Friday, February 22, 2013

Social Terms in Mergers, US Air, American, Office Max and Office Depot

We've noted before on this blog the importance of negotiating on all aspects of the deal, not just price. (See, The Interrelated Nature of Deal Design.) The recently announced  mergers of US Air and American Airlines and also Office Max and Office Depot  are good examples of the importance of social terms.  

Social terms include things like the name of the merged firm, where it will be headquartered, who will be the CEO and how the board of directors will be constructed.

Consider the US Air - American Airlines merger.  Although US Air pursued this deal vigorously and is the acquiring firm, the combination retains American's name and will remain headquartered at its Fort Worth location.  Doug Parker, CEO and Chairman of US Air becomes CEO and board member of the new firm and after one year, Chairman of the Board.  Thomas Horton, Chairman, President and CEO of American Airlines will be Chairman of the Board for only one year.  

The Board of Directors of the combined firm will consist of 12 members, three from American Airlines,   four from US Air, and five from the creditors of American Airlines.   I'm a bit surprised that US Air doesn't dominate the board.   

Think that board composition isn't important?  Recall the merger of Duke Energy and Progress Energy that closed in July 2012.  Bill Johnson, the former CEO of Progress was to be CEO of the new firm, but was fired within 24 hours.  Replacing him was Jim Rodgers, the former CEO of Duke.  Under the merger terms, Rodgers was supposed to have been Chairman of the Board.  Reportedly, both of these CEOs had suffered errors in their stewardship as CEO.  Why did Rodgers survive?  One possibility has to do with board composition: the combined firm had 18 board seats, 11 from Rodger's Duke Energy and 7 from Johnson's Progress Energy.  

And then there is the merger of Office Max and Office Depot announced yesterday.  According to the announcement (which was, incidentally inadvertently leaked on Wednesday) the name and headquarters will be announced after the company appoints a CEO?

Huh?  Social terms are important components of any deal determined in the give and take of normal negotiations.  And social terms are costly - they involve real changes with real economic effects.  But not knowing the social terms?  That, would seem to be even more costly.  Not knowing these items as a deal is announced does not seem like the start of a prudent, coherent strategy.  Integration is fraught with uncertainty in the best of deals.  Starting out without  knowing the basic game-plan can only increase integration costs.  
Knowing your social terms? Important.  

Not knowing your board (if you are a new CEO)?  Courageous or some other adjective. 
Not knowing your CEO or name or headquarters? 

Priceless.  (Not.)

Just a thought,


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