In 1986 Honeywell Inc paid Unisys Corp $1bn for Sperry Corp’s aerospace business, a deal generally seen as a good idea at the time, given the fact that the merger of Sperry and Burroughs Corp to form Unisys Corp was all about achieving synergy in the information systems market alone. But in 1988 Honeywell accused Unisys of overstating the off-loaded unit’s assets and earnings and also of having hidden cost overruns. In high dudgeon, it then launched a $350m lawsuit, settled five years later out of court for $470m. Now is the moral of the story that Unisys acted improperly, or instead that the party who acted worst was Honeywell, for not carrying out the dull-sounding but frighteningly important take-over procedure known as ‘due diligence’? Probably both, but that doesn’t let Honeywell any less off the hook. According to a January Economist article, there was $659bn worth of merger and acquisition activity in the US alone last year; Broadview Associates Inc says 72% of the high-tech firms it surveyed at the end of 1996 plan some form of merger in 1997; and there are a lot more information technology company founders driving Ferrarris to their helipads because they sold their creations to hungry deep-pocketed partners than because they made it to the pinnacle of a successful public offering.
Acquisitions driven by fear, greed and panic
One factor is probably that so many information technology acquisitions are driven by those perfectly respectable trio of business drivers, fear, greed and panic. Bill Jordan, vice president of Strategic Sales at InterTrust Technologies Corp in Sunnyvale, sums up why we will continue to have so much activity – the relentless competitive pressure. Sometimes people get bought by companies just to foil the opposition – If I don’t buy this guy, will my competitor? Yet many mergers and buyouts stink, perhaps not as spectacularly as Honeywell-Sperry -let alone Burroughs-Sperry!- but still pretty whiffily. At last month’s Second Annual Software Mergers & Acquisitions Forum in San Francisco, due diligence emerged as key. As Jordan told the forum, The thing about due diligence is that you can never do enough and you will always be surprised. The buyer should always try to be prepared for the worst kind of shock, and the seller should really think about being prepared to come out with the issues upfront. In other industries a major merger might take 18 months to wend its way to deal handshake; accountants Arthur Andersen courted Asahi Shinwa & Co for three years, which in software is about as long as we’ve been living in cities, comparatively speaking. Progress Software Corp’s director of Corporate Development Les Trachtman shared his own company’s extensive due diligence hit list, which includes, obviously, financial data (five years’ worth of quarter-by-quarter financials,) but also sales reports for the preceding three years, with identification of customers and dollar amounts for each sale; salary reports for all employees for three years; details on all prepaid accounts; all tax and other such corporate data; contracts and agreements (including all leases, and distributor agreements); proprietary rights/ intellectual property (including a list of all the software programs of the company, with a description of all their functions and features, with a chronology of their respective development); research and development (including source code listings in electronic and hard copy forms); employment issues (including details of any union activity by any individual, and a list of all employees no longer employed by the company, with copies of severance agreements); and much, much more. In Trachtman’s words, The number one cause of the failure of mergers is inadequate due diligence; the number two cause is the failure to pay attention to the information gained during due diligence.