Opportunities for Action in Financial Services. The M&A Maze: Showing Employees and Investors the Way

Transcription

1 Opportunities for Action in Financial Services The M&A Maze: Showing Employees and Investors the Way

2 The M&A Maze: Showing Employees and Investors the Way The dizzying pace of global mergers that characterized the late 1990s has slowed, but CEOs in many industries, including financial services, are still searching for acquisitions that can add long-term value to their companies. The high level of uncertainty surrounding today s markets and the recent lowering of price-earnings ratios may, in fact, make the present an especially opportune time for bold moves. But senior executives are also aware that many acquisitions in recent years have failed to deliver anticipated cost and revenue synergies. These shortcomings have been clearly reflected in the share prices of acquiring companies. For example, a recent study of more than 300 corporate mergers between 1995 and 2001, conducted with The Boston Consulting Group, revealed that fully 61 percent of buyers destroyed the wealth of their own shareholders, as reflected by their stock price a year after the merger was announced. There are many reasons, of course, why acquisitions can fail to add value: overly optimistic valuation of potential cost and revenue benefits, exorbitant acquisition premiums, the inability to mesh different systems and corporate cultures, even old-fashioned burnout, which can set in before integration has a chance to gel. The heart of the matter, however, and a prime reason why many mergers and acquisitions hurt value, is that they involve significant, fundamental change. There is change in the way the new entity does business, in the way employees think, behave, and

3 interact, and in the way investors perceive the merged company s prospects. Managing these changes requires extreme sensitivity to emotional and behavioral issues and a willingness to address them and is every bit as critical to a successful acquisition as are a good business fit, thorough due diligence, and wellplanned implementation. A key to successful change management is a simple, yet crucial, realization: during the acquisition process, the interests of employees and investors are very closely aligned. The role and challenge of management is to demonstrate to both of these constituencies that, whatever their short-term fears, the acquisition is in their collective long-term interest. Therefore, when screening potential merger candidates and thinking about how to communicate possible deals to the market, CEOs need to think both like investors and like employees. The support of both groups is essential, and to earn it management must respond credibly to the questions it will surely confront. The Four Critical Questions Employees and investors often hear of a possible acquisition at the same time, through the press. That s when their alarm bells start to go off. Employees fear first for their job security, then they become anxious about their salary levels and possible unpleasant changes in reporting lines or corporate culture. Investors worry immediately about the value of their holdings. They want to know how the merger will lead to profitable growth. These dynamics lead to four critical questions that firms must answer for employees and investors alike before undertaking a major acquisition.

4 Is change really necessary? To move forward efficiently in a merger, employees must believe that they really have to change. The most effective way to convince them is by presenting a sound business case that demonstrates exactly why the company must make a move and how it will prosper as a result. Perhaps it will become much more competitive, for example, or gain entry into new markets. The case for a local merger can be made easier by an M&A trend in the local market. No one wants to be the last player without a partner in a consolidation wave, especially companies whose employees may perceive a lack of development opportunities for the institution, and reduced career possibilities for themselves. Also, employees are often suspicious of management s motivation for acquisitions. Over the past few years, fears that some high-profile deals were made to enrich executives, to the detriment of employees and stockholders, have tragically proven to be justified. It is all too easy for employees to believe that jobs will be cut to provide the inner circle at the top with huge bonuses. A fact-based, undeniable argument for change is thus a mandatory first step in gaining employee support. When Banque Nationale de Paris (BNP) launched its bid for Paribas and Société Générale in 1999, it was in reaction to a Société Générale offer for Paribas. Had that initial offer been successful, BNP would have been left isolated. Its employees fully understood the value of reacting fast to the threat. Investors, for their part, need a compelling equity story. Precisely outlining the cost-reduction poten-

5 tial commonly up to 15 percent of the total cost base in a local merger and the extent to which the cuts will bolster the bottom line can be a convincing argument for change. If shareholders don t sense that an acquisition will ultimately enhance earnings and the market has historically been highly prescient in this regard they will desert you. One memorable example is the insurer Conseco s $7.1 billion buyout of Green Tree Financial in Conseco shareholders didn t believe the company s argument that a mobilehome lender would add value, and they couldn t believe the price a stunning 86 percent premium over Green Tree s market capitalization. Conseco shares fell by nearly 50 percent within a year after the deal was done, and far lower afterward. Is this particular move the best one? Employees know that mergers and acquisitions often mean layoffs. Even if one s own job is secure, those of friends and valued colleagues may not be. Moreover, corporate cultures can clash. A laid-back, light-touch ambiance that is highly respectful of employees independence can end up colliding with a hands-on, controlling, hierarchical approach. The simple truth is that acquisitions can result in very painful situations for employees. It thus falls to management to show that the particular move in question as opposed to other strategic paths or different acquisition targets will make a positive difference, and that a solid implementation plan exists. BNP, which ended up acquiring Paribas but not Société Générale in 1999, explained clearly to employees how the merger would bring together complementary product lines such as consumer credit and leasing, and how it would reinforce competitive positions in areas where both institutions already had

6 a presence, such as private banking, asset management, and investment banking. It made a solid case that any short-term discomfort would be compensated for by the long-term benefit of working for a stronger, more diversified company that would be a clear market leader. The bank, now BNP-Paribas, has delivered on its promise. Investors also wonder: Why this particular move? Why should we take this bet? If an acquisition premium is being offered, which in effect transfers wealth from the acquirer s shareholders to those of the target institution, it must be justified with defensible synergy evaluations and cash-flow projections. If management cannot do that convincingly, as was the case with Conseco, the wrong signal will be sent to stockholders. One of the more successful combinations in the United Kingdom was the 2001 merger of the mortgage lender Halifax with Bank of Scotland. By combining Bank of Scotland s product range with Halifax s distribution capabilities, the deal gave the merged entity, known as HBOS, a strong position from which to attack the banking market for small and medium-sized enterprises. From an investor s viewpoint, a very sound business case was enhanced by the terms of the deal: a one-for-one share exchange in which no acquisition premium was paid by either company. Two major U.S. mergers of the late 1990s Travelers Group s acquisition of Citicorp and NationsBank s buyout of BankAmerica were achieved with small premiums and have also been successful. What s in it for me? The most common feeling among employees in situations involving corporate change is insecurity. Yet it is precisely these situations in which companies most

7 need their employees cooperation, energy, and enthusiasm. Without it, there is no way the institution can deliver on its promises to investors. That is why managers must invest the time and resources to assuage the insecurity by communicating the merger benefits to their workers not just on a broad, corporate level, but on an individual level as well. Talking candidly about the process and the principles that will be applied fairness, transparency, global balance of job appointments, career paths is an example of a reassuring and honest approach. Question-and-answer sessions, simple as they sound, can be highly effective forums. Moreover, always remember that mergers and acquisitions provide copious pickings for headhunters, who will circle the field ready to pluck off star performers. CEOs have to convince their most valued colleagues that the new entity will be the best place for them to invest their talents and energies, and to continue their careers. Outside the financial-services sector, the 2001 merger of two pharmaceutical companies, GlaxoWellcome and SmithKline Beecham, was recognized for its smooth integration and low attrition of key talent. Investors, of course, also want to know what s in it for them. They want to understand how the move is going to contribute to cost savings and earnings and, just as importantly, when. If the acquirer wants their backing, it must have credible answers for them. This means offering detailed, year-by-year projections of the cost and revenue effects of the acquisition and of the estimated lift to profits. A classic M&A story in financial services, in which the acquiring company failed to do this, was Prudential PLC s bid in 2001 for the U.S. life insurer American General. The all-stock bid was originally worth $26 billion, but Prudential investors, wary of the deal s long-term value, pum-

8 meled the company s shares after the merger was announced. This enabled American International Group to muscle in and acquire American General with a counteroffer that was actually lower than Prudential s initial bid. It was a painful lesson for Prudential, but one the company learned from. Does management have the necessary staying power? In the beginning stages of an acquisition, everyone s concentration is on getting the deal done. The second and really long chunk of work is actually integrating the two companies. Next, a fatigue factor sets in. When the time comes to truly create new ways of doing things, leadership can lose focus. The urge to get back to normal, even though no normality for the new entity yet exists, can overwhelm the desire to doggedly pursue and realize the strategic synergies that made the acquisition seem attractive in the first place. Employees often sense this and can become cynical. Management must therefore demonstrate that it knows exactly where it is going and that it will stay the course and make the tough decisions needed for the merger to work. For example, the day after the BNP-Paribas merger was sealed, BNP s management presented a threephase plan. It gave itself six days to make any urgent decisions, six weeks to appoint the first wave of 200 to 300 managers for the merged entity, and six months to prepare detailed integration plans. This approach proved to be a powerful communication tool, as people in both banks felt reassured that management knew where to go from the outset. In addition, the CEO of BNP-Paribas announced that he would personally chair the integration steering committee to ensure that the six days, six weeks, six months schedule was adhered to.

9 Investors, of course, also ask: Is this the management team that can do it? They wonder whether the CEO is up to the classic challenges to be faced after an acquisition is completed, such as accurately assessing the talents and capabilities of his own lieutenants and those of the target company, and putting in place the right organizational structure and processes. It is enormously helpful to have a track record of successful change management that shows investors the company is up to the task. If there is no such history to fall back on, clearly defining the integration plan and the milestones that investors can look for becomes that much more important. Leaps of Faith Marriages between two human beings that lead to long-term fulfillment and that realize all the benefits envisioned at the beginning of the courting phase are unfortunately rare. Marriages require new ways of living, relating, and working. In today s global society, they often involve adapting to a new culture, at least for one party, sometimes for both. Marriages often lead to power struggles, the retooling of daily expectations, and personal sacrifice for the sake of the greater good. Yet somehow, that is how the most value and satisfaction are created. It is also why truly successful marriages are so difficult to achieve, and why success requires the complete focus of the principals involved. And it certainly helps to have the support of other people! Corporate marriages mergers and acquisitions work very much the same way. But the party doing the proposing the management of the acquiring company has a lot more people to convince of many things: that change is necessary, that the move in

10 question is the best one to make, that there will be tangible gains for most individuals, and that the project won t be allowed to collapse when the going gets tough. Making those arguments compelling will dramatically increase the chances of achieving a merger that brings long-term value. The key for management is to remember that the interests of all the people whose support the merger absolutely must have employees and shareholders are not divergent. The concerns of these two groups are essentially the same, and each camp will have many doubts and fears. It will be up to you to show them the way. Jeanie Daniel Duck Mark Sirower Didier Ribadeau Dumas Jeanie Daniel Duck is a senior vice president and director in the Atlanta office of The Boston Consulting Group. Mark Sirower, based in New York, is head of the firm s Mergers and Acquisitions practice. Didier Ribadeau Dumas is a senior vice president and director in BCG s Paris office. The authors may be contacted by at: duck.jeanie@bcg.com sirower.mark@bcg.com ribadeau dumas.didier@bcg.com The Boston Consulting Group, Inc All rights reserved.

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