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What Makes a Merger Successful?

AUTHOR:

PAUL WALKER AND DAVID HANNA

TITLE:

What Makes a Merger Successful?

SOURCE:

Strategic Finance Magazine 80 no10 58-62 Ap ’99

The magazine publisher is the copyright holder of this article and it is reproduced with permission. Further reproduction of this article in violation of the copyright is prohibited. UK-based The Sage Group plc acquired State of The Art, Inc., now known as Sage Software, Inc., in March 1998. With operating divisions in France, Germany, the U.K. and the U.S., and revenues of more than $320 million for its fiscal year ended September 30, 1998, The Sage Group is the largest supplier of mainstream PC accounting software in the world. Paul Walker is the CEO of The Sage Group plc, and David Hanna is president and CEO of Sage Software, Inc.

With the March 1998 merger between The Sage Group plc and State of The Art long behind us, and with the new group getting even stronger, we thought we’d reflect on the elements that make a successful combination of two companies and share some of the valuable experiences gained by both sides involved in the process.

A merger is like a marriage–it’s all about people and their ability to work together in a way that benefits the combined enterprise. The basis for a successful acquisition/merger includes a common understanding of the reasons for the merger, a considered assessment of what both sides bring to the party, and complementary product lines and geographic markets. In addition, there must be thorough due diligence on both sides, a recognition of potential problems, and the ability to exploit synergies.

In the case of The Sage Group and State of The Art, we two CEOs had been meeting informally for about four years preceding the merger. Over that time we had developed a good knowledge base of each other’s business and strategic objectives as well as management styles. In late 1997, when we began serious talks about a potential merger, the stage was already set for us to move quickly. In January 1998, once we knew State of The Art’s fourth quarter results, our two management teams met, and over the next three weeks we put together the mechanics of the deal.

Because it was a cash offer [Sage acquired all the outstanding stock of State of The Art at $22 per share, or approximately $263 million], the details of the transaction were simpler than if it had been a pooling. Overall, the process went pretty smoothly. PAUL WALKER: At The Sage Group, we’ve grown our business through acquisitions in other countries. We’ve always believed that because all countries have their own characteristics, the most effective way to enter a new geographic market is through acquisition of established local companies.

Prior to the merger, one big gap The Sage Group had was in the U.S. market. We believed we needed a strong player with good products and a proven sales and distribution channel. As part of our due diligence efforts, we conducted market research in the U.S. earlier in 1997 to accurately assess the opportunities in the American market and to confirm State of The Art’s reputation as a major player in the midrange accounting software market. Another reason we were interested in State of The Art was its approach to product development.

Sage is very strong in marketing, but we felt our product and channel development capability could be strengthened and that we could learn a lot in these areas from State of The Art. DAVID HANNA: From State of The Art’s point of view, the decision to merge with The Sage Group was based on our belief that the worldwide market for accounting software is consolidating and on our desire to gain a competitive edge through international reach. Also, it gave us an opportunity to access Sage’s successful marketing and branding programs. From the beginning of the merger, we’ve been very receptive to Sage’s marketing ideas and practices.

Sage has been extremely successful establishing leading market share in the U.K., France, and Germany because of the impact its branding has made. With encouragement from The Sage Group, we completed our own extensive market research in the U.S. last summer, and, based on those findings, we’ve been rolling out a range of new marketing programs in the U.S. under the Sage brand ever since.

We really believe each of our companies brought complementary strengths to the merger. While both Sage and State of The Art contributed strong management teams, each organization added its unique strengths–Sage in marketing and branding and State of The Art in engineering and technology.

We’ve done a good job of establishing the synergies of the two companies with the result that the whole is indeed greater than the sum of the parts. PAUL WALKER: Another concern we had before the merger was how to manage a U.S. company remotely from such a distance. My team made sure that Sage personnel spent a great deal of time at State of The Art in the early weeks right after the merger.

And, just as important, senior executives from State of The Art visited Sage in the U.K. This focused interaction was central to Sage’s strategy of adopting “best practices” from each of its subsidiaries. The cross-pollination of ideas, strategies, and tactics has been very successful. At the same time, the Sage philosophy is to let the divisions run their businesses without a lot of intervention from the head office.

We continue to have very strong, ongoing dialogue, and The Sage Group management team visits the Irvine office every quarter. Bottom line, the positive attitudes of both State of The Art and Sage people have made it all work. DAVID HANNA: One question that always comes up regarding impending mergers concerns the apprehensions of employees of the acquired company.

In our case, we had always told our employees that we would participate in the industry’s consolidation, so they were prepared and confident with the decision to become part of a larger international company.

As an organization, we believe the merger gives us an edge in the marketplace, and our resellers see a difference in their ability to compete. I’m happy to say no member of the State of The Art management team left the company after the merger, which is a very good indicator of a successful and productive merger. WALKER/HANNA:

The last aspect we’d like to address is the importance of a shared vision between companies involved in a merger. St…………

What Makes a Merger Successful
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