Merger mania comes to company near you

By Lisa Buckingham and Roger Cowe

LONDON: Whether it will be next week or next month, the world is about to see its first US$100 billion corporate takeover. But even the $100 billion deal is unlikely to hold the record for long. We are in the most extravagant takeover boom of all time.

Last year the total changing hands in the global corporate reshuffle topped $2,400 billion. Oil giant Exxon heads the pack with the largest successful bid, valued at $80 billion, for Mobil, bringing together organizations with 123,000 employees.

Day after day, corporate giants topple landmarks that once seemed invincible. Only 18 months ago the financial world held its breath as the British drinks giant, Grand Metropolitan, dared to splash out $16 billion to buy Guinness and create the most powerful global spirits and foods empire. Today, the price of the deal which brought together Johnnie Walker, Burger King, Jolly Green Giant and Tanqueray gin looks like chicken feed.

Fuelled by the hunger of financial architects and driven by growing competition, the appetite for takeovers and mergers appears unstoppable. No deal is regarded as too big to be contemplated.

Yet the evidence shows that mergers fail to achieve what they set out to: the most recent research suggests only one in every three takeovers gets anywhere near achieving its goal.

While directors' egos push them relentlessly towards bigger and bigger deals, the price is paid lower down the corporate scale. It is almost unknown for a takeover or merger not to be predicated on saving costs, largely by sacking staff.

"The only way I was going to keep sane was just to ignore everything, put my head down and do my work," said a survivor of Britain's biggest science merger, between Glaxo and Wellcome.

It took nine months before staff in that deal learned whether they would keep their jobs. Then, on two ghastly days in October 1987, coinciding with the stock market's Black Monday, more than 1,000 employees were each given an appointment at which they would be told their fate. Employees were directed in small clusters to a waiting room and then on down a corridor. Those sent to an office on the right were reprieved and given a perfunctory welcome to their new job. Those sent to the left were sacked. One employee commented: "It was like being led to the slaughter."

After the takeover of Union Bank of Switzerland by Swiss Bank Corporation, UBS employees in London were told they were out, on the grounds that SBC's information technology was better and so were its people.

Those losing their jobs in the current wave of global consolidation are not the first casualties of corporate warfare. The urge to merge is endemic in the Western business system and every now and again it becomes the height of fashion for all aspiring chief executives.

Buoyant stock market prices -- London shares last week hit a new valuation peak -- usually underpin the waves of bidding frenzy.

In the 1980s, diversification was out of fashion. Suddenly it was all the rave to buy another business in order to cut costs. It was also the heyday of corporate raiders such as Lord Hanson, of pretenders such as Alan Bond and the Wall Street financiers embodied in the film character Gordon Gekko.

In real life, predators such as Sir James Goldsmith and Robert Maxwell prowled the globe to exploit undervalued businesses with the help of over-excited bankers.

Now business thinks it needs to become global. Many industries such as oil, drinks and banking are regarded as "mature", with their best growth years behind them, so the only way to continue to drive profits forward is to reduce the costs.

In the world drugs business, governments are slashing their health spending so big companies are trying to become more efficient at research and distribution. Companies are increasingly merging with direct rivals. Look at German motor giant Daimler Benz and U.S. car maker Chrysler, British Aerospace and GEC Marconi, Vodafone and Airtouch, Mobil and Exxon, BP and Amoco and drugs groups Zeneca and Astra.

But the importance of fashion should not be underestimated. And this can tempt business people to risk their reputations and their livelihoods on an outrageous deal.

"Of course they rationalize it beautifully," said Cary Cooper, professor of organizational psychology and health at the University of Manchester Institute of Science and Technology. "But most of these deals are motivated by the ambitions and egos of chief executives."

He said the most common reasons blockbuster takeovers fail included a clash of culture between the two merging organizations, a failure o f communications, inadequate business rationale and ineptitude to cope with "soft" issues such as people, style, culture and values. Peter Ellwood, chief executive of the Lloyds TSB banking group -- widely regarded as one of the few truly successful recent mergers -- believes it is only possible to put together two sizable organizations if they share a common philosophy and business approach.

"You have to have similar values. Lloyds and TSB both focused on shareholders, but knew that was only possible by focusing on customers. That would not have been achievable if we had been up against an organization which thought about nothing but profits."

Acting quickly in a takeover was an imperative, he said. Lloyds and TSB forced many staff to reapply for their jobs but within three months had appointed the top 1,000 managers within the group.

Andrew Pettigrew, a professor at Warwick Business School, said despite all the examples of takeover catastrophe -- when insurance broker Willis Faber bought rival Stewart Wrightson many top people defected and set up a rival firm -- too many managers were obsessed with money and forgot they were dealing with people.

"The focus is financial in the early part of the process and that has big consequences. People are preoccupied by the financial aspects and then who has got the top jobs... the effect on the climate in the business can be a very difficult issue."

"Integrating two cultures is the most difficult thing of all. It's not just like taking out a cassette and slapping another one in. But people don't think it through. Managers are more sensitive these days, but they still don't fully understand what's involved. That affects everyday things like the way meetings are run and the way decisions are taken. It's not trivial -- delays and misunderstandings reduce people's confidence."

-- Guardian News Service