are final.

The Y2K bug comes from antiquated hardware and software formats that denote years in two-digit formats, such as "98" for 1998 and "99" for 1999. The glitch will occur in 2000, when computers are either fooled into thinking the year is 1900 or interpret the 2000 as a meaningless "00." The glitch could throw out of whack everything from bank systems to building security procedures, critics warn.

While many companies have taken steps to ensure their own systems are Y2K-compliant, analysts say unexpected problems could crop up when computers systems are combined or linked, as usually happens following a merger.

Nothing short of a megamerger boom has been occurring recently, with deals like Travelers Group and Citicorp, Bell Atlantic and GTE, Netscape Communications and America Online, as well as yesterday's $80 billion deal between Exxon and Mobil setting the pace for unprecedented unions between huge companies.

Corporations that merge and analysts who observe those deals both say increasing competition among major global firms will lead to further consolidation, and a trend toward simplification is driving these megamergers.

As mergers occur and corporations join their infrastructures together just as 1999 approaches, some observers are concerned the Year 2000 issue is not being addressed in meetings between chief executives even as they lay plans to tie their computer systems together in one form or another.

"I suspect it is not on the top of the list as business leaders make these decisions," said Ed Yardeni, chief economist for Deutsche Bank Securities. "Most of these mergers are occurring with the assurance of both sides that they will get the job done."

In fact, both Exxon and Mobil had already begun working on the Year 2000 technology problem a few years ago, and have filed their estimated Y2K project costs and estimated times of completion with the Securities and Exchange Commission (SEC).

But saying you are working on the problem and writing the cost of the work on paper does not mean the issue is receiving attention during merger negotiations. That falls short of what Yardeni and others consider adequate preparation for the problem.

"I think most business managers are running full speed ahead and don't stop [to address] Y2K fears," Yardeni said.

Investment consultant Dennis Grabbow thinks the lack of discussion on the millennium glitch was rooted more in board room tradition than anything else. "Up to a month or two ago, Y2K as an issue was not a factor during talks," he said. "This went along with historical corporate culture. IT people just haven't had a seat at the table."

However, Grabbow, who is the chief executive of Millennium Investment Corporation in Chicago, thinks that new pressures from the SEC to disclose Year 2000 conversion progress and costs is prompting discussion, albeit on a small scale.

"With these SEC disclosures, companies are beginning to [include] what they have done, what they think will happen, and what the ramifications are in writing. These SEC disclosures make it into the contracts for sale. Whether it is causing them to change their minds is another thing."

Giga Information Group analyst Ann Coffou said she started hearing about merger and Y2K concerns in the first half of 1998 when a number of institutions in the financial industry were making acquisitions of other companies. "Companies who are looking to make an acquisition are asking what the status is of the other company's Y2K program. How far along are they?" said Coffou.

Usually when the issue comes up in negotiations, the two companies look at each other's program and decide which one is making more headway. "If one company has a better program in place, they will use that."

Although she wouldn't mention any company names, she did say the issue has been known to make or break a deal. "There have been a number of times where we have been called in to evaluate the status of the company that is being acquired. I've seen people walk away from the table" if the project isn't far enough along, she said.

In big merger deals, risks of possible Y2K computer failures will be the burden of the company making the acquisition, she said. Companies are now taking into account any possible litigation that may ensue due to Y2K failures of the other company's system.

For companies in the merger market, Coffou advises them to look at all the information the other company has about its Y2K program.

"Look at embedded systems, contingency plans, and mission-critical computers. Look at where they are in the process and what have they done about their suppliers on the supply chain. Use their SEC disclosure as a starting point and dig deeper," she advises.