There is a growing body of thought that argues the so-called AOL Time Warner "merger of equals" might not have gone so far astray had it not been for Chairman Stephen Case's ill-timed decisions to buy back the 49% stake in AOL Europe owned by German publishing giant Bertelsmann AG and acquire European magazine publisher IPC Media. Admittedly, the U.S. media giant would neither be saddled with $29 billion of debt today nor facing threats of below-investment-grade status from credit rating agencies. The New York-based company also would not have to be considering the sale of some of its most profitable properties at a time of severely depressed asset prices. "It would have made a huge difference if the merged company had not made that AOL Europe purchase right after completion of the merger," says Sean Egan, a managing director at Philadelphia-based ratings firm Egan-Jones Ratings Co. "What they were doing in a sense was doubling their bet on the Internet economy, right before the Internet economy tanked."
Maybe so, but even if the company moved from foundering to merely floundering, most business experts still would put it among the classic cases of business combinations that were critically flawed from the start. Not necessarily because AOL was new economy and Time Warner is on the cusp of the new and the old. And not only because one company–AOL–was all about expanding revenues and market share, and Time Warner was structured around maximizing profits. Many experts now feel that the AOL-Time Warner merger imploded as much because almost no consideration was given, at least until it was too late, to the question of how to integrate the operations and personnel of the two businesses–not during the pre-merger planning, when only a handful of the most senior executives were drawing up what one mid-level Time Warner executive cynically refers to as the "pre-nup," nor even after the deal was completed.
As a result, some of the smartest executives, such as ex-Time Warner CFO Richard Bressler, were shoved out, while Time Warner managers who remained were marginalized. (Bressler ended up becoming CFO at Time Warner's prime competitor, Viacom Inc.) "It was hubris," says Kathryn Harrigan, a professor of business leadership at Columbia Business School, who has taught several former and current Time Warner employees. "AOL acquired Time Warner at the pinnacle of its stock price, and they felt they could do no wrong. No one at AOL wanted to listen to anyone from Time Warner."
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Forging a Relationship
Although the M&A game has always revolved around financials and setting a workable purchase price, the rough road encountered by so many mega-combinations over the last decade–even when the economy was good–has made executives realize that there is a touchy-feely component that must be addressed to ensure smooth sailing. This goes significantly beyond throwing out the words "corporate culture" and bringing in a human resources executive after the CEOs have already shaken hands. "In a smart merger, a lot of time and thought goes into planning for future integration," says Robert Mittelstaedt, vice dean of executive education at the Wharton School. "What tends to happen though, particularly in acquisitions–like [AOL Time Warner]–that don't make a lot of sense, is that integration gets pushed aside, or it is just discussed as a formality."
Whereas integration had once been considered an afterthought by the vast majority of companies, it's now considered a "core competency" by 45% of major U.S. corporations, reports The Conference Board, based in New York. Even most of those that place less emphasis on the practice say they do apply lessons learned from prior experiences. "If a company has made a dumb bet, then no matter how much preparation went into the integration effort, it won't help," says David Dell, research director for The Conference Board. "But bets like these are won on how well the game is played from start to finish," which includes cooperation among key players, effective implementation of new ideas and critical communication of strategies to employees.
Unfortunately, roughly 80% of merger and acquisition activity creates negative shareholder value, at least two years after the marriage, contends Ranjan Pant, a private consultant with an M&A practice in Boston. Pant says the reasons and circumstances vary among the deals, but among the leading causes of a botched merger more often than not is that the integration of cultures and management philosophies has been careless.
In contrast, examine, for instance, the way that American Electric Power Co. (AEP) went about acquiring Central & South West Corp. (CSW) in June 2000. From the start, it was clear the power company realized a successful relationship was about much more than hammering out a purchase price. It understood that the two businesses with their varying management philosophies and cultures had to be integrated into one cohesive unit–all, of course, to increase shareholder value.
To pursue synergies, teams were formed to evaluate the operations and the associated costs within the divisions of each company, as well as to plot a future course. AEP not only expects to drive out $2 billion in cost over 10 years, but it has also increased the size of its generation, broadened its geographical reach and diversified its fuel sources. The deal has been relatively good for shareholders: Though the stock has slipped in recent weeks to around $20 a share from $50 and has trailed the performance of the S&P 500 for the last year, AEP has outpaced the performance of the New York Stock Exchange Utilities Index.
"A difference between our merger and most other mergers is that we had a very long courtship," said Susan Tomasky, AEP executive vice president and chief financial officer. "Utility mergers typically have a long approval process; ours took two-and-a-half years. While there were many downsides to that delay, we put the time to good use, examining every aspect of our operations to enable us to make informed decisions when building the post-merger company. Because of this, the transition from separate companies to a single company was seamless."
Mattel's Hard Lesson
More typical is the example of Mattel Inc.'s buyout of The Learning Co., a children's software publisher, for $3.5 billion in May 1999. First and foremost, most analysts concluded that the price was simply too high for Mattel to support. But the combination was also hampered by management sparring. Eventually, the toy maker was forced to sell its new property to Gores Technology Group in 2000 for no consideration and a promise of future profits. Mattel's stock took a beating, and Chairwoman and CEO Jill Barad had to resign.
"The false momentum that gets created in senior management teams during intense merger negotiations often leads to ignoring targets for future synergy capture and cultural integration," says Pant. "Therefore, pre-close planning in parallel with negotiations is crucial."
"When the negotiations are friendly, the merger generally works out well," adds Keith Wasserstrom, a partner in the securities practice of Hogan & Hartson in Miami. "I've been involved in deals when the buyer is overly aggressive, which has alienated the old management and paved the way for the new entity to fail."
Without question, all companies that consider merging anticipate better things ahead. But if the success rate is to turn the corner, integration must be given the highest priority. "Best practices" suggest that task forces are necessary to tackle the web of complexities that can entangle a merger. A squad dedicated to evaluating each business area for possible synergies and the resulting savings is necessary so that business managers can focus exclusively on running their units.
In the case of AEP, about 20 teams were formed to examine the various corporate divisions. Current practices were assessed fully before the findings were recorded and new ideas were presented, says Bob Bellemare, who worked at CSW and co-led the team looking at the deregulated marketing unit. He is now CEO for Albuquerque-based UtiliPoint International Inc., a consulting firm. "We met with those who were expected to eventually act on our ideas and they took us very seriously," says Bellemare, who adds that his committee's review took four months to complete.
Similarly, AmerisourceBergen Corp. was formed in August 2001 when two drug distribution companies determined that they could increase shareholder value most by combining the two companies. They estimated that by merging, the two companies could achieve a cost savings of $150 million in three years–all on a total operating income of about $700 million. Thus far, the market likes what it sees: The Valley Forge, Pa.-based combined company has seen its stock rise from $52 a share to $78 a share.
Before they merged, leaders from both companies formed an integration team whose sole job was to find new synergies and write the detailed work plans to achieve them. The team examined everything from the mission statement to the structure of the new company. Toward that end, the entity created a fresh logo right away to let everyone know–both internally and externally–that it was a new day. To bolster savings, the group suggested consolidating the number of distribution centers from 51 to 30, including six new ones, and also recommended savings in procurement, administration and other areas.
After the merger, the integration team became a separate organization from operations, reporting to the COO. The integration office is responsible for implementing the integration plans and ensuring that the company achieves the $150 million in savings. "If you create this level of change, you need a separate group driving integration or the cost savings won't appear," says Michael D. DiCandilo, AmerisourceBergen's CFO. "That leaves the rest of the organization to work with our customers and suppliers."
It has been a bruising learning curve, but companies appear to be coming around. As an increasing number of those undergoing mergers implement "best practices," it may make the newly merged operations profitable ones for not just shareholders, but also for customers, suppliers and employees.
–Dave Lindorff contributed to this story
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