SPECIAL REPORT: A SUCCESSFUL UNION BASED ON SHARED FACTS

You can forget the prudish stereotype about the British. In high profile companies across the UK, our top businessmen are at it like rabbits. But banish all thoughts of racy office flings from your mind because the urge to merge that is sweeping the nation's boardrooms is strictly professional.

In recent months, a flurry of merger and takeover bids has reflected an insatiable appetite for accelerating expansion through aggressive acquisition strategies. It is a trend that has left few industry sectors with their corporate landscapes intact. From mail order (witness the Otto Versand takeover of Freemans) to database marketers (see Consodata's 51 per cent acquisition of Consumer Access), companies are falling over each other in the race to find suitable partners.

But market share and the desire to reach critical mass have not been the solitary catalysts of this spate of activity. As the direct marketing deity that is customer data becomes subject to increasingly frenzied worship, the cross-selling opportunities triggered by mergers are the obvious Holy Grail.

Which is why in a marketing environment that is shifting all the time from a product-driven outlook towards a consumer-centric global view, data mining software and the secrets it can unlock are absolutely central to companies' performance. Perceptions are that the practical implications of marrying two disparate systems can be financially daunting and time consuming. But speaking to those who have been involved in recent high profile mergers, such issues are superseded by talk of the positive pay-off.

"Ownership of information is the most valuable asset of any company involved in direct marketing. Whether the party involved in a merger is the purchaser or the vendor, the quality of data is critical," says Livingstone Guarantee managing director, Jeremy Furniss.

Just how critical may be suggested by recent merger activity in the financial services sector. Last year's amalgamation of insurance giants, Commercial Union and General Accident, for example, gave the new CGU Insurance firm a 13 per cent share of the UK insurance market. Merger integration costs reached pounds 105m.

That merger was followed by Lloyds TSB's announcement in June that it had sealed the purchase of Scottish Widows in a pounds 7bn deal. The takeover is widely perceived as shrewd business, not least by those who see it as presenting rich data mining potential.

One analyst comments: "The Scottish Widows database has 2.5 million customers to add to Lloyds' 15 million existing personal and business customers. And Scottish Widows' use of powerful database software - such as Microstrategy's DSS Agent for profiling, Exchange Applications' Valex tool for customer communications, and SAS for statistical analysis and modelling - suggests that its commitment to data management would ensure smooth integration with the Lloyds TSB group marketing database."

The contract to design and manage that database - worth between pounds 5m and pounds 10m over three years, complete with 15 million customers and 2,000 fields of data - was awarded to Crawfords Computing last year. The consolidated system, launched within the past few weeks, will target the delivery of more than 60 million mailings a year and underpin the company's statement insertion and telemarketing strategies.

Crawfords' system uses its Resolve suite of data hygiene products to clean and refine data from more than 20 sources into a common format. According to business development manager, David Lunn, this can pose significant problems.

He says: "When companies merge, data reconciliation can become a serious issue because of the different data types and systems that may have been utilised. Rigorous data cleaning and deduplication are essential because of the long term CRM implications that can result from inaccuracies in the database."

Once the data has been cleaned, John H Harland's Pinnacle software performs a range of functions, including segmenting data online to generate customer strings for campaign management. Its reliability and data processing prowess make it ideal for handling large quantities of data at high speed.

Lloyds TSB senior manager of database marketing, David Wreathall believes the data merger will yield annual savings of pounds 1m. "There was relatively low duplication between the two databases because of the different geodemographic profiles of the companies' customers. The measure of our success will be how well we retain, satisfy and cross-sell to our customer base, and merging the data will prove a potent weapon in the battle to achieve that," he says.

The use of military style language may seem melodramatic, but it is a sign of how frantic the quest to attract and retain customer loyalty has become. And not only for financial services companies. Across a wide range of industries, CRM firms have been prompted to devise sophisticated software solutions for clients looking to develop customer-led operations.

Harte-Hanks, for example, has just launched a mergers and acquisitions service to help companies understand their extended customer base and limit problems with database duplication. According to Tom Scampion, business development manager for Harte-Hanks' data re-engineering software package Trillium, this process can uncover the most unexpected obstacles.

"When companies merge, there can be difficulties with establishing the definition of a customer," he says. "One of our clients has more than 20 definitions of a customer in its enterprise data warehouse. How often do they have to transact to be regarded as a customer? When are they regarded as lapsed? Are they still a customer if they are inactive? And so on. These are all questions that have to be answered," he explains.

Trillium, whose 200 global clients include Microsoft, is used to clean data and identify potential matches between records. As Scampion says, creating the single customer view through deduplication is essential if merged companies are to establish immediately viable CRM and cross-selling strategies. But he warns that access to more customers and their data can be a double-edged sword.

"Having better quality data represents a great opportunity, but if not managed properly, it can also become a minefield. For a merged company to establish the lifetime value of customers, for example, it has to meet the technical and cultural challenges of restructuring its data management operations, which is why advanced data tools are so important."

Important they may be, but without due consideration of their data protection responsibilities, merged companies could find themselves powerless to use them. The Data Protection Registrar has the authority to shut down the database operations of non-compliant firms, a very real threat for those undergoing the complex technical restructuring that a merger is likely to prompt.

Shelagh Gaskill, a Masons Solicitors partner and data protection lawyer, says that in situations where data recollection must be by consent, it is vital that companies have an effective software system for flagging up the need to contact the customer. Equally essential is the appropriate issuing of Fair Collection Notices.

"It is an expensive process. But it is worth doing properly, because companies which have quality customer data are ultimately going to make more money out of that data than from sales of their core products," she says.

Her role as a "data greaser" involves performing data audits of companies which are proposing to merge and valuing that information. "If a company's stock-in-trade is its customer list and the data has not been properly collected, then that company isn't worth tuppence," she warns.

It is a view shared by Martin Hickley, a consultant at Berry Consulting, which is part of Acxiom Group. The company is considering the launch of a tool that would perform bespoke audits by looking at the Data Protection Act compliance of data and of the system which holds it. And with the arrival of a new Act next March, companies are certain to be kept on their toes.

Hickley suggests that the overwhelming emphasis on data-driven direct marketing is obscuring correct compliance with the regulations. And with regard to the motoring industry, Gaskill goes further: "My belief is that customer data is being transferred between motoring companies without permission."

The industry has certainly been a hub of takeover activity this year. Ford's April buyout of Kwik-Fit for pounds 1bn was explicitly a strategic move designed to generate cross-selling opportunities. Long term access to Kwik-Fit's database is almost certain to be fruitful as the distinction between selling motoring-based products and services becomes increasingly blurred.

Last February, Trade and Industry Secretary, Stephen Byers, announced that he was blocking Cendant's proposed acquisition of the RAC unless it disposed of its Green Flag breakdown assistance business. And once utilities and financial services provider, Centrica, saw its bid for the RAC rejected, it was inevitable that the AA would be next to occupy a space in the increasingly crowded market of motoring organisations looking for merger opportunities.

Reaction to last month's pounds 1.1bn bid by Centrica for the AA, which will be voted on by up to 4.5 million AA members in September, has been mixed. Some analysts have criticised the deal for its apparent lack of synergy. Furniss, for example, says that the attempt to build a corporate strategy on the principle of customer service is likely to be a struggle.

But that is an accusation which is, according to others, without foundation. "There are very exciting prospects for our database operations," says John Kinsey, marketing director for British Gas Trading, a part of Centrica, which itself was born out of the demerger of British Gas. "The brand attributes of Centrica and the AA are very similar. The growth of our Goldfish credit card and insurance packages have shown our commitment to establishing a portfolio of service-led brands," he points out.

The cross-selling potential is surely undeniable, and while both parties are being understandably coy about the database implications of a merger, there is obvious anticipation of the cost savings likely to be triggered by amalgamating their telemarketing and customer handling operations.

With Centrica believed to be preparing itself to scale the telecommunications ladder with a bid for Energis in the first instance, it looks like the UK could soon have its first genuine multi-utility player.

A database company insider says: "Centrica has clearly recognised that expanding into new areas of business and creating the potential for extensive cross-selling are the way forward. If it exploits the opportunities that merging such diverse data operations provides, the company can only go from strength to strength."