When CVS Corp. bought 1,268 Eckerd drugstores in August 2004, it worried that its Eckerd customers might flee. Rivals “were putting up signs saying, ‘If your local pharmacy is changing hands, you can always come to us,’ ” says David Rickard, executive vice president, CFO, and chief administrative officer of the Woonsocket, Rhode Island–based pharmacy chain.
The prospect of buying a business only to lose at least some of its customers can keep an acquirer awake at night. It does happen, often as the result of a failure to reassure customers who are attached to the acquired company and fear switching to a new one. Whatever the industry, the job of retaining the consumer base involves quickly creating a positive customer experience, while countering preconceived worries.
“Whether it’s Old Economy or New Economy — banking or software — focusing on the customer-retention piece of a merger or acquisition is the key to success,” says Ian Campbell, West Coast head of The Abernathy MacGregor Group, an M&A public-relations firm. The inherent obstacles and an unusually hostile competitive environment can make this a perilous task, as CVS’s Rickard experienced. “Speed is crucial in every aspect of M&A, and this is no exception,” adds Janet Kelly, an attorney with Minneapolis-based law firm Zelle, Hofmann, Voelbel, & Gette LLP.
The Eckerd stores that CVS purchased are located in Texas and Florida, far from the company’s home base. So CVS quickly launched a vigorous marketing and advertising campaign to introduce itself to its new customers. It also donated $20 million worth of Eckerd-branded products to the hunger-relief program America’s Second Harvest, a gesture that generated goodwill for the company in its new market, especially after a CVS vice president plugged the donation on “The Ellen DeGeneres Show.”
Let the Competitors Know
As nearly every acquisitive bank can attest, retaining clients during a service-industry merger is a special problem, where one-on-one relationships and regional loyalties often shape the decision whether to keep or change providers. And staffers of both the acquirer and the acquired are crucial players.
“The question is, are your employees on the phone with a headhunter, or are they on the phone taking care of customers?” says Robert van Brugge, a Sanford C. Bernstein & Co. beverage analyst. “The postmerger paralysis phase is inevitable. The best thing you can do is to make sure it is as short as possible.” At CVS, executives immediately flew to Florida to reassure Eckerd store managers that they could keep their jobs.
“On Day 1 you have to take the nervousness out of the employee base” with well-planned internal communication, says Bill Teuber, executive vice president and CFO of Hopkinton, Massachusetts-based EMC Corp. Salespeople need special attention. “Have the whole thing laid out in writing for the sales force of both acquirer and target,” advises John Cook, a director at consultancy McKinsey & Co. That way, sales will be promoting the deal right away.
Failure to work quickly and take a project-management approach prolongs the fear and uncertainty, which leads to head-count loss, customer loss, and revenue loss, says Robert Cell, former CFO of San Mateo, California-based Blue Martini Software. He adds, “Make sure your competitors know you’re not bleeding in the water waiting for the sharks to attack, because they will.”
Wearing “One Face”
After Blue Martini’s 2002 purchase of private Cybrant Corp., Cell and other company executives met with customers, partners, and prospects. Their message: as a larger public firm, Blue Martini could offer a wider array of applications (the company provides sales-optimization systems) and greater financial strength.
“Customers’ biggest fear is that after the company is acquired, their technology will be killed,” says James Mackey, head of corporate finance for SAP America Inc. After its acquisition of Lighthammer Software Development Corp. last June, SAP quickly assured Lighthammer’s customers that, initially, it would continue to promote the Lighthammer solution and provide a “migration path” as SAP moved from one integration phase to the next. Of course, SAP’s experience in keeping customers also helped it woo clients when a rival made itself vulnerable (see “A Case of Indigestion?” at the end of this article).
“Explain exactly what’s going to happen to your customers,” advises EMC’s Teuber. “Customers want to know who will be calling on their account and what differences they will notice. You want them to be able to say, ‘Life will continue in a way that is familiar.’” In its 2003 acquisition of Documentum, for example, EMC put “one face on the new organization as quickly as possible,” installing a Documentum-EMC 800-number.
In the end, of course, the best way to ensure customer retention is to offer customers better value. After buying the Eckerd stores, CVS invested an average of $350,000 per store, lowering shelf heights and installing brighter lighting and new carpeting. Plus, “Eckerd hadn’t had enough people in the stores,” Rickard says, “so our first step was to increase the labor hours.” The company increased operating hours, reduced pharmacy wait times, and earmarked 5,000 items for price cuts.
The results were rewarding: in the first 10 months, sales in the converted Eckerd-CVS outlets rose 16 percent.
Gay Jervey is a New York–based freelance writer.
A Case of Indigestion?
How Oracle’s PeopleSoft deal provoked a rival.
Companies often talk about needing to “digest an acquisition” before making the next deal. To understand one reason for this — preventing customer flight to competitors — consider Oracle Corp.’s purchase of PeopleSoft, completed in January after its long, hostile run at the enterprise-software maker.
After buying PeopleSoft, which itself had just acquired JD Edwards, Oracle quickly outbid German archrival SAP AG for software vendor Retek Inc. SAP, though, saw an opening to take business away from the acquisitive Oracle.
“PeopleSoft executives and salespeople were leaving in droves,” says William Wohl, SAP’s vice president of global communications. SAP capitalized, using its salespeople, image advertising, and financial incentives to compete. One incentive, dubbed Safe Passage, offered discounts to former PeopleSoft clients. And SAP acquired PeopleSoft support-services provider TomorrowNow Inc., using it for leverage. “We sent the message that SAP could be a very safe harbor in a very stormy sea,” says Wohl, arguing that, unlike Oracle, SAP wasn’t “distracted by this long, drawn-out, and messy takeover battle.”
The numbers have borne SAP out, it says, with the SAP U.S. market share (based on licensing revenues on a rolling four-quarter average) rising to 41 percent at the end of second-quarter 2005 from 35 percent at the end of first-quarter 2004. In the same periods, it adds, the combined Oracle-PeopleSoft share fell to 33 percent from 37 percent.
The response from an Oracle spokesperson: “Our integration with PeopleSoft has gone very well and has already proven to be in the best interest of our customers, employees, shareholders, and the community. We said we would move quickly with the integration, and we have done that.”
Customer anxiety caused by the grueling 18-month Oracle/PeopleSoft takeover battle was partly responsible for SAP’s gains, acknowledges Wohl, but clearly “it was a climate in which we could market and take as much full competitive advantage as possible.” — G.J.