3 Failed Mergers and What They Reveal

Many deal professionals focus predominantly on rigorously assessing the quantitative elements of a transaction rather than the qualitative. However, time and again, history has shown that without a productive integration of the merging entities, the quantitative successes will never be realized.

In the paragraphs below we examine three distinctive mergers that vividly illustrate the alarming ramifications of qualitative rifts on the outcome of a transaction.

Lesson 1: Make Cultural Alignment a Transaction Prerequisite

Daimler Benz and Chrysler

Reality has persistently demonstrated that failed cultural integrations are often at the heart of merger difficulties. For example, in a 2004 Mercer survey of executives involved in M&A deals, 75% cited “harmonizing culture and communicating with employees” as the most important factors for successful post-merger integration.

Two years later, a 2006 Economist Intelligence Unit (EIU) white paper showed that 67% of survey respondents had found cultural integration to be the most critical success factor in an M&A deal. Even more recently, a 2008 report produced by EIU and Mercer found that cultural differences and human capital integration issues ranked as the two most significant transaction challenges faced.

To see these obstacles play out, we need not reach further than the 1998 transatlantic merger of Daimler Benz and Chrysler. At the outset, the deal was widely perceived as the perfect union of carmakers. Yet it subsequently transformed into what is now an infamous public fiasco.

From a technical standpoint, the merger had tremendous potential. It was publicized as the linking of two companies that specialized in different areas of the automotive market, with not only two diverse product portfolios, but from two complementary geographies.

However the structural and financial merits of the deal were rendered irrelevant when the two companies couldn’t find a way to operate productively under competing cultural identities.

Problems arose, to quote Miami University economics professor John Brock, when an “upright, hierarchal approach to things at Daimler Benz and … a risk taking, entrepreneurial, loose organization [at Chrysler]” were forced together. Indeed many analysts cited friction between the American and German management teams from the outset, in what led to a situation where “the spirit of what was truly unique at Chrysler was gutted out of it and led to executives leaving just ahead of the merger.”

What unraveled the Daimler Chrysler marriage holds very actionable implications for today. By overlooking cultural rifts, the engineers of the merger were neglecting a key prerequisite to deal success. Indeed, Axial Member and Total Safety SVP, Stenning Schueppert, maintains that cultural due diligence should be a basic barrier-to-entry for any transaction. “If we cannot provide good evidence of cultural alignment, the rest of the business doesn’t matter.” While this may prevent you from investing in certain assets, you don’t want to end up “buying some assets and losing the people to run the business for you.”

Lesson 2: Communicate Integration Plans Before It’s Too Late

Bank of America and Merrill Lynch

The integration and consolidation of human capital is easily the most challenging step of the merger process. Of course, the natural remedy here is to communicate plans around organizational and leadership modifications as honestly, clearly — and most importantly — as early as possible.

Yet while this would appear simple and almost basic, even the largest corporations have failed to achieve prompt communications in the very recent past.

For example, the landmark acquisition of Merrill Lynch by Bank of America in January 2009 illustrates the substantive damage that can result from failing to communicate integration plans sufficiently early. While the merger was indeed under external pressure, there were breaks in communication that caused major cracks in the organizational fiber of the newly combined entity.

And while mergers often prove troublesome, few have set “the land speed record for disaster” as quickly as the Bank of America Merrill Lynch (BAML) acquisition. More importantly however, the dragging integration process that deteriorated productivity at the merged company — frequently a result of legal delays in other transactions — is most often attributed to cultural fissures in BAML’s case.

BAML was given the task of integrating two broker-dealers housing two separate investment banks. Regardless of integration scope, however, the real shortcomings in planning and preparation became apparent when, four months after deal close, many of the major decisions had yet to be announced. This included key appointments such as who would run the core investment banking groups. Moreover, Merrill and Bank of America executives were still divided over whether even the “combined investment business will be run using the Merrill Lynch-style decentralized model or Bank of America’s centralized ‘command and control’ structure.”

This fear and doubt already percolating through the legacy Merrill ranks, in addition to a lack of definition around the consolidated outcome, and the absence of pre-emptive communications, led to the rapid departure of prominent Merrill bankers that ultimately sucked away the potential of the combined franchise.

The key learning here is the incredible importance of timely transaction planning and communications. In a point made perfectly by Tom Nelson, Axial Member and Managing Director at T G Nelson, “there will always be structural differences between two merging firms” but “communication is what makes it work. The best approach is to just get [the employees] all on one page and communicate the best you can… If there is uncertainty after the close it can cause real issues in integration.”

Lesson 3: Preemptively Address Implications of Ownership Structure

Volvo and Renault

In an industry where (a) transaction price and (b) cash vs. stock mix are front and center, ownership dynamics are rarely the primary element of deal decisions. However the attempted merger of Volvo and Renault in 1993 plainly illustrates the staggering effects of pro forma ownership structure on the outcome of a transaction.

What could have been a union that would save an astounding $5 billion in production, engineering, and distribution synergies, ultimately precipitated a collapsed deal and the resignation of a Chairman that had led Volvo for more than twenty years.

While this was again an attempted marriage of two automobile manufacturers, it lacked the upfront executive dissent that condemned the Daimler Chrysler story. The leadership teams at Volvo and Renault had mutually planned to phase into a merger by starting with a joint venture, and were well on their way to consummating the deal in December 1993.

However, Volvo was investor-held while Renault was owned primarily by the French government. The combination of the two entities would leave Volvo with a 35% stake in the new company and the French government in control of the remainder. While not inherently detrimental, certain French comments about plans to privatize Renault implied that the enterprise would effectively become a French company under French shareholder control.

More importantly however, a number of analysts felt that the root of the problem was a widespread sentiment — within both Volvo and Sweden — that one of the nation’s industrial gems was being sold to a foreign government that was likely to ignore the interests of Swedish employees.

While there were clearly “too many cultural incompatibilities to make a merger work …the CEOs of both companies decided to go forward anyway” explains Robert F. Bruner, dean of the Darden Graduate School of Business at the University of Virginia. However “employees at Volvo rebelled, ultimately forcing out the CEO. Volvo’s stock price cratered and the brands of the two companies suffered.”

Volvo Chairman Pehr Gyllenhammar woefully explained that, in considering the merger, “business issues have been mixed with political and social ones.” “The massive and often aggressive debate”, he lamented, “has created a powerful pressure on Volvo’s social fabric.  Management has not quite been able to resist these pressures.”

Indeed despite continued support from Gyllenhammar, the combination of employee pressure, public dissent, shareholder disapproval, and management revolt not only forced Volvo to back out of the deal, but resulted in a slue of leadership resignations and threw the future of the two carmakers into disarray.

What precluded the ill-fated Volvo and Renault marriage gives us valuable insight into the scope and implications of shareholder composition.

It was neither transaction price nor consideration mix that rendered this deal unworkable, but rather the overwhelming impact of ownership on cultural dissent, which snowballed into a sequence of costly events. Partner and managing director Dunstin Seale, of Senn Delaney, perfectly summarizes the challenge, indicating not only that culture is the main catalyst of the two-thirds of M&A efforts that fail to meet expectations, but that when it’s not the acquiring company’s culture rejecting the foreign culture, it’s the acquired company’s culture rejecting its new owner. This rejection, as we’ve seen, can come from above or below but has the propensity to “systematically destroy value.”

In conclusion, focus on making cultural alignment a primary transaction assessment area, communicating integration plans upfront, and maintaining sound judgment of ownership dynamics.  And you will be averting some of the biggest mistakes in recent dealmaking history.