2014-05-22 12:56:01
The romance of a merger of equals rarely lasts long
May 17th 2014
PARIS and champagne. What better way to celebrate an engagement? But that was
last July. On May 9th a terse joint statement from their bosses confirmed that
Publicis and Omnicom, two advertising giants, would not be getting married
after all. Instead, although they maintain a great respect for one another ,
the two companies have jointly decided to proceed along our independent paths.
The only thing missing was a Gwyneth Paltrow-esque reference to consciously
uncoupling .
Anyone connected with the two firms should probably count himself lucky that
they uncoupled before rings were exchanged. (Indeed, shares in both firms edged
up after the cancellation.) Corporate marriages often go wrong, but mergers of
equals in which two firms of roughly similar size combine, there is neither
buyer nor target and typically no cash changes hands account for a
disproportionate share of the most notorious failures. Before making a comeback
as the latest merger wave gathered force, they had deservedly gone out of
fashion after some disastrous couplings around the turn of the century.
When Travelers and Citibank unveiled their merger of equals in April 1998,
Sandy Weill, one co-chief executive of the aspiring financial powerhouse,
Citigroup, pledged to share with his co-boss, John Reed, the lucky office
fireplace he insisted on having built. There was not to be much toasting of
marshmallows together. Barely a year later Robert Rubin, a former treasury
secretary, was hired to make peace between the feuding couple. In February 2000
Mr Reed quit this m nage trois. Large chunks of Citigroup have since been
offloaded, as if to confirm that the merger should never have been consummated
in the first place.
In May 1998 Daimler and Chrysler announced their union, creating a giant
German-American carmaker. Two years later J rgen Schrempp, by now in sole
command, having seen off Robert Eaton, the former boss of Chrysler, claimed
that the term merger of equals had been used only for psychological reasons
. The marriage struggled on until May 2007, when a divorce was announced.
Worst of all was the merger in January 2000 of Time Warner, a media giant with
70,000 staff and revenues of $27 billion, with AOL, an internet firm whose
12,000 employees generated less than $5 billion. To symbolise their devotion to
power-sharing, Steve Case, boss of new-economy AOL, wore a tie to the press
conference celebrating the deal while Gerald Levin, boss of old-economy Time
Warner, turned up without one. Months later the dotcom bubble burst, making a
fool of Mr Levin, who announced his retirement in December 2001. In 2009 AOL
was spun off. Jeff Bewkes, Time Warner s current boss, calls the merger the
biggest mistake in corporate history .
Although the deals have since been smaller and fewer, the tales of woe have
continued. After failing in 2001 to complete a merger because they could not
agree on how to share power, Alcatel, a French telecoms-equipment firm, and
Lucent, an American rival, eventually tied the knot in 2006. The combined firm
s share price has slumped through a series of bosses. Now there is talk of a
possible merger with Nokia, a Finnish rival. In February 2012 Glencore and
Xstrata, two mining giants with headquarters in Switzerland, agreed on a merger
of equals, only for Glencore to change its tune before the deal went through
and insist that its boss, Ivan Glasenberg, take sole charge of the combined
firm. Duke Energy behaved even more brazenly after completing its merger with
Progress Energy in July 2012. As part of the deal, Jim Rogers, Duke s boss, had
agreed that William Johnson, Progress s boss, would run the combined firm, and
he would be executive chairman. That was honoured for roughly two hours, before
the board that had just appointed Mr Williams as chief executive fired him and
gave Mr Rogers the job. Lesson for any boss considering a merger of equals:
ensure your firm gets at least half of the members of the new company s board.
The aggregate data on mergers of equals reinforce the message of these sorry
tales. On average, mergers have a mixed record, rewarding sellers shareholders
a bit more than they hurt buyers . But equity deals and large deals tend to do
worse, notes Steven Kaplan of the University of Chicago: Mergers of equals are
both large and typically done with stock rather than cash.
From Omnicom to Omnishambles
So why does anyone enter into such a deal? Both firms tend to be big and
similar, which holds out the possibility of lots of lucrative cost-saving. Yet
their similar size makes it hard for either boss to make a convincing case for
taking sole charge. Bosses tend to have planet-sized egos, believing they can
make anything work, including the combination of incompatible corporate
cultures. That proved a task too far for Omnicom and Publicis. The bosses even
convince themselves they can share power or each believes that, if not, he can
see off the other. Yet all too often, merger of equals effectively translates
into rudderless behemoth, says Peter Clark, one of the authors of
Masterminding the Deal , a book on how to execute mergers. Everything has to
be checked so many times to ensure that everyone is on board, and competitive
speed is lost.
The rare merger of equals that succeeds, such as the creation of Lockheed
Martin, a defence firm, in 1994, or of ConocoPhillips, an oil giant, in 2001,
tends to have a detailed integration plan agreed in advance, and one boss who
is eager to retire as soon as possible. Typically, neither is the case. Their
record is so bad that any talk of a merger of equals should set alarm bells
ringing. You have been warned, shareholders of Lafarge and Holcim (two European
cement firms that agreed such a deal last month). Forget the romance of
power-sharing; when it comes to the tricky business of making a merger work,
someone must be in charge.