Did I.T. Derail a $1.3 Billion Deal?

Back in July, Valassis Communications, a marketing services firm that’s one of the biggest coupon distributors in North America, announced “exciting” news: It was planning to buy direct-mail firm ADVO.

The proposed $1.3 billion cash deal, announced July 6, was to have created “the nation’s largest integrated media services provider,” serving 20,000 advertisers around the world with 7,900 employees in nine countries, according to Valassis’ press release. ADVO, based in Windsor, Conn., is best known for the postcard-size ad mailings it sends to 114 million households, which represent more than 90% of U.S. homes.

Valassis, headquartered in Livonia, Mich., distributes coupon booklets to 60 million homes through 550 Sunday newspapers.

“We are very pleased to welcome ADVO into the Valassis family,” Alan F. Schultz, Valassis’ president and chief executive officer, said in a statement announcing the news. “This is an exciting opportunity for employees, clients and shareholders.”

But the excitement didn’t last long. Just 55 days, in fact: On Aug. 30, Valassis filed a lawsuit to nix the deal. ADVO, according to the Valassis complaint, intentionally supplied false sales forecasts and withheld information about “significant internal control deficiencies associated with ADVO’s enterprisewide order-to-cash system.”

Schultz’s comments this time had an entirely different tone: “ADVO left us with no choice. The pertinent information we received was erroneous, projections were grossly inaccurate and we believe we were the victims of fraud.”

ADVO responded with a countersuit seeking to enforce the terms of the acquisition, in which it says it informed Valassis of the issues with its enterprise resource planning system. The company, in a press release titled “ADVO Responds to Valassis’ Meritless Claims,” asserted that its erstwhile partner had gotten a bad case of buyer’s remorse and that the lawsuit “appears to be a tactic designed to pressure ADVO to agree to a price lower than the parties’ binding agreement requires.”

At press time, the dispute was headed to court, with a trial set to begin Dec. 11 in Delaware Chancery Court. Neither ADVO nor Valassis would comment beyond the statements they have already issued.

How did this friendship end so bitterly? One of the key points of contention concerns problems with ADVO’s Service Delivery Redesign (SDR) enterprise resource planning system.

In its lawsuit, Valassis said ADVO concealed the full extent of the problems with SDR—while ADVO, in its court-filed response to the lawsuit, said it described the issues to Valassis six months prior to the signing of the merger agreement.

ADVO had been working on SDR for four years prior to its launch in April 2006, according to the company’s response to the Valassis lawsuit. The system is based on Oracle applications and was implemented by ADVO working with IBM’s Global Services division, according to the ADVO response. (Oracle and IBM declined to comment about the project.)

SDR consolidated seven order-entry systems into one and was designed to integrate “virtually every aspect” of the business, ADVO said in its court-filed response to the lawsuit. ADVO added that SDR is supposed to automate a number of ADVO’s business processes, including provisioning price quotes from advertising clients; processing client orders; printing, sorting and packaging direct-mail advertisements; tracking and paying postage and printing costs for mailings; and handling client billing.

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