Mergers of Equals Are Rarely That -- WSJ

Date : 06/15/2019 @ 8:02AM
Source : Dow Jones News
Stock : United Technologies Corporation (UTX)
Quote : 127.015  0.335 (0.26%) @ 3:34PM

Mergers of Equals Are Rarely That -- WSJ

United Technologies (NYSE:UTX)
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The UTC-Raytheon deal is the latest to be billed as an even swap, but investors are duly skeptical

By John D. Stoll 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 15, 2019).

United Technologies Corp. Chief Executive Greg Hayes and his counterpart at Raytheon Co., Tom Kennedy, sounded all the familiar notes this week in pitching their proposed tie-up as a merger of equals.

"We're going to pick the best of both worlds," Mr. Hayes said in a conference call, promising to combine things like office staff and engineering departments while welding together a $100 billion-plus defense-and-aerospace behemoth. Mr. Kennedy, on the same call, invoked the "one plus one equals three" mantra often used to dress up these arrangements.

The blueprint for a win-win at the new Raytheon Technologies Corp.: Raytheon (the smaller of the two companies) retains the primary corporate name, and its Boston offices serve as headquarters. Mr. Kennedy, after spending his entire career at Raytheon, takes home the consolation prize of a chairman role that expires in two years.

UTC gets more board seats (eight vs. Raytheon's seven), more shares (57% vs. 43%), the CEO title for Mr. Hayes and therefore more say in the combined company.

If you're wondering if a merger of equals that looks so lopsided will work, you're not alone. The combined market value of UTC and Raytheon fell 7.2% in the week following the announcement, even as the broader stock market was flat.

"There is definitely skepticism of the challenge of trying to pull off the integration of two companies of considerable size," said Emilie Feldman, a professor at the University of Pennsylvania's Wharton School. "They also ask if the deal is strategically logical and they ask 'what are we going to lose in the process?'"

The UTC-Raytheon proposal isn't the only one taking flak. When Fiat Chrysler Automobiles NV approached Renault SA recently, it proposed an MOE. The French government, which is a major Renault shareholder, balked. SunTrust and BB&T, a declared merger of banking equals announced earlier this year, has faced skeptics. Its decision to rename the entity "Truist Financial" brought out the cynics, with one academic wondering if they stole the name from a tube of toothpaste .

More than a dozen declared MOEs are formed annually, according to financial data provider Refinitiv. Thus far in 2019, the 9 MOEs proposed represent 8.4% of all proposed M&A by value. Those deals were more popular before accounting changes limited tax-saving maneuvers about two decades ago, but they remain a fixture in global M&A.

Merger of equals is typically only invoked in all-stock deals where little or no premium is paid. Management teams are often assured they will have a chance to stay at the combined company and shareholders split the pie as close to 50-50 as possible.

The challenge is that there are no firm rules. It is a term of art, lacking the strict legal demands, for example, of deals designed to avoid taxes.

Without those boundaries, executives may not do the hard upfront work to properly identify cost-cutting initiatives, or synergies, experts say. These deals often lead to top-heavy organizational charts, infighting or a lack of immediate direction that can stall integration or even kill a marriage.

Part of the allure of an MOE lies in its no-hard-feelings ambiguity.

"It's the way each company says, 'We respect each other,'" Robert "Steve" Miller, the well-known turnaround artist who has served on the boards of companies that have merged, told me. It is also a signal to investors that even though there is no immediate deal premium or cash proceeds available, executives believe there is a profitable future for those who stick around.

A glance at the history books explains why many MOEs are greeted with cynicism. Some of the most famous -- including Daimler and Chrysler or AOL and Time Warner -- quickly imploded. Citicorp and Travelers lumbered from crisis to crisis; and Morgan Stanley and Dean Witter was swept up in political infighting.

Others face substantial turbulence before even getting off the ground.

The 2013 proposed merger of advertising equals between French multinational Publicis Groupe SA and U.S.-based Omnicom Group Inc. was abandoned within a year due to cultural differences, strategic mismatches and Publicis' concerns that Omnicom was attempting an outright takeover. The 2012 merger of energy equals Duke Energy Corp. and Progress Energy Inc. went through, but only after an ugly boardroom scuffle over leadership.

Plenty of MOEs succeed and deliver at least some value for investors. Among the notable winners in recent years, according to Refinitiv data, are the 2017 merger of Dow Chemical Co. and Dupont Co.; the tie-up of advisory firms Willis Group Ltd. and Towers Watson PLC; and the combination of Strayer Education Inc. and Capella Education Co. Among the last 20 mergers of equals done by U.S.-based companies, as many outperformed the S&P 500 as lose value.

"There are a graveyard of deals," that get far more attention than success stories, said Wharton's Ms. Feldman, who focuses on M&A. She says MOE's set "the expectation that everyone is going to get 50% of the pie." As the Raytheon-UTC deal shows, that's impossible.

Ms. Feldman says studies have shown a relative few stakeholders actually share in the upside when things go right. Several top executives and many in the rank-and-file are pushed out to make a merger succeed, for instance.

Mr. Miller said that a lot of problems could be cleared up with better communication when the deal is done. For one, he said, replace ambiguity with clarity: Give a straightforward view of who is in charge, and lay out the endgame. He pointed to his time working as a board member on the Dow-DuPont merger as an example.

In 2015, the two companies announced a merger that would first fuse the chemical and agricultural giants into one, and ultimately lead to a breakup into three companies. Along the way, the arrangement cut costs strengthened the three business units, which now trade independently, with a collective value near $120 billion.

Maybe it's time to retire the term merger of equals. Let's follow one of the first laws of M&A -- keep the meat, trim the fat -- and just call them mergers.

Write to John D. Stoll at john.stoll@wsj.com

 

(END) Dow Jones Newswires

June 15, 2019 02:47 ET (06:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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