Flight Risk

Buyers must act quickly to keep customers from defecting — or prevent rivals from stealing them.

When CVS Corp. bought 1,268 Eckerd drugstores in August 2004, it worried that its Eckerd customers might flee. Rivals “were putting up signs saying, ‘If your local pharmacy is changing hands, you can always come to us,’ ” says David Rickard, executive vice president, CFO, and chief administrative officer of the Woonsocket, Rhode Island–based pharmacy chain.

The prospect of buying a business only to lose at least some of its customers can keep an acquirer awake at night. It does happen, often as the result of a failure to reassure customers who are attached to the acquired company and fear switching to a new one. Whatever the industry, the job of retaining the consumer base involves quickly creating a positive customer experience, while countering preconceived worries.

“Whether it’s Old Economy or New Economy — banking or software — focusing on the customer-retention piece of a merger or acquisition is the key to success,” says Ian Campbell, West Coast head of The Abernathy MacGregor Group, an M&A public-relations firm. The inherent obstacles and an unusually hostile competitive environment can make this a perilous task, as CVS’s Rickard experienced. “Speed is crucial in every aspect of M&A, and this is no exception,” adds Janet Kelly, an attorney with Minneapolis-based law firm Zelle, Hofmann, Voelbel, & Gette LLP.

The Eckerd stores that CVS purchased are located in Texas and Florida, far from the company’s home base. So CVS quickly launched a vigorous marketing and advertising campaign to introduce itself to its new customers. It also donated $20 million worth of Eckerd-branded products to the hunger-relief program America’s Second Harvest, a gesture that generated goodwill for the company in its new market, especially after a CVS vice president plugged the donation on “The Ellen DeGeneres Show.”

Let the Competitors Know

As nearly every acquisitive bank can attest, retaining clients during a service-industry merger is a special problem, where one-on-one relationships and regional loyalties often shape the decision whether to keep or change providers. And staffers of both the acquirer and the acquired are crucial players.

“The question is, are your employees on the phone with a headhunter, or are they on the phone taking care of customers?” says Robert van Brugge, a Sanford C. Bernstein & Co. beverage analyst. “The postmerger paralysis phase is inevitable. The best thing you can do is to make sure it is as short as possible.” At CVS, executives immediately flew to Florida to reassure Eckerd store managers that they could keep their jobs.

“On Day 1 you have to take the nervousness out of the employee base” with well-planned internal communication, says Bill Teuber, executive vice president and CFO of Hopkinton, Massachusetts-based EMC Corp. Salespeople need special attention. “Have the whole thing laid out in writing for the sales force of both acquirer and target,” advises John Cook, a director at consultancy McKinsey & Co. That way, sales will be promoting the deal right away.

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