May 18, 2014 / 12:22 PM / 4 years ago

Ad deal collapse busts ‘merger of equals' myth

NEW YORK (Reuters) - 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.

Maurice Levy (L), French advertising group Publicis Chief executive, and John Wren, head of Omnicom Group, gesture during a joint signature ceremony in Paris, in this July 28, 2013. REUTERS/Christian Hartmann

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.


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

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