Acquisitions are not the same as mergers

I am responding to your article on mergers (21 October 1997). – Mergers and acquisitions are two different things. Interbrand acquired Newell and Sorrell; they did not merge.

I am responding to your article on mergers (21 October 1997).

Mergers and acquisitions are two different things. Interbrand acquired Newell and Sorrell; they did not merge. This is not a “marriage” as the article says.

Interbrand is now the boss. It owns Newell and Sorrell. By selling the firm to it, Newell and Sorrell and any of the other major shareholders in the company are no longer in charge. Interbrand controls the salaries employees will earn in the future, and Interbrand policy will prevail for bonus, profit margin targets, vacation, working hours, raises and health insurance policies, and so on, (those that are not regulated by the Government).

The acquirer usually puts a chief financial officer or controller into the acquired group to protect the investment. The acquired gives up the use of its name, and the principals usually have to sign a non-compete agreement with varying degrees of restrictions.

The motivation for the principals who stay with the company after it is acquired is supposed to be to meet financial targets (and sometimes quality), to promote the health of the entire entity, not the part that once was theirs. The fact that part of the payment for the company is in the form of stock in the parent company reinforces this.

There is only one reason that principals of a consultancy sell the company to another: money. It has been a way for them to get rich, or at least secure for the rest of their lives, and to get their equity out of the business. Their employees are usually not able to buy them out, even over time, and continue to run a profitable company.

Of course, the recent exception is the management buyout of Wolff Olins. Many shareholders receive payment for their ownership in a combination of cash and stock. Many have a payout agreement where they stay in the company for one to five years (this varies) and have financial targets to meet. Some take or are given cash to leave. Other motivations are to play on a larger playing field, to get the benefit of introductions to clients of the parent, and to offer global clients local expertise in the form of colleagues in other geographic areas.

Ian Cochrane’s statement about a failure rate of 80 per cent is not replicated in the US. If success means to continue to be profitable, to increase revenues, to retain key staff and to have a degree of synergy with the parent, then I’d say that on this side of the ocean, there is at least an 80 per cent success rate.

Staff jobs are not always secure. It depends on the situation. Interbrand decided to eliminate the “retail” design capability from the Schechter Group and let go of those specialists. The packaging design group seceded when, in its perception, quantity was replaced by quality, but in the main, the acquisition has been a success. So have those for Lippincott & Margulies, Anspach Grossman Enterprise, SBG Enterprise, Landor Associates, Siegel & Gale, Diefenbach Elkins, and Gerstman & Meyers.

In a service business, which is what a design consultancy is, clients have formed relationships with individuals in the firm: American Express with Gene Grossman and British Airways with John Sorrell, I am told.

As long as these clients continue to receive the counsel of these key players, they will keep their accounts with the consultancy. If they don’t, and they haven’t formed close relationships with other people there, they will look for a different consultancy. In the case of clients with global reach, the alliance with firms in other regions is usually seen as positive.

About names. The word on the street is that eventually all the companies in the WPP family with “Enterprise” attached to them will become one under the name of Enterprise. Same with Interbrand. One of the selling points of the Diefenbach Elkins acquiring offer is the maintenance of the name of the acquired although affixed to the Diefenbach Elkins name. This also reinforces a Diefenbach Elkins selling point to clients that the service they receive will be a combination of local and worldwide expertise.

There are several motivations for acquirers, but clearly the most important is the growth and financial health of the entire company.

Last point. About stock. The stock that matters on the Interbrand deal is in Omnicom, Interbrand’s parent. For Coleman and Diefenbach Elkins, (owned by McCann Erickson) it is stock in the Interpublic Group of Companies, the parent of McCann.

RitaSue Siegel

RitaSueS@aol.com

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