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By Soyoung Kim
NEW YORK May 18 Mergers of equals were largely
dead long before ad giant Omnicom Group Inc struck its
ill-fated $35 billion deal with rival Publicis Groupe SA
That didn't stop Publicis Chief Executive Officer Maurice
Levy and Omnicom's John Wren from trying to sell the deal as
just that to investors and employees, and won't stop other
executives in the future, bankers and lawyers said.
In fact, the Omnicom-Publicis deal's undoing may have been
that how close it came to merging two equal companies - they
negotiated terms such as 50-50 ownership for the two sets of
shareholders with no premium paid to either, a co-CEO situation
with Levy and Wren and equal board representation.
It seemed so harmonious in Paris in July, when Wren and Levy
toasted each other with Champagne under the Arc de Triomphe and
posed for photographs in each other's embrace. Since then, the
future co-CEOs bickered over who would fill key jobs such as
chief financial officer,, what would happen to
Levy after Wren took over as sole CEO, and over such issues as
the company's tax structure while combining the different
cultures of a U.S. and a French company.
With two people in charge and key issues left for later, it
became clear that the hype didn't match reality: one company was
actually trying to take over the other, and the company being
taken over was Publicis.
"The deal was gradually sliding from a merger of equals to a
takeover and this is not what we had signed for," said a person
close to Publicis last week. "Maurice made it very clear from
the beginning: Yes to a merger of equals, no to an acquisition."
For companies, there are substantial benefits to portraying
the deals as mergers of equals, even though the outcome may not
always be best for investors.
For the buyer, such a portrayal can help reduce the premium
they would have to pay. Steps such as giving the target
significant board representation and a roughly 50-50 shareholder
split in all-stock transactions shows that the seller's
shareholders are not giving up all control, and so don't need to
be paid as much for it.
The average premium paid in deals globally that were billed
as mergers of equals so far this year was 11.9 percent, compared
with the average of 25.6 percent paid in other takeovers,
according to Thomson Reuters data.
For the seller, the benefits are mostly psychological.
"I think a lot of it is to reassure the employees, the
culture that they're used to, the organization they're used to,
the people they report to even, isn't going to totally
disappear," said Alan Klein, an M&A partner at law firm Simpson
Thacher & Bartlett LLP. "It sounds much less threatening than a
behemoth company is swallowing your company."
"The phrase, merger of equals, is used far more frequently
than the reality," Klein said.
George Sard, chief executive of strategic communications
firm Sard Verbinnen, said investors will likely demand more
clarity up front on key decisions such as leadership, board
structure, governance, headquarters location, and name.
"Mergers of equals have long been among the most challenging
deals from a communications perspective because of the internal
politics involved and because nobody believes there really is
such a thing," said Sard, who was speaking generally and not
referring to any specific situation.
HISTORY OF FAILURES
In the late 1990s, many companies tried to combine with no
designated acquirer, creating structures where power was shared
and shareholding was equally divided, with neither side getting
a takeover premium.
However, many such deals, including Time Warner-AOL,
Travelers-Citicorp and BankAmerica-NationsBank, struggled to
integrate operations, with top executives from each company
fighting for supremacy.
In the $72.6 billion union of Travelers and Citicorp in
1998, for example, Citicorp's John Reed was ousted in a
management shakeup less than two years after the merger, leaving
Travelers' Sandy Weill as the sole CEO of Citigroup Inc.
Similarly, the BankAmerica-NationsBank deal led to the
departure of BankAmerica's David Coulter, while Hugh McColl of
NationsBank took over at Bank of America Corp.
"There have been very few 'real' mergers of equals - no
premium exchange ratios and equal boards that have been
successfully implemented," said Robert Schumer, co-head of
mergers and acquisitions at law firm Paul Weiss Rifkind Wharton
& Garrison LLP.
Transactions billed as "merger of equals" peaked in 2000,
when 63 deals were billed as such in announcements, according to
Thomson Reuters data.
In June 2001, the Financial Accounting Standards Board,
which sets accounting rules for U.S. companies under the
authority of the Securities and Exchange Commission, ended, at
least in accounting terms, the ability to combine two companies
in a merger of equals.
It reached "the conclusion that virtually all business
combinations are acquisitions." Since then, more than 300 deals
have been touted as merger of equals, the data shows.
(Editing by Paritosh Bansal and John Pickering)