Buyer's Poker

By Edward Cone  |  Posted 10-15-2004

Buyer's Poker

 

Page 1

: Introduction">

When two of the most powerful chief information officers in the gaming business met last July to discuss a merger that could reshape the industry landscape by creating the world's largest casino company, they chose a surprisingly pedestrian venue. They had breakfast at a local Denny's.

"I felt like some Amway guy, ordering the Grand Slam breakfast," says Tim Stanley, senior vice president and CIO of Harrah's Entertainment Inc. But Stanley knows from previous takeovers that it helps to have a good relationship with his counterpart at the acquired company, in this case CIO Carol Pride of Caesars Entertainment Inc. After all, integrating information systems will be critical to the success of Harrah's proposed $9.4 billion acquisition of Caesars. And without Pride's help, Stanley's job will be considerably more difficult. On this deal, however, building those bonds may take some finesse. Says Pride, "It's safe to say that his executive team is more excited about this transaction than mine is." Denny's, besides being convenient to both of their homes, was, as Pride notes, "a neutral site."

Stanley's meeting with Pride is just one example of Harrah's distinctly non-gambling approach to acquisitions. The company performs exhaustive due diligence, even consulting Stanley on the technology issues it is likely to encounter. That said, Stanley brings a certain Las Vegas swagger to his job. "We're a growth company," he says of the big casino and hotel operator, which has acquired five rivals in the last six years. "We have acquisitions down to an art, and I think we can take on just about anything."

Harrah's Take
Company | Harrah's Entertainment
Corporate Headquarters | Las Vegas, NV
Senior Vice President and CIO | Tim Stanley
Revenues | $4.42 billion (trailing twelve months)
Profits | $305 million (TTM)
Stock performance | 52 week high-low: $57.50–$40.85 Oct. 8: $54.09

Source: Harrah's; Yahoo! Finance

The proposed purchase of Caesars is Harrah's biggest target yet. The two companies are about the same size, although Harrah's is far more profitable, with $292 million in net income last year on $4.3 billion in revenue, versus profits of just $46 million for Caesars on revenue of $4.4 billion. Pending regulatory approval—a process that could last well into next year—the combined company would be the largest in the gaming industry, with more than 50 casinos around the world. No problem, says Stanley: Absorbing new talent and technology assets is one of the things his organization does best.

Should the deal go through, Stanley's job will be to create a single information technology department that can support the combined company, without missing a beat in powering ongoing operations. Information technology is critical to the casino business, and Harrah's can't afford to stumble through the integration process: The company is still in the process of digesting Horseshoe Gaming, the Las Vegas-based casino company it bought for $1.45 billion earlier this year.

Casinos rely heavily on IT to drive both revenue and profits. "There is a huge marketing component to the casino industry," says Andrew Zarnett, a managing director at Deutsche Bank Securities, in New York, who covers the gaming industry. "Database marketing is very important in reaching and understanding customers—their level of play, frequency of play, where they prefer to play—so companies can create offers specific to a particular customer's wants. Reach the customer with the proper offer, it drives revenue."

Harrah's Chief Executive Gary Loveman believes that the current wave of consolidation in the casino business will ultimately result in just two large industry leaders. He plans on Harrah's being one of those behemoths. Buying Caesars would position Harrah's as the worldwide alternative to the rival giant proposed last June by the planned merger of MGM Mirage and Mandalay Resort Group, which, if approved, will have 28 casinos and $6.5 billion in revenue. For a company such as Harrah's, which has widespread operations, the ability to drive customers from one Harrah's location to another will be critical. IT-intensive rewards programs that help create brand loyalty across the chain are a key to its strategy.

Harrah's is ready for its biggest integration challenge, says Stanley, in part because IT has been in the loop from the beginning. "We have a formal business development team that reports to [Chief Financial Officer] Charles Atwood," he says. "I'm generally involved in the strategic planning discussions as they consider our growth options, and bring in ideas that fit our requirements." As a potential target comes into focus, Stanley will discuss it in detail with CEO Loveman. "[Loveman] says, 'Could we do this?,'" says Stanley. "We talk it through, I tell him how I would do it, and what I need to get it done."

Could Stanley kill a deal that didn't look like it would work from the technology end? "I probably could," he muses, although as yet no such dramatic intervention has been required.

Page 2

: Learning by Doing"> Learning by Doing

Meticulous preparation is the key to Stanley's confidence. "We look at the organization in question and consider their technology approach," says Stanley. "We look at potential sticking points and consider the different functional areas, decide at a high level whether we would want to keep some of their systems or convert them all, so that we don't look up in the middle of the integration and say, 'Uh-oh, how do we do this?'"

Stanley does due diligence on potential acquisitions with a staffer who is sworn to secrecy in order to avoid leaks that could move the stock market or cause problems with the SEC. When he can, Stanley reaches out to his counterpart at the target company, often speaking with the tech executive on the phone, and sometimes meeting in a clandestine location (for one deal, the rendezvous was at an airplane hangar).

But one thing that's no secret to anyone who's going into a Harrah's deal is where the center of gravity in the merged IT organization will be. Like the Borg on Star Trek, Harrah's assimilates its acquisitions, and the surviving IT entity is going to be Tim Stanley's shop. "[Leadership of the merged organization] has not been an issue, I don't know that I've worried about it," says Stanley, a onetime consultant and former CIO of National Airlines. After two years as Harrah's vice president of information technology, Stanley replaced longtime CIO John Boushy in early 2003.

Harrah's knows what it wants out of its acquisition deals before it ever launches one. "Based on the results of previous acquisitions, we would like to see at least a 20 percent improvement in the revenue and operating margins of acquired companies," says Stanley. "We have rules of thumb, having done this so many times—we can tell on the back of an envelope whether or not a deal is likely to work."

Casinos are information-rich environments, with the data that is captured at slot machines, retail outlets, restaurant points of sale and hotels being constantly warehoused and analyzed in hopes of goosing both the top and bottom lines. Former Harrah's CIO Boushy, who stepped down from the top tech post but stayed on as senior vice president and chief integration officer, has credited technology, such as data-warehouse software sold by Teradata, with powering the successful Total Rewards customer-relationship-management program that has helped drive consistent sales growth at the company's existing properties.

A customer who enrolls in Harrah's Total Rewards program acquires "frequent gambler" points every time she plays any game at a Harrah's casino. Accumulate enough points and she is comped for dinner, drinks, even hotel rooms, with Harrah's knowing just what to offer her, based on its analysis of its customer database. The player will seek out Harrah's properties in order to accumulate more rewards. And in the end, the house always makes it money back and then some. Harrah's has seen same-store revenue growth in 21 of the last 22 quarters.

Stanley wants to impose the same formula on the acquisitions. "We look for the opportunity to apply our technology-driven capabilities to make the business perform better under us than its current owners," says Stanley. "We want to bring efficiencies to the back of the house, the financial and payroll system, and to juice the performance with marketing and branding too."

Page 3

: Acquired Knowledge">

Acquired Knowledge

Every acquisition has involved its own challenges and lessons for Harrah's. An early deal for the Rio Hotel and Casino, for example, taught Harrah's to address integration issues before the ink dries on an acquisition. "Their systems were a rat's nest," says Stanley. "We didn't change much technologically, and that ended up being a big thorn in our side for a couple of years. Finally, we went back and looked at the problems again, and we bit the bullet and took on the job of converting their systems."

Currently, Harrah's is busy integrating the assets of Horseshoe Gaming. Stanley says Harrah's "got smart" about technology integration by investing in integration middleware, such as Tibco Software Inc.'s Business- Works, which allows Harrah's to use acquired systems "even if the backend is still ugly." The ability to show its workers modern-looking graphical interfaces, instead of the old-fashioned green screens, on an otherwise workable system is a confidence builder, he says. "It gives us more flexibility about an acquisition like Caesars, because we know we won't have to gut all their properties."

The investment in middleware may be valuable beyond the Caesars acquisition, too, as the gaming industry continues to consolidate. For all of IT's prominence in the sector, many casinos still run their technology onsite at each individual location, instead of running large, centrally managed, networked systems. With the cost of converting each acquired property to Harrah's standards running as high as $10 million, Stanley needs to make the process efficient for the deals to pay off.

Some things have gotten easier with practice. While the 2000 purchase of Players International required 18 "fairly painful" months to fold a single property into Harrah's systems, the 2001 acquisition of Harveys Casino Resorts involved four properties and was done in just five months.

Harrah's has even been able to mine Harveys for some technology, including a coupon system—now being introduced in many Harrah's properties—that allows customers to feed a promotional coupon directly into the bill validator on slot machines. Slots can provide up to 80 percent of a casino's profit from gaming revenue. "We're buying better-quality competitors these days in terms of technology, so there's more for us to keep," says Stanley. Integrating acquired technologies should help Harrah's meet its larger goal of developing new capabilities faster, says Stanley, whose IT team is now evaluating Horseshoe's proprietary slot system and other casino-floor systems (including those for table games) at Harrah's Las Vegas tech lab.

Page 4

: The Human Factor"> The Human Factor

The most critical part of any merger, says Stanley, involves the people who run all this technology. He used to meet with erstwhile Horseshoe CIO Jon Wolfe at neutral sites before the deal went through. Today he just walks down the hall: Wolfe, now a Harrah's employee, has an office two doors down from Stanley's at the company's Las Vegas headquarters. Stanley sees Wolfe, who is focused on integration issues, as a valuable asset. "He was with them for years, and he's got a lot of knowledge and industry expertise," says Stanley, to whom Wolfe now reports. "He's been important to us during this job."

Harrah's management does road shows, forms integration teams to get people involved, and uses retention and performance bonuses to keep them motivated. There may be cuts and attrition in IT staff over time, says Stanley, but no real bloodletting. "It's not draconian like it can be in areas like accounting, where you just don't need two people to do the work anymore."

Communication within Harrah's is critical, says Stanley, and he works to prepare his people for the task of integration. He tells his direct reports about acquisitions as soon as he can, often on the day a deal is announced even though not every possible deal goes though. "Sometimes I feel like the boy who cries wolf, but we've got to be a growth company that is prepared to scale up," he says. "We take our people through the business rationale, talk about what we might sell off and what the implications of that could be."

Whether or not the acquisition by Harrah's is approved by regulators, Caesars CIO Carol Pride will be a busy woman. Caesars Entertainment is a relatively new company. Originally called Park Place Entertainment Corp., the company acquired Grand Casinos and Caesars World in 1999. Park Place Entertainment changed its name to Caesars Entertainment in 2004. Pride was named CIO just days before the Harrah's deal was announced.

Pride seems sanguine about her likely departure in the event of a successful takeover by Harrah's. "Merger, no merger; we buy, they buy; that's just the nature of this business," she says. "Nothing really changes but the name on the paycheck."

Harrah's Take
Harrah's Entertainment Inc. has bought five rival casino companies in the last six years. Now it is upping the ante with its biggest deal yet, a proposed $9.4 billion acquisition of Caesars Entertainment Inc. The take so far:

Company | Showboat Inc.
Year purchased | 1998
Price | $1.05 billion
Number of properties | 4
IT integration status | done

Company | Rio Hotel and Casino
Year purchased | 1999
Price | $987 million
Number of properties | 1
IT integration status | done

Company | Players International
Year purchased | 2000
Price | $439 million
Number of properties | 3
IT integration status | done

Company | Harveys Casino Resorts
Year purchased | 2001
Price | $712 million
Number of properties | 4
IT integration status | done

Company | Horseshoe Gaming
Year purchased | 2004
Price | $1.45 billion
Number of properties | 3
IT integration status | underway

Company | Caesars Entertainment
Year purchased | announced July 2004; regulatory approval pending
Price | $9.4 billion
Number of properties | 28
IT integration status | prospective

Source: CIO Insight

As Pride knows, managing through regulatory limbo is a special challenge. "It's a royal pain, because uncertainty is hard," she says. "But I don't dread that we will be drifting, we've got fun and exciting things to do."

When mergers do happen, she says, "technology is not the hard part. The cultural issues make more of a difference." Under whatever future management Caesars may have, alignment will depend on human factors. For Pride, that starts with keeping people motivated.

Stanley sees the two companies as having different strengths: Harrah's with its strong marketing and customer relationship programs, Caesars with its back-end systems, such as human resources, that are essential to any company.

Says Stanley of Caesars, "Their technology is not as well integrated into the culture and the business of the company, so that's an area where we may find some opportunity to improve efficiencies." Harrah's may also get value from the table-game technology used at Caesars, which tends to draw a higher-end crowd to its properties than does the slots-oriented Harrah's casinos.

One big asset of Caesars is a customer information warehouse with what Pride describes as "multiple terabytes" of data on almost 30 million customers. "Our challenge is to pool and leverage that data," she says. Another area where Caesars has a clear lead is in retailing. "They have more stores, more amenities at their properties, and they have done a better job of integrating them into the operations," says Stanley. "We are looking at doing more of that, and that's a good thing that could come out of this deal." Harrah's is already expanding its understanding of the entertainment end of the gaming business via the Horseshoe acquisition, and Caesars could add to that momentum. The overall customer experience is a big part of the Caesars culture, says Pride. "Our advantages aren't specific to technology, but in the way we manage our customer service and our brand."

A familiar challenge for both companies is regulatory compliance for casinos spread across a maze of different states, all with different rules. "I couldn't have identical systems in all our properties if I wanted to," says Pride. "In New Jersey, it's a requirement to have systems in the casino building itself. Mississippi does things its own way, other states their way."

If things go as planned, Harrah's will be done integrating the Horseshoe properties before getting started on the massive Caesars job. And federal regulators, currently focused on the Mandalay-MGM deal, still have to have their say. Harrah's and Caesars are already making some changes to ensure the deal is approved—and have agreed to sell four casino properties to help smooth antitrust concerns.

Stanley says the slow process isn't all bad. "Hopefully I get a beach vacation in there somewhere."