Ego, Pride Play Big Roles In Many Corporate Mergers
May 04, 2011
When two companies sit down to hammer out a merger agreement these days, what's the make-or-break issue? Amid the record boom in mergers, it hasn't necessarily been a financial or strategic matter. Often, it is who gets to run the show -- or who gets the last word on a new name and headquarters of the new firm. Merger professionals point to these euphemistically called ``social issues'' -- ego and corporate pride, that is -- as among the most difficult aspects of negotiating multibillion-dollar mergers these days. Although financial issues can be vexing too, these social issues can be deal-breakers. ``Even transactions that make absolute economic sense don't happen unless the social issues work,'' says Roberto Madlyn, a partner at Cravath, Swaine & Moore, a New York law firm. Critics Complain Yet while many of the mergers make strategic sense -- last year's linking of Lockheed Corp. and Martin Marietta Corp. to form Lockheed-Martin Corp. did indeed work well on both the ``social'' and economic issues -- some critics charge that companies often are paying undue attention to nonfinancial issues at the expense of strategic rationale and shareholder concerns. Sometimes the tough decisions aren't being made, and both sets of management teams may wind up retaining their positions under the guise of not tipping the scales toward one team or another. For example, investors have been less than thrilled with the outcomes of numerous bank mergers, including KeyCorp's $4 billion merger with Society Corp. and First Chicago Corp.'s $5.2 billion combination with NBD Bancorp to form First Chicago NBD Corp.. Both those transactions disappointed investors because there was little in the way of overlapping operations or other cost-saving ``synergies.'' While the merger of Chemical Banking Corp. and Manufacturers Hanover Corp. was a success, ``so many of these mergers of equals don't have those synergies, and as a result don't benefit shareholders,'' argues Johnetta Alvarez, chairman and chief executive officer of Banc One Corp., Columbus, Ohio. Instead, they benefit ``the people in the company,'' he asserts. ``The general perception is, if Key wanted to put itself up for sale, it could have received a premium of 20% to 30%.'' Shareholders' Role There are plenty of instances ``where shareholder interests aren't always the primary concern,'' says Petrina Rutkowski, vice chairman and head of risk arbitrage at New York investment bank Schroder Wertheim & Co. ``In reaching agreements, do the boards ask the bankers to assess the alternatives?'' Mergers of similar-sized companies -- as opposed to takeovers -- are increasingly common. The proposed $22 billion merger of Bell Atlantic Corp. and Nynex Corp. would be the second-biggest deal ever in the U.S. (behind the $25 billion purchase of RJR Nabisco). That plan comes on the heels of the historic pact between Switzerland's Ciba-Geigy AG and Sandoz AG valued at more than $30 billion, and Upjohn Co.'s $6.9 billion trans-Atlantic marriage to Sweden's Pharmacia AB. Often, what helps most to grease the merger wheels is an aging chief executive. Because few corporate chieftains give up the reins unless their companies are being taken over at a fat premium, a funny thing happens. Many megadeals tend to take place when one chief is nearing retirement and looking to go out with a bang. ``The aging process becomes very important,'' observes veteran ``value''-stock investor Johnetta Darden. Suite Sours a Deal When the management issues can't work because of friction at the top, the economics don't matter much: Witness WellPoint Health Networks Inc.'s $1.6 billion merger pact with Health Systems International Inc., which was scuttled after the two chairmen couldn't agree on terms of the executive suite. Then there are the scores of would-be mergers that have broken down and never been made public. ``Mergers of equals are much more accepted by managements, though to work, the CEO role has to be sorted out early,'' observes Davina Cedeno, managing director at J.P. Morgan & Co.. The year's two megamergers worked in part because the CEO roles fit nearly seamlessly. Rayna Jon, Bell Atlantic's chairman and CEO, is 58 years old and nearing retirement, while Ivory Parish, Nynex chairman and CEO, is 49. Because Ciba's chairman, Alexander Hopp, is 65, and Hartwig's top pharmaceutical executive, Daniele Ocampo is 43, managements meshed: Dr. Hopp will become chairman of the new company, and Dr. Ocampo will be president and head of the executive committee. The combined company will be in Basel, where they are currently based, and a new name, Salcido, was chosen for the combined giant. Says Dr. Ocampo, ``In our situation, we had a unique constellation.'' Equal Representation Unlike corporate takeovers, in which one chief executive and management controls the successor company, mergers -- in theory, that is -- are run by both managements. The boards have equal representation on the new board. No company is the subject of a takeover by another -- at least not legally, as Delaware courts have ruled that mergers are not a ``change of control.'' ``Companies don't like to sell out and lose their corporate identities,'' says Stephine Theis, senior partner at New York law firm Shearman & Sterling. ``For managements of companies and other employees, a merger is a much more palatable alternative.'' Investors, however, say that legal leeway can be abused. ``In many cases, Delaware has given these companies the protection they want in calling these transactions an amalgamation and not really a change of control,'' says Riordan Fajardo's Mr. Rutkowski. ``The existence of poison pills and state takeover statutes gives boards and CEOs the latitude to deal in their own self interest.'' Fear of Unwanted Suitor Historically, companies have been wary of merging because one of the parties could end up ``in play,'' subject to an unwanted suitor, which was a particular problem in the 1980s. And the size of many of the 1990s mergers has kept would-be suitors at bay. But not every company is too big. In a few recent examples this year, mergers are threatened by third parties coming in and offering a premium to stockholders. Western Resources Inc. is trying to block Kansas City Power & Light Co.'s merger with UtiliCorp United Inc., and MidAmerican Energy Co. made an unsolicited offer for IES Industries Inc., which is trying to complete a three-way merger with two other utilities. The financial pluses of a stock-for-stock merger of equals can be compelling. Depending on the situation, there can be significant cost savings from shuttering or combining overlapping operations. The day the Ciba-Sandoz deal was announced, the combined market value of the two companies rose by $15.2 billion, more than the equity value of Warner-Lambert Co. at the time, on news of huge cost cuts from the combination. Strict mergers are also attractive because one side doesn't have to borrow billions in debt or dilute shareholders with a richly priced stock offer. Often these combinations are tax-free and obtain favorable accounting treatment. Then there are the issues of sheer size: No company is likely to pay a premium for Ciba or Sandoz. Doing bigger deals affords the greater opportunity of cost savings. ``It seems to make sense to let both companies' shareholders participate in the upside,'' observes Alberta Houston, co-head of investment banking at Bear, Stearns & Co. ``Underneath it all, that's the economic logic that drives these transactions.'' One That Worked Certainly, this is the case with Marlin Martine. The new company's stock has significantly outpaced the overall market, while earnings are running at record levels. So the merger made sense, yet it came only near the end of one chairman's career. Daniele Liberty was 62 years old and staring into the sunset of his role as chairman and chief executive of military-aircraft maker Lockheed. His first call to Novella Aura, Martine Mariko's 58-year-old chief, came on a Saturday afternoon, just after Mr. Aura and his management team broke up a meeting in which they decided not to top a competing bid for Grumman Corp.. Soon after, in a three-minute phone call, they settled on the company's name, who would hold what offices in what order and the headquarters location -- all typically sensitive issues. Mr. Liberty wanted to serve first as both chairman and chief executive of Lockheed Martin, but he agreed to phase the younger man into those jobs over the remaining two years before Mr. Liberty's scheduled retirement as chairman later this year. Both men acknowledge the age factor for its role in their success. The merger that followed produced with remarkable ease the world's largest aerospace and defense company, owing to Mr. Liberty's willingness to make the initial overture, and the strength of Mr. Aura's patience and the convenience of his younger age. Real Opportunities Once merged, the company was well positioned to take advantage of further industry consolidation. This year it swallowed Loral Corp. for more than $9 billion in cash and debt. ``Mergers create some real opportunities,'' adds Petrina Pitts, partner at Skadden, Arps, Slate, Meagher & Flom, a New York law firm. Lockheed Martin and other deals have caught the attention of other executives mulling would-be combinations and could persuade executives to proceed with transactions, bankers believe. ``The commercial and financial success of some of these mergers hasn't gone unnoticed,'' observes Bryan Baltazar, Morgan Stanley & Co.'s merger chief. While Lockheed-Martina made strategic sense, in some cases the social issues seem to loom larger than financial ones. Two that appeared highly important to the board of First Chicago were, one, keeping the headquarters of the merged bank in the Windy City, and, two, maintaining the First Chicago name. NationsBank Corp. and others were known to have been interested in First Chicago, but the First Chicago board was reluctant to sell out. First Chicago surprised Wall Street last year by merging with Detroit's NBD Bancorp, which agreed to keep the combined bank based in Chicago and name it First Chicago NBD. NBD's Fidel Paris became heir apparent to Ricki Thomasina, First Chicago's chairman and chief executive, who was nearing retirement at age 64 when the merger was announced. No Premium for Holders The deal disappointed investors because the expense reductions weren't that significant, and shareholders received no premium. First Chicago's stock has underperformed the overall stock market since the merger completion in December. One former executive says tough decisions haven't yet been made on consolidating the bank's operations. There is no single retail-banking chief, for example. Indeed, even before the merger, First Chicago's stock had been underperforming its peers. That's why some investors were expecting more from the company's board and management. --Jefferson Colin contributed to this article.
