Network Riptide: Acquisitions and Spinoffs

FRAMINGHAM (04/03/2000) - If there is anything more breathtaking than the pace of acquisitions these days, it's the pace of spinoffs. Integration and disintegration seem to be equally popular. With major players involved in such opposite activities, the trends are creating a virtual riptide in the industry.

The big question is whether these actions are taken for the right reason - to deliver better products to customers. The quick answer is no.

The acquisition modus operandi is well-established. Led by Cisco Systems Inc., Alcatel SA and Nortel Networks Corp. are fighting for second place. With the stock market rewarding the merger mania, these firms and others use their stock value to buy everything in sight. These actions typically are rewarded by even higher share prices that trigger even more equity activities. Cisco, for example, has so much financial clout that it has even branched out into the services sector.

Whenever an acquisition or a merger is announced, you know for certain that the management chorus will be singing a song of synergy. "By bringing our two companies together, we'll be better able to serve. . . ." You know the rest.

Shareholders in both firms profit handsomely with most of these consolidation moves. But do customers truly benefit?

Not long ago, Lucent, Cabletron and Network Associates also sang this tune. But all three in recent months have announced fairly dramatic "disintegration" strategies. What ever happened to all that synergy? And does this riptide signal vast changes?

It is inevitable that, eventually, big becomes too big. Organizational infighting, culture clashes and just the gargantuan task of trying to motivate and focus an army often cause an organization to deteriorate.

Not long after taking the helm as president of behemoth Nortel, David House went home - citing the inability to effect change in an organization of some 70,000 people.

The recent spinoff move by Lucent seems to be an admission that it was just too big to function effectively.

Yet, Cisco - with nearly 50 acquisitions under its belt in the past five years - says it expects another two dozen this year. Is Cisco on its way to "too big," or is it different?

Interestingly, the common thread among the previously cited spinoff companies was their slumping stock prices. Coming off a $200 million dollar loss, Network Associates announced it would become a holding company for the various units that were formally part of the same synergistic company.

Cabletron split apart as a last-ditch effort, apparently hoping that "starting fresh" with new names would bring back the magic.

Lucent admits dumping "slow-growth units" into the company-to-be-named later.

This is a move designed more to please shareholders than customers.

So are we moving back to an age of focus, or just caught in the throes of making radical moves to please a fickle stock market?

Tolly is president of The Tolly Group, a strategic consulting and independent testing firm in Manasquan, N.J. He can be reached at ktolly@tolly.com or www.tolly.com.

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