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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