Hi guys, see bold
Andy Kessler: Technology's
Turkey Tie-Ups
By Andy Kessler
Special to TheStreet.com
11/24/98 10:10 AM ET
In the spirit of the AOL (AOL:NYSE)-Netscape
(NSCP:Nasdaq) merger, and the flame it has lit
under Internet stocks (like they really needed a
flame), I ask you: Are technology mergers a recipe
for a successful company and satiated investors,
or an undercooked idea headed for an Alka
Seltzer moment? (Can you tell I am looking forward
to Thanksgiving?)
Despite spending 10-plus years working for
investment banking firms and rooting for mergers
and the fat fees associated with them, I think most
mergers in the technology industry are turkeys.
There may be a promise of tasty returns, but in
reality mergers are just big, dumb, overstuffed,
flightless fowl.
Fortunately, it won't be hard to prove this to you. If I
had a dime for every merger announcement that
falsely promised "synergy," I'd have enough dimes
to finally afford one share of Yahoo!
(YHOO:Nasdaq). I am going to get in trouble for
describing them, but examples of bad mergers
litter the landscape.
We can go all the way back to the
Burroughs-Sperry merger that gave us Unisys
(UIS:NYSE), way back in 1987. The other outfit
IBM (IBM:NYSE) laid waste to is more interesting:
NCR (NCR:NYSE). It actually fought the AT&T
(T:NYSE) merger, and it would have done both
companies a big favor if the protests had led to a
cancellation of the deal. But no such luck -- AT&T
was intent on getting into the non-PC computer
business in a big way just as most computer
companies were trying to figure out how to get out
of it. That bad episode ended only when NCR was
recently spun out.
When National Semiconductor (NSM:NYSE)
wanted to reposition itself as a system-on-a-chip
company, it bought Intel (INTC:Nasdaq)
microprocessor clone-maker Cyrix, maker of the
PC on a single chip. Good theory. But until
National moved the line over to its own chip plants,
Cyrix depended on IBM for a foundry. Little
wonder, then, that Cyrix had a hard time getting
parts from IBM, since Cyrix's biggest customer
was Compaq (CPQ:NYSE), which was competing
with IBM at the low end of the PC business.
Ooops, National is still reeling from the purchase.
The network-equipment business is a huge growth
market, but the consolidation craze has wrecked
more great companies than competition ever
could.
Bay Networks, which combined Synoptics and
Wellfleet, had huge problems integrating the
Boston 128 and Silicon Valley cultures, product
lines and time zones. But obviously, West
Coast-based Ascend (ASND:Nasdaq) wasn't
paying attention, since it bought East Coast
Cascade just as Cascade's ATM switching
business started deteriorating, dragging down the
combined company.
Now, the word on the Street has it that Bay has lost
MCI WorldCom's (WCOM:Nasdaq) huge
frame-relay equipment business to
Ascend/Cascade, thanks in part to Bay's having
been distracted by its merger with Northern
Telecom (NT:NYSE). And speaking of synergy,
WorldCom itself has seen an exodus of top
marketing brains from MCI in another financial
merger that has yet to prove itself. What a tangled
mess.
Or take 3Com (COMS:Nasdaq), which wanted to
be a consumer player but should have stuck with
buying names of football stadiums, because it got
the proverbial candlestick when it bought U.S.
Robotics. The combined pair have been stuck
with an overstuffed consumer channel ever since,
just when they should be flying high.
Hardware mergers are not the only turkeys: The
software industry has plenty to pluck from, too.
Most are based on an attempt to compete with
mighty Microsoft (MSFT:Nasdaq). (I'll get to their
turkeys in a future column.)
Novell (NOVL:Nasdaq) tried to merge with Lotus,
but both stocks dropped 20% the day of the
announcement, and they got the message and
called it off. Instead, Novell bought Word Perfect
and Borland's Quattro Pro spreadsheet to create
a suite to take on Office. It didn't turn out so sweet
and the pieces are now scattered about. After
Microsoft bought Softimage to get into the video
effects business, Silicon Graphics (SGI:NYSE)
bought the next two players, Alias and Wavefront.
These will probably be sold off by new SGI
management, just as Microsoft dumped Softimage
on Avid (AVID:Nasdaq).
To be fair, not all mergers are awful. IBM seems to
be making hay with the Lotus and Tivoli
purchases, but it is hard to tell inside of what has
become a mammoth hardware/software/service
company. The deal may be worth it for the great TV
commercials alone.
To me, there are two types of mergers that make
sense.
1.Really smart guys just buy the customers and
recurring maintenance revenue of a failed
company and then detonate a neutron bomb.
Computer Associates (CA:NYSE) is
famous for this and doesn't kid itself about
synergy. Network Associates
(NTWK:Nasdaq) is another company that
consciously changed its name from McAfee
to ape Computer Associates in both name
and business model.
2.The other successful approach is taken by
firms that realized that they were paying not
for ongoing businesses, but for talent,
technology and maybe products, in that
order. Cisco (CSCO:Nasdaq) is famous for
this. Outside of Crescendo's ethernet
switches, not too many of its mergers have
subsequently turned into major successful
product lines. Unfortunately, this probably
includes Stratacom, a somewhat dwindling
asset that cost Cisco $4 billion. For the most
part, Cisco buys engineering teams
specializing in technology that Cisco needs
in the future. Intel's acquisitions, such as
graphics controllers and remote access, are
far enough away from microprocessors to
play a supporting role.
As to Compaq-DEC, we'll see. And to AT&T-TCI
(TCOMA:Nasdaq), good luck. If you can think of a
major acquisition that changed an acquirer for the
better on a long-term basis, let me know.
Editor-in-Chief Dave Kansas will send a TSC hat
(won't you Dave?) to the best merger pointer. If
none are best (in my opinion), I get the hat. I
promise to be fair. |
