SPL Takes First Step in Acquisition Strategy
In December of 2003, Harry Debes, CEO of SPL, announced his intent to execute an acquisition strategy. A few months later, on May 4, 2004, he signed a definitive agreement to acquire CES. Acquisition strategies are fraught with risks. Research has shown that acquisitions increase shareholder value only 20% to 50% of the time. The few that do succeed are able to improve shareholder value, meet more customer needs, and provide employment. Will Mr. Debes become one of the rare few executive officers that creates value in acquisitions or another disappointing statistic?
Known Success Criteria
What Really Works by Nohria, Joyce, and Roberson outlines four factors that enable businesses to successfully execute acquisition strategies. (Ref. 1) These factors are grounded in marketing and operational issues. From a marketing perspective, acquisitions either provide a new customer base to leverage existing products into market or provide new products to leverage to the existing customer base. One or both of these marketing criteria must be met in order for the acquisition to provide shareholder value. From an organizational perspective, the acquiring firm must be able to integrate the new business unit. This is accomplished best when the firm executes multiple small acquisitions rather than a few large deals.
Missing from the list of success criteria is any discussion of the purchase price, cost savings, or ephemeral synergies. Their research indicates that the nuts and bolts of marketing and operations are much stronger determinants of success than these other commonly discussed issues. We can evaluate the SPL acquisition of CES against the criteria of known success factors.
Criteria Applied to SPL’s Acquisition
The SPL acquisition of CES meets the marketing criteria exceedingly well. Both SPL and CES serve the utilities market with business function specific software solutions. SPL provides customer information systems while CES provides outage management solutions. CES currently has 33 utility customers of which only 5 overlap with SPL’s larger customer base. Thus, in terms of distribution capability, the acquisition nicely enables SPL to distribute the CES solution to a larger market.
From an organizational standpoint, the CES acquisition also bodes well. CES is a comparatively small outfit with fewer than 70 employees while SPL employs approximately 600. Because CES is much smaller than SPL, integrating the newly acquired employees within the organizational culture, routines, and structure of SPL should be achievable. However, this is SPL’s first acquisition and thus they have little experience with organizational integration. To manage the integration, SPL and CES executives will need to develop and implement a transition plan to incorporate the newly acquired skill sets, knowledge domains, and customer relationships. During the past five years, SPL has undergone two significant organizational restructurings. Some of the managerial skills gained through recent restructurings should be applicable to the organizational integration challenge facing SPL today.
SPL’s acquisition of CES rates 8.0 out of 10 on the Strategic Acquisition Scale. The Strategic Acquisition Scale is based on the marketing and operational issues discussed by Nohria, Joyce, and Roberson. Any score above 5.0 implies expectations of a positive outcome. Given that this is their first acquisition, a higher rating is not possible. (Ref. 2)
Adaptability was the competitive frontier during the last round of industry competition, and SPL led. Utilities were uncertain of their requirements for customer management in proportion to the uncertainty of deregulation legislation. SPL positioned itself on its ability to support utilities’ needs to innovate, adapt, and excel. In doing so, they sold a highly adaptable solution that customers could upgrade over the system’s lifetime.
Competition has emulated SPL’s stance in the few years following their claim to hold the position of adaptability. Concurrently, some industry customers are no longer focused on best-of-breed point applications after the publication of Carr’s article arguing that IT is ceasing to be a source for competitive advantage. (Ref. 3) Due to these pressures, SPL has increasingly seen itself in competitive sales situations against SAP, a major ERP vendor.
According to Guerry Waters, CTO and Sr. VP Marketing & Strategy, SPL has no intention on recreating SAP’s solution footprint but does plan to expand their own. The SAP solution spans general business functions such as accounting and HR. SPL’s strategy is to create a suite of solutions that addresses specific challenges facing utilities. For SPL, this implies expanding their solution from their core customer information system to include outage management, distribution automation, asset management, risk management & trading, and mobile workforce management. By remaining focused on the needs of utilities while their largest competitor is forced to address general business challenges, SPL is able to increase their relevancy to their target market.
Broadening the solution suite for a specific industry vertical is a proven competitive strategy. SunGard in the financial management market and ADP Dealer Services in the car dealership market have each taken this approach and achieved growth and profitability. For companies serving a constrained market, expanding the solution suite enables economies of scope in selling.
SPL had the option to either conducting in-house product development or acquiring a known solution in order to expand their solution suite. Mr. Waters addressed this decision crossroad by considering the timescale required to bring new business software products to market. In his estimate, a point solution to one of the above utility functional issues would have required a year of product development followed by a few years of market development prior to becoming an industry competitor. On the other hand, acquisitions enable SPL to accomplish a strategic repositioning within months of selecting their target. Considering the risks and time scales, SPL chose an acquisition strategy.
SPL’s choice to acquire a larger solution suite is a known successful competitive strategy. Their first target is well in keeping with the researched success criteria. On both the short and long term strategic levels, the acquisition should succeed. Now Mr. Debes must implement and repeat.
1. Nitan Nohria, William Joyce, Bruce Johnson, What Really Works, HBR July 2003, p 42.
2. T Smith, Itron Raises Stakes in Acquisition Spree, The Wiglaf Journal, July 31, 2003.
3. Nicholas G. Carr, IT Doesn’t Matter, HBR May 2003, p. 41.