When Two Become One

When Pomeroy IT Solutions completed its acquisition of Alternative Resources (ARC) on July 23, 2004, its recently minted CEO Stephen Pomeroy knew the most challenging part of the deal was still in front of him.

At the time, Pomeroy (No. 75 on the 2004 VARBusiness 500)was a $600 million solution provider known primarily for reselling computers and networking equipment. It was determined to boost its visibility in services and increase revenue in that segment from 20 percent to at least one-third of all sales. Management knew that ARC--an all-services, $135 million solution provider of consulting, management, staffing and field services--was the right fit. In addition, its base in Barrington, Ill., gave Hebron, Ky.-based Pomeroy the national footprint it sought. But it wouldn't be worth jack if the two companies didn't work and play well together.

Pomeroy recently took time out from his efforts (his deadline is April 5, the end of the company's first quarter and the date he expects all integration efforts to be completed) to talk to VARBusiness about the specific steps he and his company are taking to guarantee that the company's largest acquisition ever--$44 million including the absorption of all debt--will be successful.

"We consider ourselves strong operators, and our competitive advantage is to leverage a low cost of operation model, especially when competing with tier ones," Pomeroy believes. "We need that model to be prevalent."

Getting Down To Business

With the company's stock climbing roughly 40 percent in the past six months, Pomeroy wanted to make sure there weren't any missteps in this critical integration. The first issue he needed to tackle was the 2,200 ARC employees that came with the deal--500 more than Pomeroy employs. Duplication of services was inevitable, an issue most acquiring companies face. More specifically, Pomeroy says there was some overlap in IT, back-office and accounting functions that needed to be addressed.

The solution isn't pretty, but it's necessary; he is currently in the process of reducing overall head count by up to 2 percent (80 employees), a task to be completed by the end of its next quarter. Pomeroy explains that his goal is to give these employees as much advance notice as possible.

At the same time, Pomeroy has gone on the road to reassure and connect with the new coterie of employees, who had been going through a bad time with ARC. The company was trying to stay afloat after the tech downturn eroded sales and profits, and the venture-capital firm that was funding it became less receptive to investing money to grow the business.

Employees, meanwhile, were understandably nervous about their new owner's plans. By the same token, ARC's customers wanted to know what the new company would do for them. So Pomeroy decided to take the bull by the horns and have his team meet both ARC employees and customers.

Pomeroy's goal, he says, was to keep both groups informed about the integration plan. In the case of ARC employees, Pomeroy and his team gave them back some benefits they had recently lost, including the reinstatement of their 401(k) matches and the rescinding of a 10 percent salary reduction. That helped to buoy their confidence in the new company.

"It's why we've had very little turnover, I believe--easily fewer than 5 percent. I'm not aware of losing any impact players," Pomeroy says. "I've been pleased with the general attitude of the legacy employees. They've embraced the new situation and are excited about raising their skill levels and the chance to grow personally."

Keep the Customer Satisfied

As for ARC's customers, Pomeroy told them that the new, larger company would offer them the same services that ARC had, in addition to Pomeroy's portfolio, and that all of it would be available at more locations nationwide. Those customers, Pomeroy says, were pleased to hear that because they want to conduct their IT spend with national companies, which provide scale. The CEO also touted Pomeroy's solid financial track record and its debt-free balance sheet.

"ARC didn't have a strong balance sheet, and its customers had concerns about its viability," he acknowledges.

Concurrently, Pomeroy made certain both companies' management teams were aligned. He insisted that all members be present at meetings to discuss operations.

"It's easy to come in and say, 'Here's the way we're going to do it,'" Pomeroy says. "But you need the patience to have an open mind, to look at what they do extremely well and what we do extremely well, and then combine them. The idea is to leverage best practices. HP and Compaq went through this. There are tough business decisions to make."

Pomeroy also made sure that different parts of the company--sales, back office, accounting and IT, for example--conducted weekly meetings, and then followed up on them. He also created a main steering committee, with its members split 50-50 between old Pomeroy and ARC management, and the CEO acting as its chairman.

Also on the to-do list was adjusting to relationships with vendors. Perhaps unusual in this particular acquisition, many of the same players--Cisco, EMC, HP, IBM, Microsoft, Sun--were familiar to both companies, although ARC knew the players more from the services side, while Pomeroy knew them from the product side.

In the final analysis, "it's about getting both teams on the same page in terms of execution," Pomeroy says. "Success or failure boils down to people...I have to be a good listener. These things can get ruined by egos taking over, and then you lose sight of overall goals."

Not Out of the Woods Yet

Pomeroy acknowledges that even now, seven months down the line, the new company is still working out all the kinks. He says he will know if the two cultures have meshed to his satisfaction in several months, when the results of the company's first quarter come in.

In the interim, the company was scheduled to announce its fourth-quarter earnings on Feb. 9. While Pomeroy cannot comment on upcoming financial results, he did point out that the company did not change its guidance, which was 30 cents to 32 cents per share, going into the company's private period.

As for integration challenges yet to be tackled, Pomeroy sees the company down the line blending its own brick-and-mortar style with ARC's virtual model to form what he calls a regional cluster model.

"I foresee that we won't need a presence in every market because it's not cost-effective," he says. And after the ARC integration is complete, Pomeroy intends to start all over again and turn his attention to new acquisitions.

"What would I like to buy next? I still want to grow services, expand our annuity business [such as co-sourcing and outsourcing contracts], and I'm looking at offshore," he says.