In the corporate world, bigger is often better. When it comes to legendary, industry-changing companies (think Microsoft), the more grandiose plans win out. We tend to think the same way with mergers and acquisitions. Some mergers are successful, so successful, in fact, that we can’t remember a time when the two companies were distinct. Where would Disney be without Pixar, or J.P. Morgan without Chase?
However, many mergers fall flat on their faces and fail. The newly created company goes bankrupt, executives are fired, and in some cases, the merged companies disband in a sort of corporate divorce. For whatever the reason, there doesn’t seem to be a magic trick to corporate mergers. Mergers are inherently risky, and without the proper strategy, intuition, and knowledge, mergers, can get, well, ugly.
Let’s hope that future executives can learn from the successes and failures of those who went before...
Successful Mergers: (The Good…)
Mickey and Nemo. Pinocchio and “Toy Story.” Cinderella and “Cars.” The merger of legendary Walt Disney and everything-we-create-kids-adore Pixar was a match made in cartoon heaven. Disney had released all of Pixar’s movies before, but with their contract about to run out after the release of “Cars,” the merger made perfect sense. With the merger, the two companies could collaborate freely and easily.
Did the merger work? Well, take a look at the successful movies that Disney and Pixar have put out since: “WALL-E,” “Up,” and “Bolt.” Pixar has plans for twice-yearly films, unthinkable before the merger, and has certainly gained the expert advice from Disney when it comes to advertising, marketing plugs, and merchandising. When it comes to marketing to children, no one does it better than Disney. Even pre-merger cartoon “Cars” got the Disney treatment and remains a top seller in merchandising amongst 4 year old boys (just ask my nephew).
Sirius/XM radio merger
On July 29, 2008, satellite radio officially had one provider when Sirius Satellite Radio joined forces with rival XM Satellite Radio. The merger was officially announced over a year before, in February 2007, but the actual merger was delayed due to one tiny problem – when satellite radio first began in 1997, the FCC granted only two licenses under one condition: that either of the holders would not acquire control of the other.
Oops. So Sirius and XM filed the proper paperwork with the FCC, allowed the FCC to investigate the merger, and waited patiently for the approval they needed. And although time will tell if the new Sirius XM company will succeed in the long-run, I consider this merger a success due to the number of big names recently added to their roster (Oprah, Howard Stern, Martha Stewart), as well having the foresight to combine forces in a down market.
Big oil got even bigger in 1999, when Exxon and Mobil signed a $81 billion agreement to merge and form Exxon Mobil. Not only did Exxon Mobil become the largest company in the world, it reunited its 19th century former selves, John D. Rockefeller’s Standard Oil Company of New Jersey (Exxon) and Standard Oil Company of New York (Mobil). The merger was so big, in fact, that the FTC required a massive restructuring of many of Exxon & Mobil’s gas stations, in order to avoid outright monopolization (despite the FTC’s 4-0 approval of the merger).
ExxonMobil remains the strongest leader in the oil market, with a huge hold on the international market and dramatic earnings. In 2008, ExxonMobil occupied all ten spots in the “Top Ten Corporate Quarterly Earnings” (earning more than $11 billion in one quarter) and it remains one of the world’s largest publicly held company (second only to Walmart).
I think it’s safe to say that the merger was a success.
Failed Mergers: (The Bad…)
New York Central and Pennsylvania Railroad
Merger failures didn’t exist in just the past few decades. In 1968, the New York Central and Pennsylvania railroads merged to become to the 6th largest corporation (at the time) in America, Penn Central. Yet two years later, they filed for bankruptcy protection
The merger seemed right on paper, but these railroads were actually century-old rivals, desperately trying to avoid the trend towards cars and airplanes and away from trains. But these trends continuing anyways and the railroads found themselves unable to keep up with the rising costs of employees, government regulations, and facing major cost-cutting. Others also claim a lack of long-term planning, culture clashes between the two railroads, and poor management.
Sometimes, rivals just can’t get along, even in the face of mutual crisis.
Daimler Benz/Chrysler ($37B)
In 1998, Mercedes-Benz manufacturer Daimler Benz merged with U.S. auto maker Chrysler to create Daimler Chrysler for $37 billion. The logic was obvious: create a trans-Atlantic car-making powerhouse that would dominate the markets. But by 2007, Daimler Benz sold Chrysler to the Cerberus Capital Management firm, which specializes in restructuring troubled companies, for a mere $7 billion.
What happened? It may be another case of corporate culture clash. Chrysler was nowhere near the league of high-end Daimler Benz, and many felt that Daimler strutted in and tried to tell the Chrysler side how things are done. Such clashes always work to undermine the new alliance; combine that with dragging sales and a recession, and you have a recipe for corporate divorce.
Mattel/The Learning Company ($3.5B)
Mattel has remained a childhood staple for decades, and in 1999, it attempted to tap into the educational software market by scooping up almost-bankrupt The Learning Company (creators of great learning-is-fun games like Carmen Sandiego & Myst). Less than a year later, The Learning Company lost $206 million, taking down Mattel’s profit with it. By 2000, Mattel was losing $1.5 million a day and its stock prices kept dropping. The Learning Company was sold by the end of 2000, but Mattel was forced to lay off 10% of its employees in order to cut costs.
Sears / Kmart
Towards the end of the twentieth century, department store legend Sears found itself slowly failing, stuck in between the success of low-end big-box stores like Target and Walmart, and high-end department stores like Saks Fifth Avenue. Hedge-fund investor Eddie Lampert purchased both a failing Sears and Kmart in 2005, and merged them to become Sears Holdings.
However, Sears Holdings continued the downward spiral of both companies. Some blame their focus on “soft goods” (clothes and home goods) rather than hard goods (Kenmore appliances and tools). Others think Sears tried to compete with mega giant Walmart with a variety of stores - Sears Essentials, for instance – that were utter failures.
In any case, by 2007, Lampert was named the America’s Worst CEO, and Sears Holdings remains on the brink of utter failure, especially in light of the recent recession.
Utter Failures (…And the Ugly…)
In 2005, another major communication merger occurred, this time between Sprint and Nextel Communications. These two companies believed that merging opposite ends of a market’s spectrum – personal cell phones and home service from Sprint, and business/infrastructure/transportation market from Nextel – would create one big happy communication family (for only $35 billion).
But the family did not stay together long; soon after the merger, Nextel executives and managers left the new company in droves, claiming that the two cultures could not get along. And at the same time, the economy started to take a turn for the worse, and customers (private and business alike) expected more and more from their providers. Competition from AT&T, Verizon, and the iPhone drove down sales, and Sprint/Nextel began lay-offs. Its stocks plummeted, and for all those involved, the merger clearly failed.
At the height of the Internet craze, two media merged together to form (what was seen as) a revolutionary move to fuse the old with the new. In 2001, old-school media giant Time Warner consolidated with American Online (AOL), the Internet and email provider of the people, for a whopping $111 billion. It was considered the combining of the best of both worlds: print and electronic, together at last!
But the synergy of these two dynamically different companies never occurred. The dot-com bust, and the decline of dial-up Internet access (which AOL refused to give up) spelled disaster for the new company.
Since the merger, Time Warner’s stock has dropped 80%. In fact, this past May, the CEO of Time Warner, Jeff Bewkes, embarrassingly announced that the marriage of AOL and Time Warner was dissolved.
In 1994, grocery store legend Quaker Oats purchased the new-kid-on-the-block, Snapple, for $1.7 billion. Fresh from their success with Gatorade, Quaker Oats wanted to make Snapple drinks just as popular. Despite criticisms from Wall Street that they paid $1 billion too much for the fruity drinks, Quaker Oats dove head-first into a new marketing campaign and set out to bring Snapple to every grocery store and chain restaurant they could.
However, their efforts failed miserably. Snapple had become so successful because they marketed to small, independent stores; the brand just couldn’t hold its own in large grocery stores and other retailers nationally. Pepsi and Coca-Cola themselves began releasing Snapple-like drinks and the general public’s new-found taste for Snapple beverages was beginning to wane.
After just 27 months, Quaker Oats sold Snapple for $300 million (or, for those of you doing the math, a loss of $1.6 million for each day that the company owned Snapple). CEO William Smithsburg’s reputation was forever tarnished, and numerous executives were fired.