Symantec's diet has caused financial indigestion

Acquisition integration problems can by much worse and much more ubiquitous than we know

A reader writes in to ask: "Symantec just reported disappointing results and blamed the Veritas integration as the problem. Is this an isolated event or do these problems happen to everyone in this situation?"

The only time you hear about acquisition integration problems is when a company misses Wall St. expectations (see "Symantec warns of faltering storage sales"). To some degree, it can be a catch all as far as excuses go, but I think that most of the time the issues are much worse and much more ubiquitous than we know.

First, let's look at the basics. One company acquires another company for only a few reasons: they need a product or technology to complete or enhance their offerings into their existing customer base; they buy a company that extends the customer base; or they buy a company as a financial investment designed to diversify their overall portfolio. There are always other motivations (i.e., greed, stupidity, arrogance, nepotism, etc.), but these cover the bulk of the legitimate ones.

The second consideration is whether the acquirer is smaller than the buyer (typically) or about the same size. Sometimes it even happens when the one bought is bigger, but that only happens when something is very, very wrong.

The third consideration is whether to integrate the acquisition, or to leave it alone. You integrate the company you buys when they either have some products or technology you want. Now that you own the technology, you probably want the engineers who create and support it, but you can probably get rid of most of the other folks as they are redundant, thus lowering the real costs of the acquisition. You might pick up some talent at various levels along the way, but to integrate them means you are looking to get rid of redundancies and create economies of scale for the business you now own. If business A buys business B because business B has a great product and US$50 million in sales, business A, which has US$500 million in sales, can probably buy things cheaper, make them cheaper, distribute them cheaper, and so on. This makes business B more profitable and then business A fires the overlapped folks from the overlapped departments to make it even more so.

If you elect to leave it alone, you try to pass on as much of the savings you can letting business B leverage your size with finance, suppliers and distribution, but you tend to keep most of the folks and let the company run as a semi-independent. You get less economies of scale, but you tend to screw it up less if it was ok to begin with.

You can't buy someone almost as big as you and get away with leaving it alone. You have to integrate it or Wall St. will fry you. If one plus one equals two instead of three, then what was the point in the first place? Only giant holding companies can get away with buying smaller operating companies and letting them run on their own. Warren Buffet's Berkshire Hathaway is one such player. The companies that are purchased and left alone live and die on their own, with leverage from daddy. Those that are integrated cause the lions share of problems in the digestive tract.

Veritas had to be integrated by Symantec; it was a merger of equals essentially. There was no point in paying a premium to own Veritas unless you could take all the revenue and lose a bunch of costs. The devil, alas, is in the details. Symantec spoke about having problems integrating ERP systems (see "Piracy ring hits Symantec, slows Veritas license rollout"). Imagine, two software companies having trouble integrating software systems -- maybe God is getting even. It would be like two GPS companies merging and blaming a blown quarter on everyone getting lost going to work, or two of the Big 5 joining up and having to restate earnings due to accounting irregularities.

Devouring a company is never easy, even under the best of circumstances -- cultures clash, human nature and ego's interfere, and politics are played. The trick is to keep the good and clean away from the bad, and that's not so easy. EMC has acquired a thousand companies, or so it seems, but it hasn't fired a whole heck of a lot of folks, which means they are keeping them, paying them, and not necessarily getting any incremental leverage from them (see "Layoffs loom at EMC"). VMware is a resounding success - that was kept separate. Documentum, RSA and Legato were huge deals, and it is not easy to see from the outside if these deals will be home runs or bombs. FilePool was a technology buy that turned into Centera, and that's a billion dollar business now. With all the acquired cultures running around EMC these days I can't tell if it reminds me of the U.N. or the bar scene from Star Wars.

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