Corporate Marriages: Not All Bliss
Mega-mergers are often equated with marriage.
“NationsBank and BankAmerica to Wed” . . . “American Home Products and Monsanto Fail to Meet at the Altar” . . . “Is the Honeymoon Over for Citicorp and Travelers?”
The analogy may prove more apt than usual this year, as the increasing difficulties in many of these alliances--even when they go through--may lead to higher divorce rates. (Nowhere near the levels of U.S. marriages, one would hope.)
As with real marriages, success in corporate combinations is proving as mystifying as ever--maybe more so as some firms are doing deals quickly. That has some critics wondering if these alliances will work for shareholders in the long run or if we will look back on this era of record mergers and wonder what these companies were thinking.
Massive layoffs, an exodus of top talent, quarterly losses, customer frustration, a negative public image, falling stock prices and bitter investors marked mergers in 1998 amid a historic consolidation wave. Some companies that haven’t even absorbed firms they purchased previously are starting on the next one without a strategic road map.
“A lot of companies just rushed into it . . . there are more showing signs of strain earlier in the process,” said Mark Clemente, a merger consultant and author of the book “Winning at Mergers and Acquisitions” (John Wiley & Sons, 1998). “It’s amazing to us that so many big, well-run companies are making so many mistakes in the merger-and-acquisition process.”
The last 12 months broke all records for mergers as a buoyant stock market boosted many companies’ share prices, which they then used to make acquisitions. The $1.62 trillion of announced U.S. deals last year almost doubled 1997’s record $906.5 billion, though the actual number of deals, 11,148 in 1997 and 11,476 in 1998, was about the same, according to Securities Data Co., the New Jersey data tracker.
And the trends driving this merger frenzy--a push to compete globally, increase shareholder value and achieve cost synergies through size--are expected to continue during 1999. That means this year could set even more records.
“All deal makers are optimists. They always believe that bad things happen to other companies and they are smarter than everyone else--especially in the high-flying industries like telecommunications and technology,” said Mark Feldman, an author and merger specialist with accounting firm PricewaterhouseCoopers.
In fact, data prepared for The Times shows that of the 182 mergers completed last year that were valued at $1 billion or more at the time of the announcement, 40% saw their closing deal value decrease from the announced value. Only 18% saw the deal value increase, and the rest had closing values that were roughly the same as the announced value, according to Securities Data.
Still, stock price declines in the weeks after a deal is announced do not mean failure, specialists agree, arguing that it often takes six months or longer from the time a deal closes before cost synergies through size and streamlining lead to added profit.
“Frankly, the hardest part about M&A; is, after the deal closes, integrating the companies you’ve bought,” said Morton A. Pierce, a managing partner for mergers and acquisitions at law firm Dewey Ballantine, who this year worked on such deals as Norwest Corp.’s $33.9-billion purchase of Wells Fargo & Co. and Daimler-Benz’s $42.4-billion purchase of Chrysler Corp.
But significant stock price drops, along with confusion, image problems and a loss of alienated customers during the transition phase, can mean trouble for a merger, some believe. In fact, only about a third of all mergers actually achieve the optimistic synergies predicted at the time of the deal, experts say.
According to Wall Street specialists, some of the bloopers this year include:
* NationsBank-BankAmerica: An exodus of top management, including the high-profile departure or demotion of 10 high-ranking women from the BofA team, has San Francisco Mayor Willie Brown already saying he is considering switching the city’s banking business to Wells Fargo. Local consumer activists are concerned about the bank’s community lending record. The value of this deal was $59.3 billion when it was announced but $47.7 billion when it closed.
* Travelers-Citicorp: This deal, valued at $70.2 billion when announced April 6, dropped to $38.6 billion when it closed in October. Corporate infighting has led to the departure of key managers, including James Dimon, president of Travelers Group. His leaving helped spur a drop in stock price, cutting $11 billion off the company’s market value in two weeks. (It has since climbed back.) Cost-cutting and announced layoffs of more than 10,000 could lead to a decline in customer service, analysts warn.
“The biggest banking deals this year will dramatically under-perform expectations,” said one Wall Street insider who worked on several banking mergers and did not want to be named. “I would say the word ‘dramatic’ is underscored. We’re finding as we look at these, there are significant differences in operating philosophy and culture.”
Indeed, success or failure often lies in the details.
Differences that can make or break a merger include work hours, communication styles and appetites for risk. Some larger companies become arrogant after a few smaller acquisitions do well, Wall Street bankers said, so they aren’t as careful in planning later deals.
“They’re taking chest-beating to a fine art--it’s clearly patterned after male gorillas,” said Feldman of PricewaterhouseCoopers. “They think they are king of the world, and so they leave the details to be handled by subordinates.”
Other deals that analysts say may not have been planned carefully enough include:
* Volkswagen-Rolls-Royce: Both BMW and Volkswagen bid for Rolls-Royce, with BMW threatening to stop delivery of engine parts to Rolls-Royce if it didn’t win. VW won--but discovered it had bought only the company, not the prized Rolls-Royce name, which BMW was then able to purchase.
* Exxon-Mobil: As merger consultant Clemente put it: ‘The biggest deal in history isn’t better; it’s just bigger.” He said the merger has the “puniest strategic value of any deal in recent memory.” By combining operations, the company will cut 9,000 jobs, but Clemente questions whether there are enough “synergies”--or benefits from the blended operation--to boost revenue and long-term shareholder value.
Some argue, however, that 1998’s mergers made just as much sense as those in years past. These analysts note that there were fewer deals announced with great expectations last year that were eventually abandoned.
“There is no evidence that the captains of industry are doing this any differently than in the past,” Feldman said. “I don’t think the [long-term] record will be any worse.”
One of the better-performing deals in the finance area, analysts said, is between American International Group and SunAmerica Inc. “These are two disparate businesses, both very successful, both understand each other and both well-run,” said one local investment banker.
Analysts also like the odds of success for cross-border deals--those between companies in two countries. Because it is clearly more difficult to meld cultures, the architects tend to be careful. For example, DaimlerChrysler, the company formed by the Chrysler and Daimler-Benz merger, is expected to do well.
In fact, despite the rush, only 7% of all mergers announced in 1998--or 250 deals worth $116 billion--were withdrawn, compared with 14%--or 344 deals worth $148 billion--in 1997, according to Securities Data. However, almost half of all deals announced last year still haven’t closed, and that higher-than-usual proportion could be the reason for the lower number of withdrawals, analysts said.
Some of the larger split-ups in 1998 include Humana Inc. and United HealthCare Corp., which agreed in August to dismiss their planned $5.5-billion merger after United announced a $900-million charge that hurt the value of its stock, trimming the deal value to $3.1 billion.
In October, Primestar Inc. pulled out of its $1.1-billion acquisition of American Sky Broadcasting Co. due to antitrust concerns. And, in one of the more bizarre alliances of the year, Zapata Corp.--founded by former President George Bush in the 1950s as an oil driller but turned into a fish-oil company in later years--abandoned a $1.7-billion plan to buy Excite, the popular Internet search service. Zapata executives said at the time they had decided to stick to the fish-oil business after all.
Also canceled was the $3.1-billion agreement between American Bankers Insurance Group and Cendant Corp., a franchise marketer that had grown rapidly through acquisitions of such brand names as Century 21. In the wake of an accounting scandal before the deal closed, co-Chief Executive Walter Forbes was ousted and the deal was called off as Cendant’s stock plummeted in value.
“Unfortunately, I’ve been involved in a few disasters,” said Pierce, who worked on American Bankers-Cendant. “Where you have companies out there doing many deals and being aggressive, you run the risk that you are not fully integrating the acquisitions you’ve made and there is a greater chance of problems.”
Still, no matter how troubled a deal is, a few people traditionally walk away with something. They include top executives who disappear with lucrative exit parachutes. BankAmerica Corp. CEO David Coulter, for example, was ousted by Hugh McColl of NationsBank a few months ago but still received a severance package estimated to be at least $30 million.
The losers, however, tend to be the workers.
Last year there were nearly 60,000 announced layoffs related to mergers as of the end of November, an increase of 60% from the number of layoff-related mergers announced in 1997, according to Challenger, Gray & Christmas, a Chicago consulting firm that tracks merger-related layoffs.
Skip Gianopulos, a vice president of financial planning for Harris Bank in Chicago, knows the faces of laid-off workers. Providing financial help to the suddenly unemployed is becoming a significant and lucrative portion of his bank’s business.
“It seems like the categories of people affected are younger and younger,” said Gianopulos.
Other merger losers, of course, often include shareholders, who find that their investments in merged companies decline in value as the merger goes forward.
Indeed, a 1997 study by Tim Loughran and Anand Vijh, professors of finance at the University of Iowa, found that investors who buy stocks in companies involved in all-stock mergers (which most of last year’s deals were) on the day a deal is announced get significantly poorer returns than those who invest in companies doing cash deals.
An investor would earn a 25% greater return during the next five years by buying shares of companies doing cash deals rather than those doing stock deals, the study found. The study tracked 947 publicly traded companies making acquisitions from 1970 to 1989, tallying returns on deals from the dates of the deal announcements to five years after the acquisitions were completed.
The biggest winners of all in mergers are typically the architects--the investment bankers, lawyers and accountants who put together mergers and can rake in hundreds of millions of dollars in fees.
Even when deals fail to work out as planned, these specialists are there to help spin off the pieces and make still more fees.
“If they come to me when they want to sell, that’s fine too,” said Pierce, the investment banker who puts companies together.
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State of the Unions
The number of mergers and acquisitions announced in the U.S. during 1998 reached a historic high as multibillion-dollar deals helped nearly double the dollar volume from 1997. John S. Reed Of Citicorp, far right, shakes hands with Sanford L. Weill of Travelers Group as their firms’ marriage was announced. Another of the year’s mega-mergers paired Exxon with Mobil in a deal that would create the world’s largest oil company.
1998 Merger Mania
Last year was a historic one for corporate mergers, with more deals than in any previous year. Driven by a need to grow and compete in a global economy, companies in record numbers were finding partners. The 10 largest transactions involving U.S. companies, as ranked by deal size, were:
Acquirer: Exxon and Target: Mobil
Date Merger Announced: 12/1
Deal Size at Announcement*: $81.2
Combined Market Value at Announcement*: $241.9
Combined Market Value on Wed.*: $261.9
*
Acquirer: Travelers and Target: Citicorp
Date Merger Announced: 4/6
Deal Size at Announcement*: $70.2
Combined Market Value at Announcement*: $153.3
Combined Market Value on Wed.*: $114.9
*
Acquirer: Bell Atlantic and Target: GTE
Date Merger Announced: 7/28
Deal Size at Announcement*: $66.9
Combined Market Value at Announcement*: $123.9
Combined Market Value on Wed.*: $155/1
*
Acquirer: SBC Commun. and Target: Ameritech
Date Merger Announced: 5/11
Deal Size at Announcement*: $64.4
Combined Market Value at Announcement*: $122.7
Combined Market Value on Wed.*: $167.9
*
Acquirer: AT&T; and Target: TCI
Date Merger Announced: 6/24
Deal Size at Announcement*: $62.7
Combined Market Value at Announcement*: $115.5
Combined Market Value on Wed.*: $153.8
*
Acquirer: NationsBank and Target: BankAmerica
Date Merger Announced: 4/13
Deal Size at Announcement*: $59.3
Combined Market Value at Announcement*: $140.4
Combined Market Value on Wed.*: $106.8
*
Acquirer: British Petroleum and Target: Amoco
Date Merger Announced: 8/11
Deal Size at Announcement*: $53.5
Combined Market Value at Announcement*: $123.4
Combined Market Value on Wed.*: $134.4
*
Acquirer: Daimier-Benz and Target: Chrysler
Date Merger Announced: 5/7
Deal Size at Announcement*: $42.4
Combined Market Value at Announcement*: $98.7
Combined Market Value on Wed.*: $95.9
*
Acquirer: Norwest and Target: Wells Fargo
Date Merger Announced: 6/8
Deal Size at Announcement*: $33/9
Combined Market Value at Announcement*: $57.3
Combined Market Value on Wed.*: $63.6
*
Acquirer: Banc One and Target: First Chicago
Date Merger Announced: 4/13
Deal Size at Announcement*: $29.0
Combined Market Value at Announcement*: $66.9
Combined Market Value on Wed.*: $61.3
* in billions
Sources: CommScan; Securities Data Co.
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Number of Deals
1985: 2,254
1998: 11,476
Dollar Volume (in billions)
1985: $203.93 billion
1998: $1.62 trillion
