"Merger of Equals": Not Really

The latest mergers and acquisitions story is getting the "merger of equals" label.  Glencore International and Xstrata are in the mining industry and used to be one company before Xstrata went public in 2002.  The merger of equals label is simplistic and used erroneously usually based on market value.  Even twin children with the same DNA are not considered equals due to functional and personality differences.  The value in mergers and acquisitions transactions is that the combined company will be able to operate with a competitive advantage which necessitates that the mergers and acquisitions companies bring differences to the bargaining table.

Buried inside a merger of equals label is the idea that the greatest benefit of the merger or acquisition is its synergies because the companies are viewed as the same.  Not so fast.  The economies of scale become diseconomies of scale when the largess of the operations raises the combined company's cost of doing business.  Synergies are difficult and often based on a confluence of assumptions, more so than sales projections.  Downsizing the combined company's workforce seems to be the only reliable synergy unlike areas such as merging technology platforms where subsequent user adoption by the remaining workforce is vulnerable to subterfuge.  Synergies are useful in identifying areas for cost cutting, but should never be used as a reason for a merger or acquisition.

As difficult as synergies are to realize, the merging of company cultures including each company's respective leadership can be chaotic and demoralizing.  The merger of equals label is good for newspapers and magazines, however it is not a label that should be used by the companies in the merger or acquisition.  The implication is that all employees are on somewhat equal footing in the combined company and that is most often not the case.  High potentials are valued, but in a work culture where most of the employees are high potentials, the distinction is less useful to an employee's identity.  And for whatever intrinsic motivation that flows from being a high potential, this can be demoralizing.  There may also be learning curves for employees that can destroy an employee's sense of mastery.

Consider the CEO position.  Becoming a CEO is the culmination of ambition, leverage, and talent.  Rarely are companies led by two CEOs.  One only has to look to Research in Motion to understand the pitfalls of two leaders in a position meant for only one.  If two CEOs were better than one, it is likely the corporate organizational structure would have implemented co-leaders a long time ago.  The degree to which the companies are not recognized as equals is evident in the negotiations for whom will lead the combined company.  The choice of CEO sends a value message in a transaction being labeled as a merger of equals.  CEOs imprint company cultures with their own leadership style so choosing a CEO of one of the companies means some of the employees enjoy a natural advantage via experience in identifying with the CEO.  In the end, attrition will be the greatest indicator of what company was more important going forward to the combined company.

Based on historical evidence, mergers and acquisitions look and work better on paper than they do in reality.  Value creation can quickly turn into value destruction if it is not clear which company is dominant.  The first group that this should be spelled out to is the employees of each company so that expectations are set at the correct level and change management is aligned properly to the degree necessary.  There is no mergers and acquisitions transaction that is a merger of equals and failing to understand that further burdens an already difficult transaction.