Beware the Ides of Mergers

Posted by Greg Bustin (March 1, 2005)

Excerpted from the book, Take Charge! How Leaders Profit From Change, by Greg Bustin.

As winter melts into spring, we see a thaw among companies whose business leaders are emerging from the tundra of the economic downturn flush with cash and poised to pursue mergers and acquisitions.

Yes, the urge to merge is once again making its presence felt. In the last four weeks, at least 118 mergers have been completed worldwide, and dozens more are in the works across every imaginable business sector. M&A volume is up 49% over 2003, according to Thomson Financial. And that trend is expected to continue in 2005.

Among the headline-grabbing deals of the last 60 days are SBC’s acquisition of AT&T, Verizon’s planned purchase of MCI, Procter & Gamble’s acquisition of Gillette, Sprint’s merger with Nextel, Johnson & Johnson’s acquisition of Guidant, the Coors-Molson merger,Blockbuster’s hostile offer for Hollywood Entertainment and Met Life’s purchase of Citigroup’s insurance unit.

Last November’s Sears-Kmart merger is beginning to sort itself out, and perhaps within days of reading this, Federated Department Stores may have inked a deal with May Department Stores.

Yet more than half of all mergers either fail to meet the financial expectations outlined at the time of the transaction or fail outright. And studies show that about half of the executives in the company being acquired leave in the first year, while about three-quarters of them leave within three years.

A recent New York Times article entitled “A Sector Where ‘Merger’ Can Mean the Start of Something Ugly” examined failed M&A activity in the technology sector, and estimated that the casualty rate among tech companies is even higher than the 50% mortality rate of mergers in other industries.

Could any of these failures have been prevented? Of course. As with most corporate initiatives, the source of success or failure inevitably is traced back to leadership.

A lesson from Julius Caesar

All too often, business leaders ignore the signals that indicate their business is headed for trouble, or that a planned merger is destined to under-perform. This failure by leaders to heed warnings is nothing new.

Julius Caesar was one such leader who, as you may recall, failed to heed warnings and paid for it with his life on the Ides of March - on March 15, 44 B.C.E. to be precise.

While we owe a debt to William Shakespeare for burning into our memory the warning, “Beware the Ides of March,” we have Plutarch to thank for the details of Caesar’s death - complete with the Roman ruler’s failure to take seriously the warning of a Roman astrologer (an ancient version, some might say, of a modern-day investment banker or marketing consultant).

According to Plutarch’s account, this Roman astrologer named Spurinna warned Caesar that on the Ides of March the great leader would be in grave danger. Caesar initially heeded the warning and had determined to remain within the safety of his home on that day. However, one of Caesar’s colleagues convinced him that the astrologer’s warnings were simply superstitious folly. As a result, Caesar decided to attend a Senate meeting on March 15th. On his way to the Senate, Caesar encountered the astrologer whom he confidently told, “The Ides of March are come.” Spurinna answered, “Aye, Caesar, but they are not past.”

Hours later, Caesar’s enemies assassinated him at the Roman Senate in the temple of Venus.

While business leaders rarely need to fear for their lives, the point of the story of Caesar is clear: Business leaders must remain alert to warnings and to trust their own instincts. And that goes for completing a merger or acquisition.

Ask and answer five essential questions

We’ve noted before that bungling a merger can destroy an organization’s culture, reputation and earning power. Management teams of both companies must ask and answer tough questions before a merger or acquisition moves forward, and then adhere to those answers as the merger unfolds. In my book, I outline five deceptively simple questions to be asked before moving forward with the M&A process, and last year I examined the question the best leaders always ask first before completing an acquisition.

So here’s another essential question effective leaders always ask:

Are lines of authority and responsibility clear - not just at the top, but throughout the organization? The operational structure of the new entity must be clear and agreed on sooner rather than later if the merger is going to move forward and prove successful.

“When we announce an acquisition, we try to have the management structure completely laid out,” says Allstate’s Ed Liddy.

Structure, roles and retention become key issues, and while most large companies assemble integration teams to address these issues, it can be helpful to call in third parties to help with this process. “It’s extremely important to reach out to the second tier of management quickly,” says Jan Leschly, who retired as chief executive of SmithKline Beecham after leading several acquisitions, including its deal with Glaxo. “We used a consulting company to evaluate all our managers in every single country [where we had redundant operations]. It was a tremendous morale boost [for the managers of the acquired company] who didn’t feel they were just being slaughtered.”

As on any big decision, move carefully through the due-diligence phase, remain alert to warning signals and make sure you implement what you’ve agreed on. Beware the Ides of Mergers.

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