Love on the rocks

The romance of a merger of equals rarely lasts long

PARIS and champagne. What better way to celebrate an engagement? But that was last July. On May 9th a terse joint statement from their bosses confirmed that Publicis and Omnicom, two advertising giants, would not be getting married after all. Instead, although they “maintain a great respect for one another”, the two companies have “jointly decided to proceed along our independent paths.” The only thing missing was a Gwyneth Paltrow-esque reference to “consciously uncoupling”.

Anyone connected with the two firms should probably count himself lucky that they uncoupled before rings were exchanged. Corporate marriages often go wrong, but mergers of equals—in which two firms of roughly similar size combine, there is neither buyer nor target and typically no cash changes hands—account for a disproportionate share of the most notorious failures. Before making a comeback as the latest merger wave gathered force, they had deservedly gone out of fashion after some disastrous couplings around the turn of the century.

In May 1998 Daimler and Chrysler announced their union, creating a giant German-American carmaker. Two years later Jürgen Schrempp, by now in sole command, having seen off Robert Eaton, the former boss of Chrysler, claimed that the term “merger of equals” had been used only for “psychological reasons”. The marriage struggled on until May 2007, when a divorce was announced. Worst of all was the merger in January 2000 of Time Warner, a media giant with 70,000 staff and revenues of $27 billion, with AOL, an internet firm whose 12,000 employees generated less than $5 billion. To symbolise their devotion to power-sharing, Steve Case, boss of new-economy AOL, wore a tie to the press conference celebrating the deal while Gerald Levin, boss of old-economy Time Warner, turned up without one. Months later the dotcom bubble burst, making a fool of Mr Levin, who announced his retirement in December 2001. In 2009 AOL was spun off. Jeff Bewkes, Time Warner's current boss, calls the merger the “biggest mistake in corporate history”.

Although the deals have since been smaller and fewer, the tales of woe have continued. After failing in 2001 to complete a merger because they could not agree on how to share power, Alcatel, a French telecoms-equipment firm, and Lucent, an American rival, eventually tied the knot in 2006. The combined firm's share price has slumped through a series of bosses. Now there is talk of a possible merger with Nokia, a Finnish rival. In February 2012 Glencore and Xstrata, two mining giants with headquarters in Switzerland, agreed on a merger of equals, only for Glencore to change its tune before the deal went through and insist that its boss, Ivan Glasenberg, take sole charge of the combined firm. Duke Energy behaved even more brazenly after completing its merger with Progress Energy in July 2012. As part of the deal, Jim Rogers, Duke's boss, had agreed that William Johnson, Progress's boss, would run the combined firm, and he would be executive chairman. That was honoured for roughly two hours, before the board that had just appointed Mr Williams as chief executive fired him and gave Mr Rogers the job. Lesson for any boss considering a merger of equals: ensure your firm gets at least half of the members of the new company's board.

The aggregate data on mergers of equals reinforce the message of these sorry tales. On average, mergers have a mixed record, rewarding sellers' shareholders a bit more than they hurt buyers'. But equity deals and large deals tend to do worse, notes Steven Kaplan of the University of Chicago: “Mergers of equals are both large and typically done with stock rather than cash.”

From Omnicom to Omnishambles

So why does anyone enter into such a deal? Both firms tend to be big and similar, which holds out the possibility of lots of lucrative cost-saving. Yet their similar size makes it hard for either boss to make a convincing case for taking sole charge. Bosses tend to have planet-sized egos, believing they can make anything work, including the combination of incompatible corporate cultures. That proved a task too far for Omnicom and Publicis. The bosses even convince themselves they can share power—or each believes that, if not, he can see off the other. Yet all too often, merger of equals “effectively translates into rudderless behemoth,” says Peter Clark, one of the authors of “Masterminding the Deal”, a book on how to execute mergers. “Everything has to be checked so many times to ensure that everyone is on board, and competitive speed is lost.”

The rare merger of equals that succeeds, such as the creation of Lockheed Martin, a defence firm, in 1994, or of ConocoPhillips, an oil giant, in 2001, tends to have a detailed integration plan agreed in advance, and one boss who is eager to retire as soon as possible. Typically, neither is the case. Their record is so bad that any talk of a merger of equals should set alarm bells ringing. You have been warned, shareholders of Lafarge and Holcim (two European cement firms that agreed such a deal last month). Forget the romance of power-sharing; when it comes to the tricky business of making a merger work, someone must be in charge.