The Promise, and Pitfalls, of European AlliancesPublished: December 19, 2001 in Knowledge@Wharton
With U.S. and European businesses increasingly finding merger partners across the Atlantic, managers face new sets of cultural and national barriers that go well beyond the usual problems of integrating two different business cultures.
While the lure of synergies, or the need for a defensive merger, are strong reasons for making an overseas match, the deal is usually followed by a rocky adjustment period, according to a panel of executives at the Wharton European Conference, part of the 2001 Global Business Forum.
According to management professor Mauro Guillen, mergers inflame all sorts of passions but the critical question for managers should be: Why do at least half the mergers fail to create value?
Watch Out for Labor Unions
Panelist Jeremy Hardisty, managing director, International Equity Sales at UBS Warburg Americas, predicted that the drive for new mergers will remain strong. His company completed a merger with PaineWebber last year and it advised Vodafone, the British telecommunications company, in its mega-merger with Mannesman AG of Germany. "In anticipation that cross-border mergers are inevitable and should continue to occur, Europe is reallocating capital," he said.
Hardisty called himself a believer in most big mergers, suggesting that the dismal statistical record cited by Guillen may not tell the whole story. For example, it is hard to say whether a merger deal itself is at fault for a decline in value, he said. In PaineWebber’s case, the company’s results are now melded with UBS’s so there is no way of knowing how either company would have fared on its own.
Hardisty also noted that the U.S. legal system protects shareholders more so than in Europe where there is greater consideration for workers and communities. The European Commission, for example, takes an active role in defending customers over shareholders. "Clearly [the Commission] is sometimes contentious and makes decisions independently," he said. "However, it is a critical and necessary part of the community and protects against the abuse of national power."
Hardisty said other industries in Europe that are likely to undergo more mergers include financial institutions, utilities, airlines and breweries.
U.S. companies attempting to merge with or acquire European firms must be mindful of the power of labor unions in Europe, he added. "They are a hindrance, but the worst mistake you could possibly make is to ignore them."
Thomas Hofstaetter, senior vice president of corporate development and strategic planning at Aventis Pharma, presented himself as part of a generation of merger veterans in the drug industry. His most recent was the 1999 merger of Hoechst of Germany and Rhone-Poulenc of France that created Aventis. It was at least the third major merger for both companies.
The Aventis merger, one of several major cross-border pairings in recent years, "is a reflection of what’s happening in the pharmaceutical industry," Hofstaetter said. "The industry traditionally has been local and regional. It is fragmented and has gone through waves of consolidation." This consolidation is particularly strong in Europe where local pharmaceutical companies have grown weak compared to their U.S. counterparts because of government protections, price controls and lack of scale.
Most drug mergers are defensive, Hofstaetter said, and it is impossible to know whether the companies would actually have returned less to shareholders if they had remained independent. He suggested that a straight-out acquisition is easier to implement than a merger that attempts to appease many corporate factions. "You know who is calling the shots," he said. "There are no compromises."
In a true merger situation, he added, managers should simply pick one company’s way of doing a particular operation rather than craft a new one: "Just take the best system and go with it because at least half the guys know it."
Maxine Gowen, vice president of drug discovery for muscular-skeletal disease at GlaxoSmithKline, said when her new company was created in the merger early this year of two British-based companies, the corporate headquarters was among the few similarities the firms had.
SmithKline Beecham was highly integrated while GlaxoWellcome units operated with more independence in different countries. The model in the new company is a hybrid, she said, mainly because SmithKline Beecham’s long lines of control were unwieldy for a company the size of GlaxoSmithKline, which has 15,000 researchers alone.
In the company’s core research and development operations, where Gowen works, the merger has taken its toll. She described a period of about six months where scientists from both companies had trouble understanding basic research concepts that were referred to by different terms at the two companies.
She has come to believe that with a merger of this size, productivity is lost for at least 12 to 24 months. A merger usually entails several reorganizations, which can tax scientists who need to collaborate on complex projects that may not pan out for years, Gowen said. "With this fragile and interactive structure there’s no way it can’t slow the process down."
The notion of a corporate culture is something most scientists roll their eyes at, she added, but after several mergers and reorganizations she has come to see its merits. "It really does allow people to make decisions on a day-to-day basis without having to look for direction."
According to Jurgen Ilse, vice president of project risk advisory at ABB Financial Services in Heidelberg, "a merger or acquisition is not a one-off event," despite the accounting treatment. "It’s a continuous process." ABB was created in 1988 with the merger of Swiss and Swedish industrial firms.
"ABB is a classic example of a cross-border merger," he said. The company has since divested some of its heavy industry but still is active in engineering and has branched into new businesses, such as finance. The finance group, he said, benefits from the company’s broad experience when it reviews whether to support projects.
"Having an industry background, we base our judgment of the project on a technical and risk review from various angles," Ilse noted. "What I really like as an outcome of a merger or acquisition is access to different experiences. A merger or acquisition can bring together various people in regions and technologies so you can network and learn from one another."
"The Night of 1000 Knives"
For Rob Mann, managing director of Scient, an Internet consulting firm, his latest merger began in November when Scient merged with iXL Enterprises. While the implementation of that merger is in its infancy, Mann told of his experiences in a reverse merger.
He was a consultant with A. T. Kearney which was acquired by EDS. EDS had been buying up small consulting groups of five to 20 people, but the EDS consultants themselves remained independent. At times, Mann said, EDS consulting groups found themselves bidding against each other.
"EDS got fed up with the consulting units," Mann said. That led to what he called "The night of 1000 knives" in which 1,000 consultants were sacked. Even though EDS was the acquirer, it was A.T. Kearney that prevailed.
Kearney had grown internally for 70 years and was highly integrated, said Mann. The people laid off were some of the most aggressive and competitive at the firm, but those assets that served them well as independents did not fit in a new culture that required teamwork.
His work with web clients has shown Mann how culture issues can affect businesses in Europe. For example, he said, Eastern European customers react strongly against the color red. Some countries have very long addresses that don’t fit into the field set up for use in other countries. And he realized the fragmented nature of European business when he took on BP Amoco as a customer and found it had 600 different websites in Europe.