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Why Corporate Mergers of Equals Almost Never Work

Alan Brew

This piece previously appeared on Forbes.com.

 

Paris. Champagne. The Arc de Triomphe in the background. It was a perfect setting to announce an engagement.

The $35 billion “merger of equals” between advertising giants Omnicom and French rival Publicis seemed so richly blessed last July when CEOs John Wren and Maurice Levy posed for photographs and spoke of creating “a new company for a new world."

Then on May 9th came the terse announcement that the marriage was off. Omnicom blamed cultural differences; Publicis complained about “inequality”. Either way, given the history of mergers of equals, they should consider themselves lucky the deal didn’t go through.

Like the story of Romeo and Juliet, many a corporate marriage begins as a romance filled with promise only to end in disaster. 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 disastrous failures.

Take, for example, union of Daimler and Chrysler. The 1998 merger of equals created the giant German-American carmaker DaimlerChrysler. Just two years later Jürgen 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”, thereby effectively acknowledging that equality was just a word used to sell the deal to Chrysler folk. It was a Daimler takeover. The marriage struggled on until May 2007, when a divorce was announced.

It begs the questions: is there really such thing as a merger of equals? Some people don’t think so. George Sard, chief executive of strategic communications firm Sard Verbinnen, says: "Mergers of equals have long been among the most challenging deals from a communications perspective because of the internal politics involved and because nobody believes there really is such a thing."

They are, in reality, a financial and legal framework which enables companies to combine with no designated acquirer. Both companies are made “equal” as far as the technicalities of the deal are concerned. To put form round this equality, the board of directors of the combined company is split equally between directors from each company. There is also typically a brokered power-sharing arrangement among the chief executives, both of which want to be perceived as winners.  The shareholders from each company retain ownership in the combined entity since these deals are structured as stock-for-stock tax-free exchanges.

From this point on the question becomes: where does equality end? Very few CEOs have found an answer. But human nature and corporate ego being what they are, the next time is always going to be different. So, in spite of the cautionary tale of DaimlerChrysler, the toxic marriages continued.

There was Pharmacia and Upjohn, for example. Here was a transnational merger of equals between two pharmaceutical giants, Pharmacia of Sweden and Upjohn of the US, in which equality became a euphemism for stalemate and deadlock between two rival cultures.

After years of declining profits, the departure of many senior people and plummeting morale, a new CEO stepped in. One of Fred Hassan’s first acts as CEO was symbolic - he renamed the company Pharmacia to clearly signal a new, ‘one company’ direction.

Most notorious of all was the stunning $350 billion merger of equals between Time Warner and AOL. Not on any basis were they equal. Time Warner, the media giant, had revenues of $27 billion and 70,000 employees; AOL’s 12,000 employees generated less than $5 billion. And they were culturally on different planets. The Internet bubble stock valuation of AOL was propping up the financial logic for the deal and the world’s biggest online service was expected to inject its “Internet DNA” into the stodgy media giant Time Warner.

So, on that heady day in January 2001 when CEOs Steve Case and Jerry Levin literally embraced and announced the creation of their star-crossed merger of equals, the largest in U.S. history, the stage was set once again for a corporate drama in which rivalries, feuds and names were central to the plot. The ensuing turf wars at AOL Time Warner, as it became, and the struggle to merge two distinctly unequal and disparate cultures soon overwhelmed the media giant.

Months later the dotcom bubble burst, the stock collapsed and Jerry Levin announced his retirement in December 2001. In 2009 AOL was spun off. Jeff Bewkes, Time Warner’s current Chairman, calls the merger the “biggest mistake in corporate history”.

If Messrs. Wren and Levy needed a more fitting example of a French/US merger gone wrong they would have done well to study the merger of equals between Alcatel and Lucent.

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 to create Alcatel Lucent. The partnership of CEO Patricia Russo, the former CEO of Lucent, and Chairman Serge Tchuruk, Alcatel’s CEO, had been problematic, according to observers.

The company struggled with integration issues as cultural differences sparked intense rivalry between the North American entity and the European organization. After six successive quarters of losses, the Paris-based company chose a Dutchman, Ben Verwaayen, to replace Patricia Russo as CEO. Chairman Serge Tchuruk stepped down.

Both Mr. Tchuruk and Ms Russo pinpointed the heart of the problem with all such mergers when they announced their resignations: “It is now time that the company acquires a personality of its own, independent from its two predecessors,” they said in a joint statement.

There it is: a sense of equality does not build unifying cultures, it is seen rather as a principle on which separation is guaranteed and perpetuated to the detriment of all concerned except, perhaps, the lawyers. Collaboration becomes nothing more than a series of trades in an environment where 1 + 1 merely equals 1 + 1. Far from being merged, the two organizations are simply conjoined, as all their names proclaimed – AOL Time Warner, Pharmacia Upjohn, Alcatel Lucent, DaimlerChrysler. Eventually, the whole rudderless behemoth spins out of control until the whole thing falls apart or someone takes control.

George Sard believes that, in future, investors will likely demand more clarity up front on key decisions such as leadership, board structure, governance, headquarters location, and name. He should have added “brand”, as the whole process of building a brand is the crucible in which a transformational culture is forged around a defining purpose.

In the meantime, merging companies should drop the use of the word “equals”. Better still, they should abandon the whole phrase, “a merger of equals” altogether. Call it a “strategic combination”, or a “new corporate entity creation”. A least investors, customers and employees would know what they are in for. 

Comments

  • Toby Dubbin said:
    July 4, 2014 6:32 PM
    Brilliant exposition of the delusion that pervades mergers. Most so-called mergers of equals are rarely between equals and are invariably takeovers, not mergers.