When Equality Isn’t a Virtue

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

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.

CEO+CEO = CATASTROPHE

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.

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