The affiliate marketing world is abuzz today, as the news about GSI Commerce’s acquisition of “certain assets” of Pepperjam spreads to all corners of the industry.   Much of the commentary we’ve read congratulates Kris Jones of Pepperjam and Michael Rubin of GSI Commerce, and their respective teams, for the strategic brilliance and great synergies underlying this deal, while others are either scratching their heads -or worse, vocally scoffing at its supposed merits.

Of course, everyone in King of Prussia (where GSI is headquartered) and Wilkes-Barre (Pepperjam’s home) are saying the ‘right’ things.  Here’s a quote by Kris Jones in an interview with Jerry Lynott of the Wilkes-Barre Times Leader 2 days ago:

“This is a great fit for Pepperjam and the hundreds of clients and thousands of affiliates that we serve…we are teaming with the leading provider of e-commerce and marketing services which will provide us with strategic guidance and the opportunity to grow our affiliate network.”

Meanwhile, Michael G. Rubin, chairman, president and CEO of GSI was a bit more loquacious and effusive in the joint-company press release announcing the sale: “The acquisition of Pepperjam is a strategic extension of our marketing services business that we believe will enhance growth opportunities for both GSI and our clients,” said Rubin, adding that “Affiliate marketing is a powerful interactive marketing tool. Last year, our affiliate marketing channel generated more than $100 million in sales for our clients. By owning our own affiliate network, we believe we can more rapidly drive innovation and service enhancements to our clients while also expanding our marketing services offering to a broader universe of prospective clients. We expect the affiliate business to represent an important opportunity over time.”

TravelDividends joins the chorus on the left in congratulating both companies and wishing them well in the future, and although we don’t share the views of the ardent naysayers on the opposite end of the table, we do believe that if GSI and Pepperjam are like the vast majority of other companies around the world (irrespective of the industry they are in), they will find the post-merger integration phase of their relationship will be far more difficult, complex and problematic than the courtship phase has been.

With this thought in mind, if Pepperjam and GSI Commerce haven’t already begun to think about what may lie ahead, here are some facts and statistics about merger and acquisition results they should be pondering on how to overcome:

  • According to a 2002 study by management consultant McKinsey & Co, 70% of all mergers and acquisitions (M&As) failed to achieve expected revenue gains
  • A similar McKinsey study in 2000 revealed that 65%-70% of deals failed to enhance shareholder value
  • Consultants at AT Kearney conducted a post-merger integration study 1999 which showed 58% of deals actually reduced shareholder value

According to other statistics cited in The Complete Guide To Mergers and Acquisitions: Process Tools to Support M&A Integration At Every Level (published in 2000), authors and professors Warren Timothy, J. Galin and J. Herndon note that

–          Only 23% of all acquisitions earn their cost of capital

–          47% of the executives in acquired companies leave within the first year, and

–          75% leave within the first three years

–          During the 4-8 months following the deal, projected synergies are not achieved in 70% of M&As, and

–          Worker productivity may be reduced by up to 50%

–          Company managers grade the newly merged company’s financial performance a ‘C-‘

  • Bain & Company, another of the world’s leading management consulting firms, suggests the number one reason why M&A deals are unsuccessful is because senior management of bone or both firms “ignore the potential integration challenges”

Pretty sobering and daunting statistics, wouldn’t you agree?  However, neither Pepperjam nor GSI seem to think so; in typical PR spin, both companies extolled the virtues of the deal in their joint press release:

“This is a great fit for Pepperjam and the hundreds of clients and thousands of affiliates that we serve,” said Pepperjam’s Jones, “We are teaming with the leading provider of e-commerce and marketing services which will provide us with strategic guidance and the opportunity to grow our affiliate network.”

Nick Pahade, president of gsi interactive, the GSI division into which Pepperjam will now report to, added: “Affiliate marketing is a proven and cost-effective channel for online retailers and marketers…Pepperjam is a young and growing company with tremendous potential. In addition to the network, we are also excited that this acquisition expands our presence in agency services for affiliate marketing and search, areas where we already have a meaningful and growing business.”

Just to make clear, TravelDividends isn’t suggesting that the merger between these two powerhouses is a folly or will fail…rather, we are saying that they have their work cut out for them.  Having been involved in many M&As during our careers, we speak from experience on this point.

What’s your view on the GSI / Pepperjam deal?  What effect do you think it will have in the affiliate marketing industry at large, and in the travel affiliate and affiliate network segments in particular?   Will this deal change the competitive structure of the industry, or end up a non-event?  Leave us a comment and start a discussion, or drop us an email. We’re very keen on hearing from our readers…