After Wall Street Meltdown, Is Smaller Better?

Ah, mega mergers. Wall Street has been in love with them for decades.

We’ve seen HP gobble up Compaq, Time Warner wed AOL (That worked out well, didn’t it?) and Bank of America swallow Fleet Bank after Fleet had barely digested BankBoston, which had resulted from the merger of Bank of Boston and Baybank. Now Bank of America is poised to acquire Merrill Lynch.

Dizzy yet?

The list of mergers and acquisitions over the years is extensive and convoluted.

But though Wall Street has tended to reward combinations that often have resulted in unwieldy mega-corporations, every time I hear conglomerate A wants to gobble mega-corporation B, I get that sinking sensation.

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You see, while some strategic acquisitions make sense, there comes a point when the merger of two enormous corporations has little to do with real growth strategy. Sometimes, it has to do with avoiding a plunge into the red and covering up how mismanaged the acquiring company has been. Other times the goal is to take out a competitor or to make a blind play for scale.

Mind you, in the right context, and with the right planning, some of these reasons may actually make sense.

But when they don’t, the results are painful. They create periods of confusion, during which customers worry about service and start considering options – which of course become fewer and fewer as more companies merge -- trigger employee firings to eliminate overlapping functions and pose sometimes-debilitating challenges in integrating cultures and IT systems. I have seen enough of the latter to know how truly difficult an integration of two companies can be.

But here’s the primary reason I hate mega mergers: Service suffers.

If you disagree, just take a look at what’s happening on Wall Street right now. And in this case, the “service” is your money, which makes it especially painful. 

Wall Street is not alone. The IT industry has seen plenty of merger-induced disasters, some of which led to the demise of companies that were once market leaders. On a smaller scale, more recently we saw the challenges Symantec faced after acquiring Veritas.

Now comes the Hewlett-Packard acquisition of EDS. I know all the arguments for why it makes sense. HP wants to beef up its services arm so it can better compete in that space.

After all, shouldn’t an IT company be all things to all people?

Should it?

I wish HP the best of luck in integrating EDS. But, really, I wish even more luck to those 24,000 people who are losing their jobs following the acquisition. This is a common occurrence with mergers: Thousands of people end up on the street, looking for jobs, often for lower pay, while analysts and investors gush about what a great idea the merger is.

Maybe it is. I have my doubts.

But the merger does present some opportunities to solution providers: The market will get an infusion of free-agent talent. Despite rising unemployment, some IT skills are hard to come by. Ideally some of the folks HP lets go have skills to suit the needs of channel companies desperate for talent.

In addition, nervous customers will start looking at options, and the best option for some customers may be to work with small, responsive solution providers as opposed to dealing with an inward-focused mega-corporation working through integration challenges.

HP has learned from its difficult acquisition of Compaq some years back, so I expect it has a firm grip on how to absorb EDS.

But one thing the Wall Street meltdown has shown us is that bigger isn’t necessarily better. It’s no secret that small businesses are the heart and soul of the U.S. economy. And those small businesses would do well to sniff around their neighborhoods for small banks and credit unions to help them on the financial side. And on the IT side, well, they probably already know smaller is better: Stick with your local solution provider.

Pedro Pereira is editor of eWEEK Strategic Partner and a contributing editor for Channel Insider. He is at pedro.pereira@ziffdavisenterprise.com.