Mergers and acquisitions, Internet-style
The Internet has fundamentally changed the way companies, employees, and investors consider M&A.
When I first began covering companies, five years ago, M&A was viewed very differently. If a company decided to merge one assumed that it had pretty much failed--its business had not come together as well as it should have, and as a last resort, being merged into a company or acquiring another firm was the only hope.
On the employee front, M&A was viewed, for the large part, as management's defection to the other side. As a whole, employees viewed mergers as a terrible sellout by the management team and an action that was beneficial only to management but not to them. In fact, I think the feeling was that as soon as the M&A was completed it was assumed that all the good employees would leave.
Thus, very few companies were able to engender a post-merger culture in which the acquired employees felt like helping the new company succeed. The culture within these merged entities was mercenary, where employees remained long enough to hit the paycheck or the vesting point they were looking for and then leave.
Finally, on the Wall Street side, aside from Computer Associates, I can't think of any company whose stock was afterward expected to appreciate. Wall Street believed that every merger implied the following three points: (1) that both the business models of both the acquiring company and the acquired company were not working; (2) that it would take a minimum of three quarters before the companies had been integrated and until that point the companies had to be significantly discounted from the pre-merger valuations; and (3) that the best employees would be leaving immediately.
Clearly the world of the Internet has fundamentally changed the way companies, employees, and investors think about M&A. Indeed, I believe that modern M&A is a direct reflection of the way the Internet operates. Similar to the networked world of the Net, where partners or competitors are one click away, in the physical world M&A replicates this model in that strategic agreements are the backbone of business models.
I have often said that strategic partnerships are critical in determining the opportunity of Internet companies. Whether these partnerships are executed through investments in the company, signed exclusives, or preferred partner agreements (or all of the above), these agreements can make or break a company.
Consider, for example, what the Netscape and Microsoft agreements have provided for VeriSign. Without these early deals, VeriSign would not have been integrated in early versions of browser and server Internet software and would have not reached the level of ubiquity that the company enjoys today. Or take the role the USA Network agreement played for CNET early on: Had it not been for this agreement, CNET would not have been able to drive significant amount of traffic and mindshare to its network. (CNET: The Computer Network is the publisher of News.com.)
In today's Internet world, M&A has become a part of the process rather than exception. Companies continually evaluate whether they should buy or be bought. Investors now build the M&A track of companies into the due diligence process of the companies they invest in: "Is this management team strong enough to be an acquirer or should I view them as target companies?"; "Is the company standalone or will it be bought for a premium?", and so on.
Perhaps the most interesting change has occurred at the employee level. Employees are now drivers of numerous acquisition discussions. While employees used to view the change that occurred with an acquisition as an indicator that they should prepare themselves to leave their company, now they view M&A as an essential element of their future: "If the company does not have an acquisition strategy then perhaps I should reconsider whether I should work here." Employees, I believe, are now excited about the prospects of acquisition or merger.
Obviously, management has also learned a great deal about how to continue to incent employees post-merger. But clearly it's working. Judging from recent mergers, it certainly does not seem as though the best employees are being lost as a result of the AOL-Netscape or @Home/Excite agreements.
So what should we expect in the future? I think you are going to be seeing the same degree of M&A activity for a while to come. The nature of the Internet lends itself to regrouping, consolidating, chasing new markets in new ways. We'll have to see how these mergers play out in the longer term, but for the moment, it would seem that companies, investors, and employees have all significantly shifted the way we look at consolidation.
This column is not a recommendation to buy or sell stocks or to solicit transactions. At time of publicaton, Hambrect & Quist LLC may be a market maker and/or have investment positions in the companies mentioned in this column. It may also have been an underwriter for these companies within the last three years.