Acquisitions Made Easy | Article

Crane putting up a buildingThe process of making and using steel is stitched into the fabric of America — from the village blacksmith who forged wrought iron into steel to the rails of the transcontinental railroad that cut across the diverse geography of America, bringing the country a little closer together. Steel battleships helped America keep democracy alive and skyscrapers whose foundation and framework are embedded with steel remind Americans that capitalism is thriving. Americans built the first car with steel and then the airplane. It also surrounded the first astronauts that breached the daunting barrier of space and trekked to the moon. But while the industry lent a hand to advance technology in America, it did little to improve its own.

The technology in most American steel plants was lagging throughout the 1960s and 1970s and continued through the early 1990s. Many steel plants had outdated and cumbersome equipment and were run inefficiently. But Bethlehem Steel, headquartered in Bethlehem, Penn., stayed ahead of the game. In 1992 the company did something most manufacturing plants in the union-run states of the Northeast might not try. It outsourced its information technology (IT) to EDS to ensure a brighter future for their investors and employees. The arrangement has helped Bethlehem Steel gain a competitive foothold in the steel industry. And the partnership has also helped the steel giant sidestep any IT integration issues that might surface as they continue to grow through acquisitions.

“In 1992 we made a brutally frank assessment that, given the many urgencies and priorities of a very dynamically changing steel business, we were unlikely to be able to keep up with rapidly changing technologically,” says Tom Conarty, director of IT at Bethlehem Steel. “With that as a premise, we believed that we had one of two strategic action that we could take — we could outsource our IT, or we could make a significant internal investment and build upon our [existing IT].”

Choosing to Outsource

Bethlehem developed a list of unwavering objectives that had to be accomplished if a vendor was to be brought in, he says. These objectives led the steel company to develop a specification and ultimately a contract with EDS.

Basically, Bethlehem wanted to increase the capabilities of its employees, deploy the latest technology and have an IT architecture that was seamless. But the company also wanted a flexible and incremental contract with its provider, he says. Essentially this type of contract would allow the company to rather painlessly integrate new businesses into the Bethlehem family of steel products, including the acquisition of Lukens Inc. that led to the formation of a new division called Bethlehem Lukens Plate on May 19, 1998.

Expanding Market Share

Before the acquisition, the $5 billion steel company’s core business was sheet metal and coated products for the automotive and construction industry. But the $1.13 billion acquisition (according to the Associated Press) of Lukens would add various forms of heavy plate products to the mix, along with $1 billion worth of business annually and approximately 2.5 million tons of steel making capacity, Conarty says. It was Bethlehem’s most significant acquisition since the onset of its 10-year contract with EDS that began Jan. 1, 1993 and terminates Dec. 31, 2002.

“In our contract with EDS, which we believe to be very good, we have flexible provisioning to not only add services through mergers, acquisitions or joint ventures, but also to reduce services to compliment restructuring or a closure of one of our facilities,” Conarty says.

Making the Transition

The acquisition of Lukens involved a lot of integration and standardization that had to be done in order to get the new division up to snuff, he says. Luken’s databases were different from Bethlehem’s, the core operating software was different and the two companies didn’t share many common off-the-shelf software packages. In that regard Bethlehem and EDS had a choice to make. They could allow the two companies to merge together, but keep the systems stand-alone. They could put together a completely new set of systems. Or it could carefully examine the best approaches from both organizations and bring them together with a best in breed solution.

“We certainly didn’t want the stand-alone approach,” he says. “So, we carefully did some replacement of systems where it was really warranted, but by and large our approach was to go with the best in breed approach. Best in breed was already very firmly ingrained in our IT culture.”

Before the agreement between Bethlehem and Lukens was signed, EDS was busy upgrading the Lukens’ facility. And though EDS was not at the table or at the front line of the acquisition negotiations and discussions, the company was very much a partner serving Bethlehem Steel’s needs in a back-office manner.

EDS made the merger work in a very effective manner, Conarty says. EDS did that by bolstering overall staff competency, managing the systems portfolio, making sure that the acquired organization had a very tight adherence to technical standards, and made sure from an IT infrastructural perspective that the new part of the organization was aligned to the overall business objectives.

“We think that this acquisition has been a tremendous success for us and I think that we have already exceeded our planned synergies — that is those significant economies of scale that would be obtained through this type of an acquisition,” he says. “The acquisition is rolling very well from a customer perspective and we certainly hope that for a long period of time our customers and shareholders will benefit and continue to benefit from taking this action. Having said all that, IT is certainly plays an important part of the entire process and our relationship with EDS helped us toward the successes we have had so far.”

Lessons from the Outsourcing Primer:

  • Bethlehem Steel’s contract with EDS has increased the information (IT) capabilities of its employees, deployed the latest technology in Bethlehem’s plants and created a seamless IT architecture.
  • Bethlehem’s flexible contract with EDS allows the steel company to add services when mergers and acquisitions take place, or decrease services to compliment restructuring or plant closures.
  • By choosing to upgrade its IT infrastructure in 1992, Bethlehem was able to make a conscious decision to outsource. Because of the rapidly changing IT environment, waiting any longer would have increased the chances that Bethlehem would have to choose a vendor by default.
  • Acquisitions involve a lot of integration and standardization that IT professionals like EDS can make easier.

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