The Crisis Factor in Mergers and Acquisitions

Presented at a two-day workshop sponsored by Makovsky + Company and The Conference Board in November 1999

Workshop Speakers from:
3M
AstraZeneca Pharmaceuticals
Bell Atlantic Corporation
Boeing Company
Citigroup
Conectiv
Continental Airlines
International Paper
KPMG LLP
Lockheed Martin
Merck + Company
New York Life Insurance Company

Before I begin my presentation on the crisis factor in mergers and acquisitions, I would be remiss if I didn't share with you news of a colossal merger that hit the wires just moments ago. “Continuing the current trend of large scale mergers and acquisitions, Christmas and Chanukah have signed a definitive agreement to fully merge operations in time for the upcoming holiday season.

“According to a source inside the negotiations, the overhead cost of having 12 days of Christmas and 8 days of Chanukah had simply become prohibitive for both sides. By combining forces, the world will have the opportunity to enjoy consistently high-quality festivities during the 15 days of 'Christmukah,' as the new holiday is being called.

The source expects little opposition to the merger. In fact, he confirmed that negotiations were concluded by a rousing chorus of 'Oy, Come All Ye Faithful.'”

Talk about a blockbuster merger...

The title of my talk references “the crisis factor.” What I am referring to is “anything that conspires to undermine the success of a merger.” That can be during or after the transaction. It might relate to regulatory problems, an unexpected hostile bid or expected synergies that aren't realized. Whatever the reason, when anticipated growth doesn't happen, it's a crisis.

By that definition, crises are rampant in M&As. The total amount of merger activity last year topped one and one-half trillion dollars. It has been quietly acknowledged for some time that a great majority of all mergers and acquisitions don't work out.

A big part of the reason is communication; specifically, bad communication. A recent survey by the Hay Group - focused on technology companies who experienced mergers - found:
• Only 28% said, “we did a good job ...”
• And just 15% said, “we did a good job communicating our vision and goals ...”

When the Conference Board asked members about the biggest disappointments in mergers they'd experienced, four of the top six referred to bad communications planning and people/culture problems.

There are three reasons that mergers and acquisitions fall into crisis:

1. Misplaced priorities - Communications is usually an afterthought, addressed once the financial and legal particulars are stitched up.

2. Insufficient planning - Due to the fact that communications is rarely part of the inner circle.

3. A perverse wish-fulfillment - When you leave planning to the last minute, it takes on the allure of a crisis.

There is a better way, and I'd like to talk about it today.

First, I want to do some level setting. I want to highlight what is really going on beneath the headline mergers and acquisitions that are today's focus. It is not always clear.

When we look closely at what we call M&A, we see a network of alliances, joint ventures, associations and vendor partnerships - often between unlikely partners and often based on informal agreements. We have to expand our definition of M&A and, as a result, adapt our understanding about what M & A communications is all about.

Second, I want to talk about trends. I see the emergence of a new kind of merger - what I call a “top-line” merger. I'd like to describe its evolution and the new set of communication challenges it poses.

Finally, I will offer some big-picture communications lessons - applicable to all types of mergers, but especially relevant for the top-line mergers I’ve just referenced.

To start, let's talk about a misperception held by many people. It's widely believed that we are in the midst of an unprecedented M&A boom. What we are really in the midst of is an unprecedented corporate restructuring boom.

Clearly, the M&A scene today is hyperactive. Today's mergers may seem to be unparalleled in size and scope, but not if you take a retrospective view. When you consider what Standard Oil did to consolidate the petroleum industry at the turn of the century, or what AT&T did to create a nationwide phone network in the 1920s, you begin to realize that there may have been more significant merger episodes in our history.

What makes today different is restructuring. Mergers are only a part of this trend (albeit an important part). Peter Drucker identifies two additional and equally significant developments: de-mergers and alliances. He writes that:

“For every mega-merger or big acquisition there is at least one - and usually several - spin-offs, divestments, sell-offs and voluntary split-ups of big companies into several new and independent businesses... The real boom has been in alliances of all kinds, such as partnerships, co-operative agreements, joint ventures, etc.”

And many of these deals are sealed by nothing more than a handshake.

Take a look at Cisco. In the past six years, it has completed 42 acquisitions, several of which were sealed within 24 hours. In the month of August alone, it absorbed two start-ups, closed two other acquisitions and negotiated two more. More importantly, while absorbing 10 companies in the past fiscal year, Cisco's profits grew 55%.

This is the image of the future: breakneck time frames, complex and improbable marketing and supplier relationships - often between competitors - based on handshakes, and a pressing need to restructure the business and replace it with a more relevant model.

We are not in the midst of a merger boom as most believe, but rather a restructuring boom.

How does that make you feel? Warm and fuzzy? Or scared?

Among the key trends in the M&A scene today is the emergence of a new type of merger É the “top-line” merger. To better understand this trend, we need to review the three dominant forms of “restructurings” that previously defined the business scene for some time now.

For the three decades beginning with the 1960s, conglomerates and bottom-line mergers drove most mergers and acquisitions.

The controlling strategic issue in the creation of conglomerates is, of course, economic diversification. Corporations attempted to minimize risk by being in many different businesses, like a “seesaw.” When the economic cycle drove one business down, the others in the conglomerate would go up and smooth out overall performance. That was why, in the 1980s, General Motors became a technology company. It's why, in the 1970s, ITT became just about any kind of company imaginable ... except for a telecommunications company.

The disadvantage of the seesaw, however, is that the whole contraption goes up and down but doesn't really move forward.

As company performance reflected this static reality, the age of conglomerates has slowly wound down. Today, companies focus on doing only that which they can do best. General Motors no longer is betting its future on its ability to make aircraft and electronics or store data, and has spun off the companies it once owned in these businesses. GM, like every major automotive company, has three major functions: design, final assembly and distribution of cars and light trucks.

What began to replace conglomerates was a second type of merger that I call the “bottom-line merger.” It is still in vogue. The goal is to acquire more customers - those of two organizations - and service them more efficiently through one company's infrastructure. Another way to look at it is an effort to spread fixed costs over a larger number of customers by buying customers.

Bottom-line mergers are essentially defensive in nature. They typically take place in consolidating or lower-growth industries such as traditional banking, utilities or steel, or in industries characterized by excess capacity, such as automotive.

In the automotive industry, Ford's acquisition path is a classic bottom-line strategy. Today, the company owns Jaguar, Land Rover and Volvo on the high end. On the low end is Mazda. And in between, Ford's traditional customer. There is nothing about Ford's fundamental business model that is changing. It is simply attempting to acquire more customers by acquiring a broader product offering.

Bottom-line mergers demand a classic set of communications responses. (There is nothing in that statement meant to diminish their importance.) The central strategic feature is a balancing act that involves three elements. First, the company has to show shareholders how it will be more profitable - essentially by cutting costs and eliminating redundant staff.

At the same time, however, it is essential to retain key employees and maintain overall employee morale by showing that the merger will ultimately create greater opportunities for those who remain.

Finally, the company has to convince its customers that service levels will be maintained. This balancing act calls for clear communications, quick action and deft tactical execution. That's no short order.

What's changing today is the emergence of a third type of merger: what I call the “top-line merger.” The top-line merger represents the wave of the future. It presents a new set of challenges. And it places even more importance on the communications function.

In an economy characterized by shortened product cycles, global markets, rapid imitation and hyper-demanding customers, CEOs are increasingly faced with the need to make wagers, to place bets, in order to get out in front of the competition.

Top-line mergers are a response to this development. A top-line merger is concerned with creating a new business model that customers find more attractive. That's a huge difference from a bottom-line merger, which is about preserving and expanding the existing business model, often by acquiring new customers.

The “top-line merger” is the wave of the future and places even more importance on communications.

AT&T's acquisition of TCI as a way to move into the broadband Internet business is a top-line merger. The consolidation between European telcos is principally a bottom-line move.

J.P. Morgan and Chase is about integrated financial services: top-line merger. Chase and Chemical were bottom-line.
Top-line mergers are ways to increase growth in sunrise industries. Bottom-line mergers are a way to slow decline in a sunset industry. As we've discussed, a bottom-line merger is ultimately about cutting costs. A top-line merger is about increasing revenue. A bottomline merger's appeal is often that it can spread fixed costs over a larger base of clients. A topline merger's appeal is that it can get a larger share of business from each customer by creating more relevant product or service offerings.

What does all this mean for the communications function? Two words: vision and strategy. By their very nature, top-line mergers are about creating and communicating a new business vision and a new business strategy. Unless all key corporate constituencies - customers, employees, investors and others - understand the new strategic purposes behind a top-line merger, are persuaded they are valid, and are inspired by their benefits, a top-line merger will fail. That's a crisis.

Let's look a little more closely at how top-line mergers change communication priorities.

With respect to employees, bottom-line mergers a re ultimately concerned with maintaining “morale” - another way to talk about productivity - amidst the specter of layoffs. They are also about blending corporate cultures to capitalize on operating efficiencies. Both issues count in a top-line merger. But what is more important is defining a new, shared vision for all employees, communicating it clearly, and rallying around it employees who are from different organizations and often different national cultures.

In a bottom-line merger, investor interest tends to center on tactical, balance sheet issues. The key question: how are the cost savings - the raison d'être of the transaction - going to be secured? In top-line mergers, on the other hand, investor communication acquires a higher strategic dimension. Investor buy-in hinges on how effectively and convincingly senior management communicates the new business model and its plans for achieving it.

With customers, marketing strategies of bottom-line mergers are typically focused on issues of customer retention. A key message is usually some variation of the classic “We're the same company you knew before, only bigger/better/more efficient.” The situation is more complex in top-line mergers, where the marketing mission is customer expansion.
Essentially, the message here is: “We are not the same organization you knew before – but we can offer you a different and better proposition. Here's how.”

There are seven lessons that apply to the sort of top-line combination I've been describing. Many apply to most mergers, acquisitions and de-mergers.

Unless key constituencies understand the strategic purposes of a top-line merger, it will fail.

Lesson One

Resolve Leadership Ambiguities
Ultimately in any merger - even in a so-called “merger of equals” - tough decisions must be made about redundant functions. These decisions should be made and executed promptly. Uncertainty kills. By creating a clear leadership hierarchy at the outset, it is easier to focus the organization on the key issues, marshalling support for the strategic vision.

Lesson Two

Engage the CEO
One of the reasons leadership ambiguities must be resolved fast is that, in today’s business climate, the CEO personifies not only the reputation of the organization, but its strategic mission. For this reason, the CEO usually needs to be engaged personally in any merger - engaged with employees, investors and key customers. Nobody else in the organization can articulate the new vision or set the tone for the new cultural climate.

Lesson Three

Put Communications in the Process
The financial and legal aspects of mergers and acquisitions take precedence while the deal is  being negotiated and completed. That’s normal. But the communications department is typically absent, and enlisted only during endgame, when it’s time to make a public statement of some kind (either that the deal is imminent or that it’s come undone). Cisco, on the other hand, has a staff dedicated solely to integration. They stay with the company from the start of the acquisition till the company can no longer be identified as an acquisition.

Lesson Four

Capitalize on the Honeymoon
Seasoned politicians recognize that the time immediately after their election is often a golden opportunity to launch their programs.
The same is true for a merger. Once a deal is announced, people expect action. Jürgen Schrempp of Daimler Chrysler says, “The resistance to change once employees feel comfortable again is much greater than if you change during the time they expect changes anyway.”

Lesson Five

Priority: Employees
In a virtual full-employment service-based economy, employees are an organization’s most precious resource. That’s especially true in a top-line merger, where the greatest asset being acquired is your employee knowledge base. In charting communications tactics, then, the first and most important target should be your people.

In a bottom-line merger, the marketing strategy is customer retention; in a top-line, customer expansion.

Lesson Six

Get All of the Shoes Out of the Closet
A best practice of good communication is especially true during the post-merger period.
If there is bad news, get it all out and do so as soon as possible. Holding back bad news is like picking the “Return to Go and Do Not Collect $200” card in Monopoly. Whatever progress you’ve made before that is immediately set back.

Lesson Seven

Candor and Honesty
There are usually more uncertainties than facts during the post-merger period. But that doesn’t mean communication must cease. Especially during a period of uncertainty, communication must continue and must be candid.

Certainly, communications isn’t the only issue involved in whether a merger or restructuring succeeds. But there is a clear and growing consensus that the people side of the equation is often to blame for failed mergers. And the key to all human relations has always been the ability to communicate honestly and effectively.

As we enter the 21st Century, the audiences we’re speaking to are more sophisticated than ever. They will increasingly demand that we tell them the truth while showing them a higher vision, one that is clear and compelling and clearly depicts the way to the future. It’s our greatest challenge.

Makovsky + Company Inc.
Public Relations • Investor Relations
16 East 34th Street, New York, NY 10016
Tel: 212.508.9600 • Fax: 212.751.9710
E-mail: mak@makovsky.com
Web Site: www.makovsky.com

Makovsky + Company
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