AOL and Time Warner

The media giants American Online (AOL) and Time Warner combined their businesses in what is usually described as the worst merger of all time. In 2001, Time Warner consolidated with AOL, the Internet and email provider, in a deal worth a staggering $110 billion. The merger was seen as a revolutionary partnership between a content owner and a company active in the brave new online world.

AOL and Time Warner parted company in December 2009, after almost nine years of nightmares. In less than a decade, the tie-up had destroyed close to $200 billion of shareholder wealth.

Vodafone/Mannesmann

Vodafone's takeover of German rival Mannesmann is difficult to beat for sheer shareholder value destruction. In February 2000, at the height of millennial dotcom madness, the agreed merger of Vodafone AirTouch and Mannesmann created a telecoms giant. The $160 billion all-share deal to acquire Mannesmann turned the merged group into the world's fourth-largest company, worth $330 billion.

In 2006, Vodafone plunged to massive losses after one-off costs of more than $35 billion connected to the Mannesmann deal.

Glaxo Wellcome/SmithKline Beecham

In December 2000, two of the United Kingdom's largest pharmaceutical companies, Glaxo Wellcome and SmithKline Beecham, came together to form global giant GlaxoSmithKline. At that time, GSK's share price was close to $30, valuing the firm at close to $160 billion and putting it in the top three of the FTSE 100.

Fast-forward 15 years, and GSK's share price is around $20, or about a third lower than at the time of the merger, destroying roughly $40 billion of shareholder wealth.

Synergy Calculations Are Totally Flawed

My interest in the failure rate of TOMs dates back to the Economist¹ series on six major takeovers or mergers (TOMs). In the articles, the writers commented that over half of TOMs had destroyed shareholder value, and a further third had made no discernible difference.

KPMG undertook a cutting-edge study² into TOMs and is a must read for CFOs and controllers involved in a TOM. The study found:

TOM advisers and hungry executives are as accurate with potential cost savings estimates as they are with assessing the cost of their own home renovations (in other words, pretty hopeless). Press clippings are easily gathered with CEOs stating that the anticipated savings have taken longer to eventuate. The reason: It can take up to four years to merge the information technology platforms together, and even when this is achieved, many of the future efficiency and effectiveness initiatives have been put on the back burner.

CFOs and controllers, as the experts with the numbers, need to ensure that the CEO and the board are under no illusion about the extent of the cost savings synergies. You can put your last dollar on the fact that the investment bank behind the deal has well and truly overstated these benefits.

The synergy calculations never allow enough costs for the myriad of consultants who are in a feeding frenzy and largely left to their own devices, staff redundancies, loss of some key customers, productivity shortfalls due to uncertainty and the costs of recruiting for key positions, as talented staff decide to move to a less stressed organization.

Loss of Focus on Customers

There is no better way to lose sight of the ball than a merger. Merging the operations will distract management and staff from the basic task of making money. While meeting after meeting occurs at the office and sales staff focus on their futures (either applying for positions elsewhere or joining in the ugly scramble for the new positions), the customers are up for grabs. Researchers, sales staff, and marketers are all busy back at their desks trying to perform damage-control exercises as they either jockey for the lifeboats or stay on board to try to keep the ship afloat. It would be an interesting PhD thesis to assess the loss of customers due to merger activity.

Culture Clash

Managing the aftermath of a TOM is like herding wild cats. Where have readers seen cultures merged successfully? In reality, one culture takes over another. This is okay when one culture is fundamentally flawed. However, in many mergers, both entities have cultures that work. Now you have a problem. Many competent staff members may choose to leave rather than work in a culture that does not suit their working style.

There Is No Heart in a Merged Organization

How long does it take for a company to develop a heart? This is more than just the culture; it includes the lifeblood of the organization. I think it takes years, and some consistency among the management and staff. The merged organization thus cannot have a heart. The organization can be kept alive on life support, but just like a critical patient, it is effectively bedridden and will be in intensive care for some time.

Loss of Years of Intangibles

An organization is a collection of thousands of years of experience, knowledge, networking, research, projects, and methodologies. If a major blue-chip company said that it was going to disestablish all its staff and management, shareholder analysts would think management had simply lost control. The stock values would fall. This is exactly what a merger does. Research and development is another victim. How do you keep on projects and maintain the level of momentum with unhappy research staff? At worst, you will be moving one team to a new location, making redundant those whom you believe are making the least contribution, and hemorrhaging talent. Research basically gets decimated.

The Wrong Management Rises to the Top

I have a theory that the main beneficiaries of a merger are the piranhas, those managers who see burying a dagger in someone's back as a necessary occurrence. The result is quite interesting; the merged company very soon becomes dysfunctional as more and more of these caustic managers rise to the top.

The senior management meetings make the feeding frenzy over a carcass on the plains of Africa look orderly. These managers do not live and breathe the organization; the ones who did have long since left.

Salary Costs Escalate

There are many financial time bombs that impact shareholder value.

Severance packages can create further waste as staff members, especially the talented ones, leave before generous severance terms disappear. Thus, to retain such people, further salary incentives need to be made that create further pressure on the bottom line.

The TOM is often the time when the shareholders realize the dilution they have been a silent party to comes into full swing, the conversion of options. The surge of the share price as speculators play with the stock means that options can be exercised profitably by the executives who then leave the shareholders holding the rotten TOM.

Human Beings Find It Hard to Conceptualize the Intangibles

For many of us, conceptualizing the abstract is very difficult. A company is most definitely an abstract quantity. It is not a balance sheet; it is much more and much less. Executives in major corporations can write off the annual gross national product of a small country on a failed merger and still not lose sleep at night. The numbers are so large that they appear unbelievable, and the senior management team (SMT) seems to be able to pass them off as just poor management decisions. Yet they are a catastrophe for the investor whose savings are now reduced and the retiree who was relying on the dividends to cover yearly living expenses.

It is impossible for the average board and SMT to completely appreciate all the implications of a merger.

Mergers Are Seldom Done from a Position of Strength

Most mergers are defensive; management is on the back foot trying to make something happen. Defensive TOMs are not a great idea as the companies escaping from a threat often bring their problems into the marriage.

Alternatively, TOMs occur because management consider themselves invincible. They talk to the general public through the press, reveling in their moment in the limelight. Their brief track record of stellar growth is now extrapolated out of all proportion.

There Is Never Enough Time to Fully Evaluate the Target

A merger is like an auction. The buyer rarely has more than a cursory look at the goods before bidding. Management often does not want to find the dirty laundry as it would mean going back to square one again.

It is important not to limit due diligence in the haste to close the deal, as you tend to know less about each other than you think. The dirty laundry often takes years to discover and clean.

Avoiding a Lemon

Some companies are still making fictitious money like Enron did. They are shams, and we need to avoid purchasing a lemon. Companies that look successful, but in reality they grow through acquiring companies and the hype surrounding this activity clouds the real facts.

The Enron documentary should be a compulsory watch for all investors and employees with pensions invested in their companies. The lessons from Enron and other similar collapses provide a useful guide to predicting corporate collapses.

Takeover or Merger Scorecard

I have designed a scorecard covering the aspects executives need to know before boldly going where others have mistakenly gone before (five out of six TOMs fail to achieve the synergism planned). If the merger must go ahead, then please look at the TOM scorecard in the electronic media and get to it. I will not wish you good luck, as that would not be adequate enough.

The current talk is about getting the first 100 days right. Using the findings from Chapter 2, Selling and Leading Change, I would recommend that you master Kaffron and Logan's and John Kotter's work. Applying these learnings, I suggest following these guidelines:

Although it is tempting, avoid bringing in outside consultants to run this transition process. Most of their previous assignments will have failed and they will have no credibility in-house. Far better to use takeover specialists as advisers to the joint committee.