There’s No Such Thing As A Merger - Chapter 1

There’s no such thing as a merger.  A merger, by definition, is the “voluntary fusion of two companies on broadly equal terms into one new legal entity;”  sometimes this is called a “merger of equals,”  but that term is an even greater misnomer.  The concept of a merger is a tenuous one.  Mergers have no legal significance and no unique legal construct.  Further, two companies are never evenly matched, and the “evening out” certainly does not begin once they join together.  Using the term inevitably sets the parties up for unrealistic expectations of equality and integration.  Perhaps this is why the failure rate for “mergers of equals” is particularly high.  There are many reasons why deals fail, but in these cases certain themes prevail: power struggles, corporate egos, culture clashes, and integration issues.  Furthermore, one company usually emerges as the true “acquiror.”  If this happens, or if the companies fail to integrate, we cannot say they have merged.  

The term “merger of equals” does not have legal significance; there are no legal requirements to qualify an MOE and no rules or applicable doctrines. “Mergers and acquisitions” is a term used to explain the buying and selling of companies, and to any layman, it would indicate two different deal scenarios or outcomes.  Doesn’t the term “merger” evoke images of two companies amicably joining together as equal co-owners?  It did for me.  However, the structure of a merger is that of an acquisition.  After any merger transaction, the target company merges directly into the acquiror or becomes a subsidiary (think: child) of the acquiror. If one company merges into another, or becomes a “child” of the other company, they are, structurally speaking, not coming together equally.  One party is in fact “acquiring” the other.  When it comes to power and control, the perceived imbalance begins at the most fundamental level when an acquiror, or surviving entity, must be chosen.  

Merger transactions are united only in common underlying characteristics.  Mergers of equals are typically structured, financially, so that there is not an actual financial acquiror.  From a financial standpoint, a “merger of equals” is the combination of two firms of nearly equal size, with neither a buyer nor a target and no exchange of cash. The shareholders from each company retain ownership in the combined entity since the deal is structured as a stock-for-stock, tax-free exchange.  The board of directors is comprised 50-50 of directors from each previously existing company.  A new joint entity is formed; and a negotiated power-sharing arrangement is attempted by the chief executives. 

While “mergers” may attempt equality, there are a myriad of external forces that can be neither fully accounted nor bargained for.  There are corporate egos, corporate politics, human nature (think: rivalries, power struggles, feuds), integration issues, cultural clashes (rather than adapting a “new” culture, the companies compete to enforce prior cultures). These forces are a collision of uncontrolled human behaviors and variables that cannot be negotiated. These complications preclude any seemingly equitable situation from being realized.  

“Mergers” exist for market perception, for psychological and cultural reasons and as an attempt to balance power and interests between the parties involved. The designation conveys a business combination to the marketplace and among the parties. It is psychologically appealing to consider a “union” or a “coming together” versus an “acquisition” or a “takeover.”   Unfortunately, the term creates unrealistic expectations in a situation where the parties might be better off  with an honest breakdown about the true nature of the transaction. 

Reviewing past MOE failures and their inequitable outcomes and integration issues helps explain why an MOE exists only as a perception.  This series will unravel the factors in play in past mergers to help demonstrate why true mergers of equals do not exist.