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Here's how Inc. 500 companies are actually thriving in our merger-a-minute economy

Last January, Dave Fried experienced a stunning reversal of fortune. Not long after his company--Human Resource Alternatives Inc. (#20), an employee-leasing company with headquarters in Burlington, N.J.--snagged several new accounts worth $10 million, he lost two longtime customers that together brought in nearly $7 million in sales. Why did the customers leave? Simple: they had both been acquired by larger businesses with suppliers of their own.

For Fried, news of the impending mergers came "completely out of the blue." He says he received notice from his number one customer, a $4.9-million account, the day before the intent to acquire was announced. "The CEO called me and said his company was being bought. It didn't look good for me," he recalls. Sure enough, some weeks later Fried got the official word from the acquiring company: we don't need you.

What happened to Fried could happen to you--if it hasn't already. Mergers and acquisitions may be the new leading cause of customer attrition. They certainly are pervasive. "I'm affected by a merger a week," says Richard Tuck, CEO of Lander International (#290), a recruitment company in El Cerrito, Calif. "It's happening in every industry. It's almost like watching dominoes fall."

For Fried, Tuck, and others who've been swept along by the M&A wave, it's been a sobering ride. But they say their businesses are better off for the changes they've made after seeing more than one customer gobbled up.

Although there was no hope for his two big accounts, Fried took several steps to salvage his business plan. For one thing, he diversified out of the sector in which his largest customer was acquired--too much M&A activity there. He's also been able to lavish more attention on his brand-new customers. When the mergers came, he says, "we were completely overstaffed on the administrative side. It hurt us financially but played well to our new customers." Perhaps most important, he's added a clause to his business plan--a hedge against lost business, not unlike planning for a certain level of bad accounts receivable. Before, he admits, "we were so cocky, we thought we couldn't be touched. Now we assume that 10% of our customer base could turn over in a year due to acquisition or bankruptcy."

The lesson learned: Don't wait for a recession to plan for lost business; your customer base will continue to churn as more companies combine.

At least Fried got paid in full and promptly. That wasn't the case for Debbi Milner, president of Jade Systems Corp. (#9), a computer reseller in Long Island City, N.Y. When banks are your biggest customers, you have to expect a little merger burn these days. And when Milner's number one and number two customers merged--with each other, no less--she predicted payment problems. But not like this: a whopping $10 million tied up for months. Did Jade Systems have trouble making payroll? "We would have had trouble making anything," says Milner, "if it hadn't been for the help of our financing partners." For one, IBM Credit Corp., the financing arm of the computer manufacturer, relaxed the terms of Jade's line of credit, and Milner's company pulled through.

The lesson learned: Increasing credit terms with nontraditional lenders can be invaluable.

"Our accountant suggested we do it with all our suppliers. We're a stronger company for it as a result," Milner adds. Eventually, she got the $10 million, and after competing with 399 other suppliers for one of a coveted three spots, Jade kept the merged banks' account and has even increased its value. So, when three more mergers swept through its banking-industry niche, Jade was better prepared.

Even as Milner lost accounts, she gained word-of-mouth sales elsewhere. "The important thing is to stay calm and cool," she advises. She and her staff spent considerable "therapy" time on the telephone while customers' employees voiced their worries about being laid off. But all the phone therapy paid off in new business when those employees went on to other jobs. "We lost some customer contacts, but some opened doors for us in other industries and at other banks," she says. "I don't want to sound calculating, but it was an upside we banked on."

She wasn't the only one searching for a rainbow after the storm. Jack Sparagowski, CEO of Sparagowski & Associates (#393), a "mystery-shopper" inspection service in Sylvania, Ohio, says that while he's lost his share of customers to mergers, recently he's been on the receiving end after certain customers went on shopping sprees for other companies. "Mobil is a customer, and when it acquired a chain of gas stations and convenience stores in Atlanta, I got that account," he says. But Sparagowski didn't assume he had the business in the bag--he went after it. "If I hadn't initiated the contact, I doubt I would have gotten the business," he says. "I've learned that not everything is driven by corporate headquarters; there can be a lot of regional autonomy" after an acquisition.

The lesson learned: After a merger, don't assume you're automatically out--or in--as a supplier.

If you're like Kate Ludeman, president of Worth Ethic Corp. (#476), an executive-coaching service in Austin, you may find yourself back in demand after the dust has settled on a deal. Ludeman knows that customers lost today are not necessarily lost forever. "It's not unusual for me to be called in a year later," she says.

Still, so many of Ralph Fascitelli's Seattle-area customers have been acquired that the CEO has had to reassure his own 40-person staff that "we're not selling out ourselves." The agency he cofounded, Imagio Technology Advertising & Public Relations (#305), in Seattle, is a prime example of how the fallout from M&A mania can change a company's outlook.

Customers for life? How about 18 months, if Fascitelli is lucky. "Companies come in to us and say, 'We've got 18 months to make it--go public or merge with someone," he says. Clients exert extreme pressure on Imagio to help make them a hit--and fast. "High-tech marketing is a constant sprint," he says. "Our motto is 'Running scared."

But even Imagio has benefited from the side effects of all that customer churn. Lower employee turnover, for one. Since Fascitelli can't count on keeping customers forever--or even for another month--he's focused on keeping employees. Among the staff benefits: profit-sharing checks paid every six months, lavish company picnics, and a 30-day paid sabbatical after five years. No one's ever been laid off in the wake of an account lost to a merger. Adversity, it seems, has brought the staff closer together. "We've actually resigned from a number of clients--they beat up your people and they're not profitable," he says.

To fill the void, Fascitelli created an incentive: two years ago his company began paying a "finder's fee" to employees who uncover leads that convert to sales. For example, certain new business from an existing account can pay a bonus of $500, while a new client nets an employee $2,000. Fascitelli estimates that, in all, the company has paid out about $50,000 in finder's fees to 9 or 10 employees who've helped generate some $500,000 in new business. Not a bad deal: he could easily have spent much more in sales commissions and expenses.

Initiatives like the finder's fee help everyone move on and not take the loss of a customer so personally. "Client attrition and new-business development go hand in hand," Fascitelli explains. There may be a merger a minute, but "there's also a lot of money coming in to start new businesses." He mentions one company called Advanced Gravis, a loyal customer until it merged with a much larger company, last year. "Then we were out," he says.

Sure, the news hurt, but the silver lining came several months later. The CEO of Advanced Gravis, reports Fascitelli, "has moved on to another company and has hired us again."

Susan Greco is an articles editor at Inc.