After Back-Slapping Wanes, Mega-Mergers Often Fail
Even though he is widely hailed today as a master deal-maker, NationsBank Corp. Chairman Hugh L. McColl Jr. wasn’t always so deft at making his company’s acquisitions pay off. After helping engineer a couple of bank purchases in Florida in 1982, McColl and other top executives were caught off-guard by the swift, and costly, resignations of roughly 70% of the officers there.
McColl said that when NationsBank imposed a dramatically new operating setup at the Florida banks, it blundered by ignoring the views of employees and “underestimating people’s psychological resistance to change. We won’t do that again.”
These days McColl, fresh from Monday’s announcement of a $62.5-billion merger deal between NationsBank and BankAmerica Corp., exudes confidence about his company’s ability to stitch together and manage the two sprawling organizations--and any other future acquisitions he snaps up.
Yet history has shown that running the corporate giants produced by mega-mergers is a daunting challenge, and one that may result in failure more often than success. In a study two years ago that used stock market performance as a gauge, Mercer Management Consulting found that nearly half of the larger mergers of the 1990s have flopped. Among the very biggest deals, three-quarters have proved to be failures.
In crafting high-profile mergers, “everyone gets focused on the deal and then goes off for the champagne dinner. The question is whether there is a team sitting there with an integration plan the next morning. Often there isn’t,” said Kenyon Hodge, a Mercer vice president and co-author of the study.
Botched mergers mean turmoil for customers and the employees who hold on to their jobs, along with layoffs for thousands of other workers, including cutbacks that might have been avoidable. Given the enormous size of the latest deals, they may well be more trouble-prone, further raising the risks to the economy.
This month brought three of the four biggest merger pacts in U.S. history: the proposed $83-billion Travelers Group-Citicorp combination, along with NationsBank-BankAmerica and Banc One Corp.’s planned $29-billion acquisition of First Chicago NBD Corp.
Mega-mergers tend to fail for many reasons. Sometimes buyers simply pay more than the acquisition is worth. In other cases, executives never devise or execute a plan to take advantage of the economies of scale or complementary products and services of the merging organizations.
Perhaps more than anything else, senior management stumbles over “cultural” issues. In other words, the two sides never learn to communicate and work together well.
That was the problem when AT&T; bought NCR Corp. in 1991 after a nasty takeover battle. Initially, the $7-billion deal was touted as a natural convergence of the global telecommunications and computer industries. But after piling up losses at NCR that eventually totaled $4 billion, AT&T; decided in 1995 to call it quits and spin off the Dayton, Ohio-based cash register and computer systems concern.
“We reached a time when the advantage of integration was outweighed by the disadvantage of complexity,” then-AT&T; Chief Executive Robert E. Allen was quoted as saying at the time.
What went wrong? Among other things, AT&T; antagonized NCR staffers by installing one of its own executives to run the company. Likewise, NCR personnel chafed when AT&T; changed the company’s name to AT&T; Global Information Solutions. (The name was changed back to NCR only after AT&T; gave up on the company.)
At AT&T; management meetings, “you’d see all NCR people huddled off by themselves. They were foreigners,” said a consultant who worked with the companies.
The secrecy that is essential in merger negotiations can lead to problems later on. When only a handful of top people are included in the talks before the deal goes to a board vote, important middle managers with key information can’t be consulted.
Without divulging the names of the corporations involved, Mercer’s Hodge pointed to the example of a merger deal between two specialty chemical companies. After the agreement was completed, Hodge said, the manufacturing chief of one of the companies suggested that “we can save money by combining our sales forces.” The head of sales at the same company shot back: “Our sales force is in the U.S., and theirs is in Europe. There is no cost savings. I thought we were saving money by closing plants.”
When Wells Fargo & Co. completed its hostile takeover of Los Angeles’ First Interstate in 1996 for $11 billion, it was then a record deal in the banking industry, and it drew raves from Wall Street analysts.
But Wall Street soon changed its tune.
Stung by computer snafus and what some outsiders said was a heavy-handed approach to pushing customers into new types of accounts, the bank saw angry business and retail customers head out the door. The expected 7,500-job loss soon turned into nearly 13,000.
The embarrassment reached a climax last summer when the company admitted it incorrectly posted some customers’ deposits to the wrong accounts and couldn’t find the money, although customers were given credit for the missing deposits.
Yet mega-mergers among companies in the same, or similar, industries generally have a better chance of success, partly because cost savings are easier to achieve and goals are easier to determine. Take, for instance, another bank merger: the 1995 combination of Chase Manhattan Corp. and Chemical Banking Corp.
At the beginning, the corporate cultures seemed worlds apart. Chase was known for its ties to the Rockefellers and its world-class art collection, while Chemical was aimed at the mass market.
Still, the process was guided by the steady hand of Chemical Chairman and Chief Executive Walter Shipley, who gained valuable experience with his bank’s 1991 purchase of Manufacturers Hanover Trust.
What went right? “Expectations have to be clear, and strategies have to be clear--but the most important issue is trust,” said Charles Raben, vice chairman of the Delta Consulting Group, which assisted in the Chemical-Chase merger. “It’s just like a marriage.”
Shared Vision Is One Key to Success
Along with cultivating trust, experts say, the keys to success in pulling together merging companies are crafting a shared vision for the organization, developing a precise transition plan and avoiding the common pitfall of focusing so much on the merger that customers are neglected. Analysts say a stellar example was set by the 1989 pharmaceutical industry merger of SmithKline Beckman of Philadelphia and British-based Beecham Group.
Instead of imposing a transition plan from the top, the companies tapped over 2,000 of their middle managers and divided them among more than 200 teams to figure out how to forge a new company. “From the very beginning, they were learning how to work together,” said Joanne T. Lawrence, who headed the companies’ “culture change” initiative and who now works as a management consultant.
The heads of the two merger partners, SmithKline’s Henry Wendt and Beecham’s Robert Bauman, carefully avoided any hint of rivalry. Early on, they decided to leave the company at the same time, in 1994, when they yielded control to an executive brought in after the merger, Jan Leschly.
Both Wendt and Bauman “acted with enormous integrity, and I think the organization knew that and felt that,” setting the tone for everyone, Lawrence said.
As a result, two second-tier pharmaceutical companies blossomed into a major health-care industry business, now known as SmithKline Beecham, with a market capitalization that has skyrocketed eightfold over the last seven years to $56.3 billion.
Running Company Is a Mind-Boggling Task
Even aside from the day-to-day complications of absorbing a merger or acquisition, directing a company with billions in revenues and assets, tens of thousands of employees, and operations across the nation or around the globe can be a mind-boggling task.
The best solution for top executives, many leading consultants and academic authorities say, is to focus on leading and inspiring people in the organization--and to forget about trying to manage the company themselves. Instead, they advise, split a company into small units and delegate the authority for running them to local, hands-on managers.
USC management expert Warren Bennis points to the European business colossus ABB Group as a model of the expertly led global corporation. ABB, which employs 215,000 people in 140 countries, is divided into more than 1,000 companies in such diverse industries as engineering, power generation, trains and financial services.
Under much-praised Chairman Percy Barnevik, ABB employs a management style known as corporate federalism. “All the decisions that can be made at the local unit are made there,” Bennis explained.
But even when executives avoid micro-managing giant corporations, focusing on such big-picture issues as communicating new strategies can prove exasperating,said Kenneth T. Stevens, chief executive officer of the retail arm of Midwestern financial giant Banc One Corp. and former president of Taco Bell. He said CEOs commonly are perplexed after they give a major speech or draft an important memo--and then find out how few staffers understand what was said.
“You say to yourself, ‘My gosh, I just told them.’ But you have to literally devise 1,000 ways to tell them,” Stevens said. “You have to work it into every communication,” and emphasize it in meeting after meeting with employees across the country, he added.
The current merger mania recalls the economic transformation at the turn of the century, when big companies began competing nationally. J.P. Morgan cobbled together America’s first $1-billion corporation, United States Steel Corp., in 1901 from 10 companies. But now corporations are looking worldwide, as well as nationwide, for profits.
That kind of competition propelled McColl and David Coulter, chairman and chief executive of BankAmerica, toward their mega-merger announcement last week.
To start meshing their organizations, the two immediately divided merger-related responsibilities among six top executives, including themselves.
“Each one of us knows what our job is,” said Coulter, the merged company’s No. 2 executive. Coulter is expected to step up into the top job when McColl reaches his anticipated retirement date in 2000.
They also are taking to heart merger experts’ common advice to keep in touch with each other and their staffs. McColl and Coulter, already constantly in touch by e-mail, flew cross-country the two days after the merger announcement to meet with rank-and-file employees on both coasts and calm their fears. The merged company will employ 180,000.
Coulter, a former Wall Street bond and foreign currency trader, says he already works East Coast hours, arriving at the office by 6 a.m. each day, so he expects to have no problem keeping tabs on what’s going on in Charlotte, where McColl will base the company. Although Coulter will remain in San Francisco, he says he’s house-hunting in Charlotte and will be there every month.
In fact, there is at least one sign the two men already are synchronized: They both showed up in Los Angeles this week wearing similar Swiss Army watches. “Just a coincidence,” Coulter said.
* TOO BIG TO FAIL: Mega-banks revive worries about risk to taxpayers, columnist Tom Petruno says. D1
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The Making of Giants
Eight of the 10 largest mergers ever in the U.S. were announced in the last three years.
TOP 10 DEALS IN U.S. HISTORY
Rank: 1
Buyer: Travelers Group Inc.
Seller: Citicorp
Date announced: April 6, 1998*
Price offered (in billions): $83.0
****
Rank: 2
Buyer: NationsBank Corp.
Seller: BankAmerica Corp.
Date announced: April 13, 1998*
Price offered (in billions): $62.5
****
Rank: 3
Buyer: WorldCom Inc.
Seller: MCI Communications Corp.
Date announced: Oct. 1, 1997*
Price offered (in billions): $35.3
****
Rank: 4
Buyer: Banc Onc Corp.
Seller: First Chicago NBD Corp.
Date announced: April 13, 1998*
Price offered (in billions): $29.0
****
Rank: 5
Buyer: Kohlberg Kravis Roberts & Co.
Seller: RJR Nabisco Inc.
Date announced: Oct. 24, 1988
Price offered (in billions): $24.6
****
Rank: 6
Buyer: Bell Atlantic Corp.
Seller: Nynex Corp.
Date announced: April 22, 1996
Price offered (in billions): $19.5
****
Rank: 7
Buyer: Walt Disney Co.
Seller: Cap Cities/ABC Inc.
Date announced: July 31, 1995
Price offered (in billions): $18.9
****
Rank: 8
Buyer: First Union Corp.
Seller: CoreStates Financial Corp.
Date announced: Nov. 18, 1997*
Price offered (in billions): $16.8
****
Rank: 9
Buyer: SBC Communications
Seller: Pacific Telesis Group
Date announced: April 1, 1996
Price offered (in billions): $16.5
****
Rank: 10
Buyer: Beecham Group
Seller: SmithKline Beckman Corp.
Date announced: April 12, 1989
Price offered (in billions): $16.1
* Pending
Note: Price is on the day the deal was announced.
Source: Houlihan Lokey’s Mergerstat
