For Dell and EMC, Merging IT Will Be Critical

 

In the biggest tech deal of all time, Dell announced in October that it had agreed to buy corporate software, storage, and security giant EMC for $67 billion.

In their respective announcement speeches, both Michael Dell and EMC CEO Joe Tucci talked about various “synergies” the two companies would enjoy following the acquisition. Neither, however, explicitly mentioned the importance of successful IT integration. It’s not surprising: According to McCombs School of Business Associate Professor Huseyin Tanriverdi, IT integration is rarely emphasized.

Case-in-point: In 2011, Tanriverdi analyzed more than 2,000 M&A announcements to assess what aspects of a deal CEOs focused on in their speeches. “Only three mentioned IT integration,” he says.

IT Integration Affects Revenue

While no one is suggesting Dell and EMC have ignored the importance of a smooth IT transition, new research suggests it may be more central to the success of an M&A than previously assumed. According to Tanriverdi, IT integration has a tendency to be overlooked and frequently is considered an operational issue to be addressed after the M&A ink is dry.

In a paper published this year with University of Oklahoma Associate Professor Vahap Bülent Uysal (McCombs Ph.D., ’05), Tanriverdi looked at more than 500 publicly listed companies to see how day-to-day IT integration (or a lack thereof) affects acquired firms. Because the target company is usually the smaller of the two firms, the tendency is for the acquirer (larger firm) to absorb the other company’s IT into its own, bigger system.

In many cases, this strategy is highly disruptive for the acquired firm. “The smaller company tends to be more agile, can grow rapidly, and can take more innovative approaches in areas like sales,” he says. “If it is asked to adopt an archaic IT package from an acquiring company, there is likely to be significant disruption in the short run.”

A sales team might not appreciate having to adopt a new IT system, but the disruption goes much further than that. Tanriverdi explains that prior to a merger, both companies will often have different sales and pricing strategies. If the acquired company is forced to adopt a new sales approach, its ability to generate revenue in the short-term could be impeded. Various factors — such as pricing methods, sales processes, how to sell bundles, and/or sales commissions — may change for the target company, leaving room for potential disruption in the early stages of a merger. 

“The target company is deviating from its previously optimized sales approaches, and it may be forced to drop the processes and applications that contributed to its initial success and growth in the first place,” Tanriverdi says.

His research also suggests that investors are savvy to this trend: In anticipation of an approaching acquisition, they frequently react negatively, leading to a drop in share price for target companies.

Growing Pains at EMC

But when it comes to IT integration, EMC understands the challenges better than most, Tanriverdi says. During his time as a visiting scholar at MIT, Tanriverdi co-authored a case study looking at how the company’s rapid expansion was periodically stifled by a fragmented IT system.   

Between 2005 and 2011, EMC’s revenue grew from $2 billion to $17 billion, thanks to major acquisitions of companies like VMware and RSA Security, he says. During this time, EMC’s IT policy was unique: It aimed to keep the specialization and talent of acquired firms even if that meant implementing varying levels of IT integration, or in some cases, none whatsoever. 

This strategy worked well while EMC was still a medium-sized operation, but as it grew and added more and more companies to its portfolio through M&As, IT decentralization was becoming increasingly problematic.

“Due to fragmented integration among EMC and its 50-plus acquired companies, sales teams started to face challenges in seeing the customer as one, having visibility into cross-selling opportunities, and coordinating how sales teams would share sales commissions if they could jointly sell their products to the same customer,” Tanriverdi explains.

EMC realized it had to make IT integration more central to its M&A process. Even back in 2011, Tanriverdi noted its integration teams in enterprise-wide shared service functions such as IT, HR, and finance had core teams of professionals dedicated to M&A integrations. Learning from previous mistakes, the company has grown to become almost a model for successful ‘target’ integration, he says.

What’s Next for Dell?

The question is, how will EMC fare now that it’s the target? Given that Dell already offers a sizeable suite of products and services of its own, the tech merger isn’t the biggest in history just because of its multi-billion dollar price tag.

Dell got into the M&A game a little later than rivals like Hewlett Packard and IBM, but it has still made some significant purchases in recent years, including Perot Systems in 2009 and, more recently, analytics software provider StatSoft in 2014. None, however, compare to the scale of integration required by this most recent venture.

But while Dell’s purchase of EMC may be unique in terms of its size, that doesn’t make it an extraordinary case. “This challenge is typical in almost all M&As,” says Tanriverdi. “That’s why companies with good integration capabilities in place on average tend to fare better in most cases.”

Tanriverdi acknowledges that if Dell and EMC can overcome certain growing pains in the short run, the long-term benefits of IT sales integration will ultimately win out. If the strategic intent of the merger is to cross-sell or bundle the two companies’ products to sell to each other’s customers, sales teams working across the country and around the globe must be able to coordinate, and that takes an integrated IT system.

“If they can manage to successfully standardize their joint sales processes, this will not be a problem,” Tanriverdi says. “If, however, they try to keep their original processes, this might get very complicated indeed.”

 

When IT Capabilities Are Not Scale-Free in M&As: How Do Capital Markets React to IT Capability Asymmetries Between Acquirer and Target is published in the European Journal of Information Systems.

 

Faculty in this Article

Huseyin Tanriverdi

Associate Professor McCombs School of Business

Huseyin Tanriverdi received his Ph.D. in information systems from Boston University and his master's, also in information systems, ...

About The Author

John Holden

Writer,

John Holden is a journalist, researcher, and professional writer. Originally from Dublin, Ireland, he has been writing for the Irish Times...

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