19 Feb HOW TO SURVIVE A MERGER OR ACQUISITION
This article will discuss mergers and acquisitions from three perspectives: 1) What is a merger? 2) What are the business cases for mergers and acquisitions, and are they usually achieved? 3) If you work for a company that is undergoing a merger or acquisition, what is your best strategy to survive it?
There is no such thing as a merger!
Contrary to what we read and hear, especially in business journals, there is no such thing as a “merger” in corporations, or they are extremely rare at best. They are kind of like unicorns and exist in myths. Let me explain:
When two corporations decide to join, usually one company buys the stock of the other with cash or stock, or a combination, and obtains control over the other corporation. Most often, there is a stock swap, in which X shares of one company are exchanged for Y shares of the other company. One company ceases to exist, or the company takes a new name, sometimes a combination of the two former corporate names. But one company bought another company, and there was a winner and a loser. One group, usually from one company, will control the new company. They may call it a “merger,” but that is primarily to soothe the acquired company’s employee’s feelings. The operations will be merged, and it is an acquisition.
In 2016, AT&T acquired Time Warner for over $85.4 billion, Monsanto by Bayer for over $66 million, and British American Tobacco acquired Reynolds American for over $58 billion. Some may call these significant acquisitions “mergers” of two giant corporations, but they were not. Time Warner, Monsanto, and Reynolds American were acquired. In each case, the acquiring corporation determined that combining the two corporations would yield greater profitability combined, or “economies of scale,” than each would do separately. Often, this will occur by eliminating redundant staff functions in one company, such as marketing, finance, and human resources.
Sometimes, the real purpose of the acquisition is to eliminate a competitor in a marketplace, although it would never be stated that way due to U.S. antitrust laws. It would probably be called an acquisition to expand markets. This happened with the wireless telecommunication companies when T-Mobile recently “merged” with Sprint, but T-Mobile is the surviving company.
Daimler’s (Mercedes Benz) and Chrysler’s combination in 1998 was termed a “merger” because they were about the same size, but Daimler acquired Chrysler, and the new company became DaimlerChrysler AG. After a short period, Daimler Chairman and CEO Jurgen Shrempp became the sole CEO of the combined entity. “During 1999 DaimlerChrysler concentrated on squeezing out $1.4 billion in annual cost savings from the integration of procurement and other functional departments.”1
I was employed by Deloitte, Haskins, and Sells when it “merged” with Touche Ross in late 1989, which was close to a genuine merger, except most of the Deloitte consulting partners and Touche Ross auditing and tax partners were forced to leave afterward. So, in this case, it was an acquisition by each firm’s most profitable businesses. No allowance was made for the competencies of the partners and staff that were let go. They just happened to be on the “losing” side.
There are also hostile takeovers, where one company tells the market that it intends to purchase the shares of a publicly traded company, regardless of whether the company’s executive management agrees to it or not. An example of this is when InBev, a Belgian-Brazilian beverage conglomerate, decided to acquire Anheuser Busch in 2008 for $52 billion. “By merging, the companies said they expect to save 1.5 billion euros annually from 2011 through synergies and that the tie-up will begin adding to earnings from 2010.”2 Mithaq Capital, a Saudi company, is presently making a hostile takeover bid for The Children’s Place.
The converse of mergers and acquisitions is divestitures, where companies like Kraft and Abbott split into two or more corporations. Kraft split into Kraft Foods and Mondelez in 2012; in 2015, Kraft Foods then merged with Heinz to become Kraft Heinz. Abbott Labs split into Abbott and Abbvie in 2011. Recently, a few large conglomerates, such as General Electric (GE), announced they are breaking into smaller units.3
Magic Elixir
Many mergers and acquisitions are the result of the combination of former competitors. Some are designed to expand into new markets. Sometimes, they are due to a company wanting to purchase a product line that may have a more significant market share or newer technology or to enter a newer geographic market. Sometimes, they are caused by a desire to hire one or more critical individuals from another company. “Mergers and acquisitions are often viewed as the magic elixir that will grow sales, enhance prestige, and some save cost through synergies.”4 But, like many elixirs, the results are often elusive.
Economic Justification
The idea of a merger or acquisition is often proposed by an investment banker, private equity firm, or a company specializing in this activity. In any case, a business case is prepared to justify every acquisition. It will include expected hard and soft synergies resulting from the acquisition due to new efficiencies (downsizing or cost cutting) or expanded markets (new revenue.) Almost every business case will include the assumption of synergies by combining operations, eliminating redundant positions, and further cutting other expenses to reduce the expenses of the new surviving entity.
Someday, I would like to compare the business cases to the actual results of some significant mergers and acquisitions. I hypothesize that very few of them achieved the expected results. The companies acquired and the acquirer has been altered forever, and many people’s lives have been irrevocably altered.
Post-merger Integration and Product Strategies
Often, when companies combine, there are overlapping products or competing strategies.
When deciding how to integrate the companies, decisions as to which products to sell, maintain, or enhance are not made on the merits of which product is doing better in the marketplace, has advanced or current technology or contains more features and functions, but instead are made based on “politics” or which of the prior companies sold them. Product decisions based on politics, the result of the decision maker favoring their prior company’s products, are suboptimal and will often result in morale issues. In the case of hostile takeovers, the acquiring company will normally fill the most critical positions with their executives. The decisions on products and people will also affect the salesforce, where they will be instructed to sell one product line versus the other. More importantly, it can affect which solution is presented to prospects and customers, which may not be the best fit.
If I seem cynical, it is because I have been through five mergers and acquisitions, and although each was different, the common theme was that most product and people decisions were political. And many people who were formerly very productive lost their jobs.
Corporate Cultures
No two companies have similar corporate cultures, and some have significant contrasts. The effect of combining two different cultures is often overlooked when the business case is prepared. In many cases, it is the most challenging part of a merger. The cultures have been built up over many years, and employees have been accustomed to them; often, they are attracted to the company because of them. In my experience, the change in culture caused many morale issues, which were never addressed. That results in employee turnover. Ironically, Deloitte, which didn’t seem to care much about culture when it merged with Touche Ross, has published an excellent guide on handling cultures when merging companies.5
What Should You do to Survive a Merger or Acquisition?
Let’s assume that you are not the President or CEO of the acquired company. If that were so, you would have received a handsome “going away” present and would not be reading this. When United Airlines acquired Continental Airlines in 2010 in a $3 billion “merger of equals,” Jeff Smisek, the CEO of Continental Airlines (the more profitable of the two airlines), became President of the new United Airlines.6 The United Airlines CEO, Glenn Tilton, received compensation of $16.8 million. Other top United executives also received multi-million-dollar settlements.7
- Which managers are chosen for the new combined company?
In a management textbook or in guides published by consultants such as the Harvard Business School and McKinsey, the advice will be to choose the managers of the new combined company based on merit, experience, and perhaps potential. Unfortunately, in my experience, that is usually not how it happens. The managers will be chosen based on who is making the decision and how the individuals are perceived, in other words, politics. Those who are likely chosen were highly thought of or politically connected, versus somebody they don’t know at the acquired company. The executives will choose the other person if they are not highly thought of or connected. Or they may attempt to equalize the number of managers from each company. However, the choices will not be made based on objective criteria or merit.
- First, assess your political strength.
Which company do you work for – the winner or the loser? If you were on the losing side, it is not hopeless. You need to take different actions. Your political strength is measured by your access to people who came out of the acquisition with an equal or more outstanding position. If you report to such a person, an honest discussion of your prospects should occur. How far away are you if you do not report to a person? One or two levels? Will your manager attest that you are a vital contributor? If so, try to get her to write this for current or later use. If you were on the winning side, you still need to take action to strengthen your position within the new company.
- Are you on the survivors list?
A preliminary list of which employees would be retained was prepared and it was shared with top management. As with the Deloitte example cited above, the list is sometimes prepared without regard to competency or merit. You need to find out if you are on the list. Check with your manager or her superiors and ask the tough question. They may lie to you; in this case, you will eventually find out. This list is often not firm, so if you are not on it, you need to take action to demonstrate your value immediately. Tell your manager or the human resources manager if you would instead take a severance package and leave the company. There are reasons why you may want to leave the company, especially if you were thinking of doing so anyway. By doing this, you may save the job of someone “on the bubble.” By voluntarily resigning, you may receive an excellent financial package, which may not be available later.
- Strengthen your political position.
Suppose you are unable to assess where you stand regarding further employment. In that case, you need to find someone with political power in the new organization, preferably somebody who is familiar with your work product or knows somebody who is familiar with your work, and ask their advice on what you can do to strengthen your employment position. If you cannot find such a person, I recommend going to the Human Resources department and ask them.
- Update your resume!
Whether you are a merger survivor or not, chaos and disruption will occur. Your job duties may change as a result. Also, there may be multiple rounds of reductions. So, updating your resume to protect yourself is a good idea. Prospective employers will understand the reason why you are considering changing jobs.
If your company is involved in a merger or acquisition, or if there are discussions, such as the proposed merger of Kroger and Albertsons, where hundreds of redundant or overlapping jobs will likely be eliminated, you must act to protect your interests. You should be updating your resume, at the minimum.
Accounting Treatment
In addition, using accounting rules, the costs incurred by a corporation due to restructuring and integration because of an acquisition, merger, or divestiture are capitalized and recorded as assets. They are not expensed in the year that the acquisition occurs. This principle allows for broad treatment of extraordinary non-recurring expenses related to termination costs (severance “packages”) of employees, travel, and expenses relating to the planning of the integration of companies, payments to the former parent company to continue to utilize their internal systems and data center rentals. These expenses are outside of the typical annual budgets. They are then amortized over several years and usually classified as an extraordinary expense that is displayed below the Income before Depreciation and Taxes amount rather than in expenses.
Mergers and acquisitions are a way of life in the corporate world. They increase or decrease in quantity depending on economic conditions. Economic turmoil or recessions typically lead to decreases in mergers and acquisitions because business executives become more risk-averse.
You may think that you are safe from them at your company, but even the most prominent companies are merged, acquired, or broken into smaller units. You must be alert, proactive, and adaptive to survive the merger.
- https://www.company-histories.com/DaimlerChrysler-AG-Company-History.html
- https://www.industryweek.com/leadership/companies-executives/article/21948686/the-battle-is-over-inbev-buys-anheuserbusch
- https://www.wsj.com/articles/general-electric-to-split-into-three-public-companies-11636459790
- https://money.cnn.com/2018/06/19/investing/ge-dow-jones-walgreens/index.htmlhttp://www.halfcostproducts.com/mergers%20&%20acquisitions.htm
- https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-ma-consulting-cultural-issues-in-ma-010710.pdf
- https://www.wsj.com/articles/SB10001424052748703969204575220372800747024
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