Expanding Markets Through Acquisitions | Article

Expanding Market GlobeThe aftereffects of acquisitions can sometimes be brutal to a corporation. The expansion of markets and increased shareholder value is what drives acquisitions, but what often taxes companies is the reorganization that takes place once the contract has been signed.† Jeff Kaplan, director of strategic marketing at International Network Services (INS), is aware of these dangers. Fortunately for his company and their investors, INS has recently made a successful acquisition, but the ill wind of reorganization has reached his offices in Quincy, Mass. Down the road a few miles, two major outsourcing corporations are experiencing difficulties after recent acquisitions.

Cambridge Technology Partners (CTI), a Cambridge, Massachusetts-based information technology (IT) services company, has stumbled over the last year as they expand their business base with the help of numerous acquisitions. Once a stock market darling, CTI’s reorganization has been slow and its shares have plummeted. CTI’s shares have traded as high as 58.38 in the last year, but they have bottomed out recently at around 10. And ex-executives of Excell Data Corp., a company that was gobbled up by CTI in August 1998, has filed suit, alleging a breach in contract, violation of securities laws, common law fraud and negligent misrepresentation in connection with the acquisition. Since over 1.6 million shares of CTI common stock were used to acquire all shares of Excell, financial experts assume that it has something to do with CTI’s shares dropping more than $20 since the acquisition.

Renaissance Worldwide Inc., a Newton, Massachusetts-based IT consultants, had its share of problems as well. Since going public in June 1996, the company has acquired 23 companies. It has helped Renaissance evolve into a full service provider, but it has taken its toll. Renaissance lost more than $31 million during fiscal 1998, in which five acquisitions were completed. And their stock has plunged around 25 points during that time.

“These companies have failed to meet the investment communities expectations because they weren’t able to assimilate numerous acquisitions,” Kaplan says. “These situation are not uncommon and assimilation is no easy task.”

Slowly but Surely

INS waited nearly two years before making their first acquisition after going public in 1996. Kaplan says that the wait was necessary in order to find a compatible partner. It is imperative not to jump into an acquisition because it looks good on paper, he says.

“The challenges with acquisitions has nothing to do with technical aspects and everything to do with the culture,” he says. “You have to identify companies that can grow together so as to create something bigger than the two pieces separate from one another, and that is a very difficult task. It is especially difficult in the professional services arena, which is the overarching nature of our business.”

INS is a global provider of solutions for complex enterprise networks. It provides services for the full life cycle of a network, including planning, designing, implementation, operations and optimization. With the close of the acquisition of VitalSigns on Nov. 23, 1998, the former Electronic Services division of INS and VitalSigns Software, Inc. combined to form INSoft, now the software business unit of INS. The INSoft product division combines VitalSigns’ family of application performance monitoring software and INS’ family of network operating solutions, which will provide INSoft customers with a comprehensive software solution for monitoring and managing the performance of their applications and network infrastructure. As a result of the acquisition INS’ role in the software solutions business has escalated.

Factors that Lead to the Acquisition

Several factors lead to the acquisition according to Kaplan. First was the idea that performance management was becoming a more accepted business practice within organizations. But more than that the increasing recognition that the performance of the applications is what impacts the end users and customers in e-commerce environments. The acquisition of VitalSigns would provide this application performance monitoring software to their clients.

Instead of INS developing this software in-house, it made sense to acquire a company with an established reputation, in order to build instant credibility, he says. INS also felt they were not only acquiring VitalSigns’ software capability, but that it was getting a top-notch management team to lead them to the next level in business.

Also, acquiring VitalSigns saved INS money in reduced development costs. And it reduced marketing and sales costs associated with building distribution channels as well, because VitalSigns already had strong inroads into the marketplace. For these reasons, reduction in time to market also occurred.

And physically it wasn’t a big move for VitalSigns because they were less than a mile from INS’ corporate offices in Sunnyvale, Calif.

“So as you can see, all the ingredients were there for a successful merger,” Kaplan says. “And it made sense for INS to acquire VitalSigns because they were a relatively small organization and we had a terrific war chest built on our IPO [initial public offering] success, but we see it as a merger of equals, the cultural fit has proven that to be the case.”

Hitting the Ground Running

Both sides hit the ground running, Kaplan continues. The two sides spent a tremendous amount of time cross training from the beginning. The moment the deal was signed, the two sides spent the first week in joint meetings, both professional and social to quickly eliminate any sense of angst.

The immediate socialization process enabled both sides to get a number of cross referral opportunities that were capitalized on. “We immediately went down the mutual lists, targeted some accounts and went after them and have had some very exciting successes as a result,” he says.

The success of the merger has been instrumental in INS’ ability to help its clients navigate through mergers and acquisitions, and vice versa.

“Almost any vertical market you look at today is going through a lot of consolidation and we have been in the midst of many of these deals,” he says. “We help consolidate their network operations and we have learned first hand what works for those particular organizations. We took some of those lessons to heart and used them to help us be more successful in this regard.”

Lessons from the Outsourcing Primer:

  • When considering an acquisition, companies should find a partner that can grow with them, so as to create something bigger than the two pieces separate from one another.
  • Acquiring a company with an established reputation builds instant credibility.
  • Acquisitions can save money by reducing development costs and reduced marketing and sales costs associated with building distribution channels.
  • Acquisitions can reduce time to market.
  • A company should cross train its employees when the acquisition is finalized and disseminate information about the acquisition to all the employees to reduce angst.

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