When Equality Isn’t a Virtue

Genuine "mergers of equals" are rare, but successes in that genre are even rarer. 
Andrew OsterlandJune 1, 2001

When James Broadhead and Wayne Leonard announced the impending marriage of their two companies last July, the chief executives of Florida Power & Light and Entergy were glowing with optimism. The “merger of equals” would combine their electric-generation capacity and form a huge 13-state service area, creating “the first real superpower in the utility industry,” according to Leonard. Indeed, it seemed likely to spark other regional utilities to unite in similar fashion.

But it was a rocky engagement. And after nine months of wrangling, the two called it off in April, with each management team blaming the other for the breakup. (Neither company would comment for this story.)

Both should probably count their blessings as they return to the single life. For a number of reasons, experts say, the merger of equals is a particularly perilous transaction–more inclined than the average acquisition to fall apart before completion, and less likely to create value if the deal gets done. And that means long odds for success, perhaps a 2-in-10 chance of creating value, compared with the 3-in-10 chance cited in various studies–one of the more recent being a KPMG study of 700 companies involved in mergers.

Analysts often point to the $40 billion deal involving Daimler Benz and Chrysler as the prime example of a merger of equals gone sour. But there are plenty of others. As merging companies work to avoid the appearance that one party is dominant, “they can spend a lot of time treating each other equally, without ever getting around to the things that need to be done,” says Mark Sirower, who leads the M&A practice at Boston Consulting Group. Among the pitfalls for management: failure to make the tough integration and cost-cutting choices quickly, a loss of focus on customers, and a tendency to use the combined executive force inefficiently.


While there is no hard-and-fast definition of a merger of equals– beyond the two companies choosing to call it that–hallmarks of the breed include similar market values; execution through a stock swap that is usually around 50-50, give or take 5 percentage points; terms calling for some sharing of power among executives from the two companies; and at least some implied division of the tasks of integration to be performed. In cases of a formal power-sharing agreement, the companies often receive equal board representation, split executive duties, and, in some cases, even appoint co-CEOs.

This above all is a prescription for disaster, says consultant Jack Prouty of KPMG LLP. “I don’t recommend doing co-anything,” he says. “I’ve never seen a co-CEO or co-headquarters situation work.” Among notable failures sharing the corner suite postmerger: Bank of America’s Hugh McColl and David Coulter.

The best mergers of equals, say experts, make it clear from the beginning who is in charge. For any acquisition to be successful, hard decisions about who stays and who goes, who leads and who follows, must be made quickly. The market typically gives merged companies two to three years to realize the synergies they promise to shareholders, notes Chicago-based Towers Perrin consultant Jeffrey Schmidt. “If they don’t deliver by then, the stock usually tanks,” he notes.

When there is inertia, it often reflects corporate politics. “If you’re driving a true merger of equals, you don’t want to step on people’s toes,” says Renee Hornbaker, CFO of Irving, Texas-based pump and valve manufacturer Flowserve Corp., which was formed by the combination of BW/IP and Durco in 1997. The company is just recovering from the merger, says Hornbaker, who believes that mergers of equals are “dysfunctional” combinations. Flowserve has been involved in numerous acquisitions since then, but the CFO says the company spent two years earnestly evaluating the best practices of BW/IP and Durco, and focusing on internal problems–rather than on its customers. “We wouldn’t do it again,” says Hornbaker, noting that market share has only recently returned to premerger levels.

“Conceptually, a merger of equals is a beautiful idea,” says Scott Patterson, executive vice president of financial management at Peoples BancTrust, a Selma, Alabama-based concern that canceled such an agreement with Southern Alabama Trust in early April, citing cultural conflicts. “But it’s a very difficult thing to pull off.”


Recent big-oil mergers, notably British Petroleum­Amoco and Exxon- Mobil, were both portrayed as mergers of equals. But the illusion didn’t last long. BP, for example, assured Amoco that it was an equal partner. But the ink was barely dry on the deal when BP CEO John Browne installed his own managers in key positions. That enabled him to make radical changes in the combined entity. “They did what they had to do,” says one Amoco executive who chose to leave.

Despite the efforts of managers to portray merging parties as equals, most supposed 50-50 deals really aren’t. Generally, one management group assumes control and calls the shots for the new organization. “When people use the term ‘merger of equals,’ they are either being very cynical or very naive,” suggests consultant Schmidt.

For the cynical approach, one need look no further than DaimlerChrysler. Daimler’s Juergen Schrempp and Chrysler’s Robert Eaton announced in 1998 that they would serve as co-CEOs of the new company. The two executives also agreed to establish their own merger integration teams. But after two-and-a-half years, and billions of dollars of Chrysler losses, Schrempp recently asserted that he never considered Chrysler an equal in the first place, and had described the merger as such only for “psychological reasons,” to get the deal done.

Granted, Schrempp had a daunting task integrating two giant companies headquartered in different countries with different languages. However, the most common criticism of the merger is his failure to move quickly to establish control of Chrysler. With disillusioned Chrysler employees now leaving in droves, Schrempp could be paying the price for his reluctance to call an acquisition an acquisition.

Andrew Osterland is a senior editor at CFO.


How Some Deals Have Fared

Merging companies Date announced Share price at announcement Current share price
Glaxo Wellcome/SmithKlineBeecham 1/17/00 $60 $55
AOL/Time Warner 1/10/00 $73 $51
Qwest/US West 6/14/99 $45 $38
Exxon/Mobil  12/02/98 $71 $87
BP/Amoco 8/11/98 $39 $52
Hercules/Betz-Dearborn 7/30/98 $37 $12
Daimler Benz/Chrysler 5/7/98 $80 $50
Nationsbank/Bank of America 4/13/98 $81  $56
BankOne/First Chicago 4/13/98 $55 $37
Citibank/Travelers Group 4/6/98 $31 $51


Every merger of equals starts out proclaiming synergies and competitive advantage. Then, in nearly every case, the companies stumble as they work out the details. It remains to be seen whether that will be the fate of a recently announced combination of two major drug-distribution companies, AmeriSource Health Corp. and Bergen Brunswig Corp. In March, they said that the $13 billion AmeriSource and $22 billion Bergen would merge to form a single entity with a $7 billion market capitalization.

True, a couple of factors suggest this merger might succeed. The companies are very similar, just based far apart–Bergen in Orange, California, and AmeriSource in Valley Forge, Pennsylvania.

More important, though, both agree that the CEO of AmeriSource, the smaller firm, will be in charge. “The headquarters are in Valley Forge, and [AmeriSource chief] David Yost is in control,” says Bergen CFO Neil Dimick, who will become CFO of the new entity. As for AmeriSource CFO Jay James, he says he “was willing to give up my role to make it work.”

And yet, the structure suggests that power will be divided. While Yost will be CEO, Bergen CEO Robert Martini, who hasn’t been closely involved in Bergen’s operations, will serve as chairman–a conventional division of labor in a merger of equals. The deal’s terms also give Bergen three of five seats on the executive management committee, although AmeriSource stockholders will control 51 percent of the new company, to be named AmeriSource-Bergen Corp.

The two parties, of course, talk a good game. “This merger will give us a larger and better-capitalized distribution system,” asserts Dimick. “It will help us to compete more effectively.” Specifically, the $125 million in costs that new management expects to squeeze from AmeriSource-Bergen will put it on a better footing with the other two giants in the industry, McKesson HBOC and Cardinal Health. But the market will need tangible evidence of that soon if AmeriSource-Bergen is to maintain momentum. –A.O.