New York Post – January 19, 2003
By Eric Wahlgren
The culture clashes, high price-tag and strategic problems plaguing the $160 billion merger of AOL and Time Warner may be unique in size, but they’re not uncommon in high-profile M&A deals across the globe.
AOL Time Warner’s three-year-old merger still may eventually prove to be a boon for shareholders if the company realizes its vision of fully exploiting the Internet to peddle Time Warner’s vast news and entertainment offerings.
But if history is any guide, chances of the deal’s success aren’t great.
As many as 80 percent of the mega corporations that have resulted from mergers have failed to perform as well as the two individual companies would have done separately had they never combined, said Robert Lamb, a New York University professor of management and the author of “Capitalize on Merger Chaos.”
“Everyone thinks their merger is going to be one of the 20 percent that succeed,” Lamb said.
“The reality is that most mergers fail.”
The main reason big deals typically go south is that companies usually overpay for acquisitions.
So sure of their eventual success, acquiring company execs typically offer premiums that average 30 percent to 40 percent over the target firm’s market price, Lamb added.
The result is an inflated deal price that can wipe out the benefits of any cost savings, or “synergies,” that were anticipated from the merger in the first place.
“The premium that companies pay almost dooms the deal from the beginning,” Lamb noted.
Another potentially dooming problem is that senior managers often fail to plan adequately for the merger’s aftermath. A big deal can involve integrating tens of thousands of employees, billions of dollars of assets and countless corporate systems and processes, among other considerations.
But frequently, CEOs shake on the pact before figuring out the best way to join their two corporations or, worse, before figuring out whether a deal actually makes sense. “A lot of deals get cooked up very, very quickly on golf courses,” said Paul Bernard, a New York-based executive coach and principal at Paul Bernard & Associates, which counts numerous CEOs among its clients.
“Often, no one questions the assumptions about the benefits of a merger before it’s too late.”
For example, Vivendi Universal, now saddled with loads of debt, has been rushing to shed assets after the 2000 merger that combined France-based Vivendi’s water and sewage assets, among others, with the entertainment concerns of Canadian drinks firm Seagram.
Many deals struggle, too, because corporate leaders are simply unable to resolve the culture clashes that arise when two disparate cultures are shoved under one roof. The 1998 deal that combined Germany’s Daimler Benz with Detroit’s Chrysler Corp. “on paper, looked great, because it gave them worldwide distribution,” said Ben Boissevain, a managing partner at Agile Equity, a New York mergers and acquisitions advisory firm. “But there was a definite culture mismatch, and it is difficult to get a large company like that firing on all cylinders.”
Still, despite the huge hurdles, CEOs sure love to do huge deals.
Bernard blames CEOs’ oversized egos. “A merger is sort of like corporate Viagra for CEOs,” he said.
But CEOs are also driven to seek deals by a rule-or-be-ruled paranoia, Boissevain added. “If you don’t acquire, you become an acquisition target – or you can be left in the dust.”