Tying the Knot

June 5, 2015

The path to merger bliss usually doesn’t begin with the haste of a Vegas wedding

By Lorrie Bryan

Las Vegas is known as the marriage capital of the world because it’s easy and affordable to get hitched there. You can get a marriage license downtown any day before midnight without a blood test (or sobriety test), and there are thousands of affordable, readily available wedding options: drive-thru weddings, Elvis-themed weddings, helicopter weddings. The latest trend—recently spotlighted on the Shark Tank TV series—is the Wedding Wagon. Touted to be as easy as ordering a pizza, you can place your order online and the company sends a van—adorned with purple curtains, an LED-lit altar, and cascading flowers—a licensed minister, and a professional photographer to the Las Vegas location of your choice for only $129.

Recent studies indicate that there is no correlation between the cost of the wedding and the length of the marriage; however, there is plenty of reason to believe that longer courtships—much longer than a Vegas weekend—lead to longer marriages. One of the country’s leading experts on corporate mergers, Andrew J. Sherman, asserts that merging corporations could benefit from longer courtships as well.

Beating the odds

Most mergers begin with high hopes, but then the reality sets in. “Reports are indicating that 60 to 70 percent of mergers fail to meet pre-closing objectives within three years of closing. If that is true, that’s horrendous. We have got to do better than that,” says Sherman, who has served as a legal and strategic advisor to dozens of Fortune 500 companies and hundreds of emerging growth companies. “A good merger is like a good marriage, but these days some mergers are more like Vegas weddings. Sometimes you have to act fast. But we need to get back to longer courtships with time for the corporations to get to know each other and make sure that the merger makes sense.”

What should companies be focusing on during courtship? Sherman, a senior partner at Jones Day, a prominent international law firm, and author of Acquisitions and Mergers from A to Z, says there are three things that are essential for a successful merger: added stakeholder value, a clear plan for accretiveness, and a post-merger integration plan.

Stakeholder value

The key principle behind merging two companies is to create shareholder value over and above that of the sum of the two companies, but that objective is not enough to ensure ultimate success.  “It has to drive stakeholder value as well. The world is now defined more broadly than just the shareholders of this company. You have to consider whether the deal makes sense for the various stakeholders in the ecosystem—employees, customers, and suppliers as well as investors. That is always a complex situation and requires some lengthy analysis,” advises Sherman.

Accretiveness

A transaction that results in profitability for the acquirer is classified as accretive, whereas one that does not, either early on or later, is more dilutive. “There has to be a clear path to accretiveness,” Sherman says. “When considering a merger, you need to know what the game plan is: the business proposition for accretiveness.”

Post-merger Integration

Vegas elopements aside, many couples get so engrossed in planning their wedding that they forget about planning their marriage. The same can be said of corporate marriages; companies focus on the legal transactions and fail to develop a strategy for handling post-merger challenges. Most deals look great on paper, but few organizations pay proper attention to the integration process—that is, how the deal will actually work once all the paperwork is signed. It is often at this critical time that mergers fail, Sherman affirms. “Culture, leadership, governance, IT systems, compensation packages, basic logistics—all of these issues are challenges that need to be considered before the merger is finalized.”

A longer courtship will also give companies a chance to get to know each other better and determine if they are compatible. The country’s leading relationship services provider, eHarmony, uses a patented Compatibility Matching System® to pair eHarmony members most likely to enjoy a long-term relationship. Sherman suggests that companies slated for merger should put more emphasis on compatibility, and cites the unsuccessful AOL-Time Warner merger. “It failed due to lack of good implementation. The company cultures were very different, and there was no way to get them the same, even though it looked like a match made in heaven on paper,” he says. Incompatible technologies can also lead to dissolution. In 2005, eBay decided to buy Skype for $2.6 billion, and sold it four years later for $1.9 billion. Unfortunately, as PC World reported, eBay and Skype were unable to successfully integrate their technological systems.

Happily ever after

One of the largest ($75.3 billion) and most successful mergers in recent history, the Exxon-Mobile merger of 1999, reflects not only the length of the courtship, but the depth and breadth, Sherman notes. “One of the keys to the success was an extensive detailed post-integration plan with a checklist that was thousands of pages long.” Exxon-Mobil went on to post the biggest annual profits in U.S. corporate history with earnings of $45.2 billion in 2008, and nearly broke that record in 2012 with $44.9 billion.

Merging can be an alluring way to grow your business, but the most successful companies are willing to take a step back and explore whether M&A is the best option before racing to tie the knot. Sometimes, building your capacity through internal research and development or borrowing resources through strategic partnerships or alliances is a much better bet. “If you rush into something, you may wake up the next day wondering what you were thinking,” Sherman adds.