Case Study: EDS’s merger with AT Kearney

The story
In 1995, Electronic Data Systems, the US information technology services group, bought AT Kearney, the global strategy consultancy in a deal worth $596m. The acquisition of a hugely successful management consultancy by a global IT group was unprecedented.

The challenge
Several concerns were raised. One was the difference between AT Kearney’s individualistic, entrepreneurial style and the more bureaucratic approach of EDS. Another concern was the alignment of incentives when combining the high-rewards culture of a partnership with the bottom-line-focused mentality of a big publicly quoted company.

The strategy
EDS wanted to create an integrated one-stop-shop so it could sell consultancy services on top of its core outsourcing and systems integration skills. AT Kearney would bring several big clients, while its fast-growth, high-margin business would boost EDS’s bottom line.

For AT Kearney, the reasons for agreeing the deal were based on self-interest and strategy. Some partners reportedly wanted to cash in their stakes, while others felt tradition was overvalued. Some liked the potential synergies, the IT competence EDS would add and its deep pockets to help fund expansion.

What happened
In 1999 Richard Brown took over as chief executive at EDS. He introduced widespread changes, the effects of which rippled through the two businesses as well as causing friction with AT Kearney’s CEO, Frederick Steingraber.

Mr Brown introduced a new business model, shed more than 13,000 jobs in three years, brought AT Kearney’s compensation plan more in line with EDS’s, and consolidated many of AT Kearney’s back-office functions with EDS’s.

Despite such cultural clashes, the first five years were judged a financial success as AT Kearney was able to take full advantage of the rapidly expanding management-consulting market. AT Kearney’s revenues tripled and in 2000 it recorded its highest revenues ever at $1.3bn.

Then the "new economy" bubble burst, sending both businesses into a downturn that led to more cuts. In late 2000, Mr Brown replaced Mr Steingraber, who had been at the company 36 years, with Dietmar Ostermann.

The financial woes continued. In 2002, EDS lost 76 per cent of its stock market valuation. Mr Ostermann shed about 1,000 of 5,000 AT Kearney employees and moved its headquarters from Chicago to Plano, Texas – where EDS was based – in a move that had been resisted by Mr Steingraber.

In 2003 there was more change. Michael Jordan took over as CEO at EDS and another restructuring began, including job cuts.

Then, in October, Henner Klein became CEO at AT Kearney. This signalled a return to the "old Kearney", as he fought to regain its former autonomy and compensation structure. But the outlook remained bleak. By mid-2005, AT Kearney’s revenues had fallen for 11 straight quarters and it had been unprofitable for the last quarter of 2004 and the first two of 2005, amounting to a loss of $36m.

In 2005 Mr Jordan struck a management buyout deal with a group of AT Kearney executives. Only seven months later, Mr Klein reported big rises in revenue (15 per cent) and profit (25 per cent) per consultant, as well as growth in its outsourcing advisory business.

The lessons
The downfall of the EDS merger with AT Kearney is a reminder – to consulting firms in particular – that promising partnerships are easily mishandled. The merger looked full of potential but the tunnel-vision of future expectations led to shortcomings in execution.

Business decisions are complex. The effects of changes, such as in structure or compensation, were bigger than expected.

Corporate culture and the personal qualities of individual leaders play a critical role in any merger.

Generous compensation and perks combined with a partnership model are key factors in motivation and performance at professional service firms. 

- Financial Times, Jul 1, 2013