Don Shay and Sandra Burnis*
cquisitions in the government services industry con-
tinue unabated, according to
Houlihan Lokey Howard &
Zukin. The McLean investment banking firm reported in Febru-
For many government services firms, acquisitions figure prominently in the strategic growth plan. This is especially true of midsize firms feeling the squeeze-too small to be a prime contractor, yet bridling at a subcontractor role. For others, access to cleared workers defense/intelligence customers is a key driver of acquisitions. Regardless of the strategic merits, studies consistently find that
60-70percent of deals actually diminish shareholder value. The
Insiderasked Don Shay and Sandra
Bumis, experts in merger integration, to identify why the postmerger part of most deals is trying and ojienfaits.
Part II. in October, will look at how to stay out of trouble.
ary 2004, "In the past 12 months, technology and defense contractors have completed
nearly 200 acquisitions, more than all the deals in 1998 and
Is Costly), Deals
typically don't go bad because of
company. Within two months after the deal's announcement, 29 of the top 30 TNS managers had
flawed strategy. They fail because
While acquisitions continue to be a key element in many government Deals Are Disruptive
growth strategies, this practice is not without peril. Consider, for
departed, causing substantial tur-
deal economics demand higher
moil. PSInet's woes continued as
returns from the combined entity
their acquisition of Metamore led
at the same time that a set of
to their bankruptcy a year later.
disruptive events and changes,
Most companies recognize
both real and perceived, is im-
that effective communications are
posed on both companies. Once a
critical to capping this uncertainty.
example, a study by noted M&A expert Mark Sirower. He found that "2/3 of 168 deals surveyed experienced significant value destruction." Reported M&A-
related hiccups in firms such as
As [customers] wonder about service deterioration, changes in sales relationships, loss of influence, and. changes in pricing, they become more vulnerable
[and] competition ... will turn up the heat.
CACI, Titan, and ManTech sug-
SEPTEMBE R 2004
}) SAP \' 'in ~ P0'9t.l1
Human Ga pltal D~I-~ith
NQ M.ajOf Prime er Sub
Ch,mge" Could ost rou
gest a level of acquisition indigestion not inconsistent
The source of these difficulties may be multiple and compound, such as inadequate due diligence, unexpected changes in the marketplace, and underestimation of the difficulties of integration. The financial outcomes are often revenue shortfalls, higher than expected integration costs, and shrinking margins.
What is it about acquisitions that makes them so tough to pull off? What problems do companies typically face when they embark on a "growth by acquisition" strategy? And what are the implications for government services firms?
deal is announced, most compa-
However, their communications
nies tell employees and customers
tend to promote the strategic and
it's business as usual. The reality is
financial benefits of the deal with-
far different. Employees of both
out directly addressing the issues
companies recognize that change
of most concern to employees,
is inevitable, and absent concrete
customers, and others.
information from management,
Consider Dyncorp's acquisi-
rumors abound. Distraction is
tion by CSC, as described by Mike
inevitable too. As a result, pro-
DeBruhl, then Dyncorp's senior
ductivity suffers as employees
vice president of