Why Dell acquisitions strategy beats the industry’s Frankenstein approach
One of the things Dell seems to get that other CEOs just don’t seem to grasp is how to do acquisitions right. The difference is akin to the difference between how a minister puts a couple together in a marriage and how Dr. Frankenstein (it is Halloween season after all) built his monster. Sadly, the industry (both in and outside of tech) has decided that the Dr. Frankenstein method is better. I started thinking about this when I read some of the research notes surrounding the Dell, EMC merger (Disclosure: EMC is also a client). The research was forecasting the horrible Frankenstein-like things Dell would do to the company not realizing that Dell uniquely doesn’t use that process.
Let’s contrast Dell’s acquisition process, which came out of IBM (Disclosure: IBM is a client and I used to work there), and why it is vastly different than how almost everyone else does it. I used to run an acquisition cleanup team when I worked for IBM and I saw personally the unnecessary pain and damage that the more common process caused and have been in the middle of it myself more than once. For me this is more about getting folks to learn that the traditional way of doing these things in brain dead stupid and that there is a better alternative.
The typical way to do a merger it to take the acquired company and slam it into the acquiring company and, over time, force the acquired company to conform with the acquiring firms policies and processes. During this process competing elements in the acquired company are discarded or, less frequently, competing elements of the acquiring company are sliced off. Employees that have been problems for the acquiring firm are force fed to the acquired company regardless of whether there is a skill match, and catastrophic management decisions are made as a matter of course.
It is common to make the sales force compensation conform to that of the acquiring company. In one company I reviewed this alone was the major reason the acquired firms revenue went from $750 million to $250 million and for the firm to move from profit to massive loss. Nearly all the good sales reps simply got up and left. In a later acquisition the acquiring firm forced the acquired firm to shift to their obsolete technology and engineer turnover jumped from small single digits to over 200 percent per year, which effectively killed the company.
[ Related: Inherited risk: The downside of mergers and acquisitions ]
The reason that this process is used is that it appears to make the result easier to manage. I say “appears” because it creates so many catastrophic problems it destroys the value of the acquired unit and the executives have to deal with all of those problems. So folks believe it is easier, but it rarely is unless you are talking about a very small firm.
Dell’s method was developed initially at IBM to preserve the value of the acquisition. It does that by shifting the focus from conformance to focusing on the value of the company acquired. The first step is to identify and protect the assets that were acquired and then not doing anything to damage what was purchased. In general the firms culture, process, compensation plan, span of control, executive team, hiring process, and even location remain intact.
What gets changed are things that can be done behind the scenes to cut costs and increase execution. For instance, it is common to use Dell’s advanced supply chain to increase the speed of the acquired firm’s execution and reduce its costs. If the change makes financial sense and doesn’t put the identified assets at risk then it is put into the plan, if it doesn’t it isn’t.
[ Related: Mergers and Acquisitions: What Do CIOs Need to Know ]
Now, if there is a competing unit and it is making money and growing, Dell will typically leave it alone. This is because they’ve learned that if you kill the unit the customer will probably be pissed and go to a competitor. Buying a firm and then convincing a bunch of loyal customers to go to a competitor seems really stupid to Dell, which is why they don’t do it.
There are a number of processes in the industry that seem obviously brain-dead stupid. Forced stacked ranking because it kills collaboration and sets employees against each other, policies against working at home because that forces out some of the most productive people particularly new mothers (or forces them to put their kids at higher risk), measuring people on things they don’t have the authority to change, covering up mistakes and remaking them rather than learning from them and avoiding them, and, perhaps the most annoying is Frankenstein Mergers because they seem to destroy more firms than any other single practice I can point to.
In any case, when forecasting what a company will do in the future, it is particularly useful to consider what they have done in the past. If a firm has a set published process to do something a certain way, forecasting they will do it both differently and more stupidly is in itself brain-dead stupid. And that is what I really think.