Last week (on July 23rd to be precise), Transocean and GlobalSantaFe announced that they would merge (see article). I meant to write about this deal earlier, but I got caught up in the middle of the excitement surrounding last week’s stock market drop. I’m over that now, …so I figured I’d come back to the Transocean/GlobalSantaFe deal.

I’m also feeling a little bad because all of my previous posts about M&A deals have been skewed toward positive sentiment. I liked the Sirius/XM deal. I liked the IHOP/Applebee’s deal. I even thought that the Whole Foods/Wild Oats deal wouldn’t have ended up half bad. As I’ve said on this site many times, most M&A deals fail. And since most M&A deals fail, it’s time to stop being a cheerleader. It’s about time I find I deal I object to. So here goes…

Quite honestly, I don’t know much about either firm. I know that they are both oil drilling companies. I don’t know much about the industry though either. I know, I know, you’re probably thinking, “Why the heck are you writing about this deal then?” I’m writing about this deal because there were a couple of things about the deal that raised a few eyebrows for me.

First, this deal was pronounced a “merger”. I always love that word – “merger”. It’s nice and meaningless.

There was a time when “merger of equals” actually meant something, …but it had more to do with the way in which a deal of that type was treated from an accounting standpoint – whether using the purchase method or a pooling of interests (for background see here) – than any real difference between a merger and an acquisition. There were some benefits to having a deal categorized a “merger”; specifically, it allowed firms to use a pooling model in which earnings were not diluted as a result of the amortization of goodwill over time (as in an acquisition). In order to qualify as a “merger” the firms being merged had to exchange equity (it had to be a stock deal), and they had to demonstrate that they were roughly of the same size and worth. Only then would a “pooling of interests merger” be allowed. But the FASB got rid of the pooling of interest method in 2001, requiring all deals to use the purchase method of accounting – whether merger or acquisition.

In that sense then, a merger was an accounting fiction.

But we still like to refer to deals as mergers. And we (in the popular press and in academia) will often call deals “mergers” when the firms are roughly equal in size or stature, in deals that involve stock swaps, and/or in deals in which the management of both firms agree to “share” the management of the new firm (i.e., no one party to the deal clearly dominates).

In reality however, labeling something a merger doesn’t mean very much. Those of you who know me know that I don’t believe that such a thing exists anymore, and you know that I think that deals that are presented as “mergers” are actually a bad idea. So that’s one reason I’m writing about this particular deal.

I’m not exactly sure why this deal was labeled a merger. I don’t think it is because they are the same size because Transocean is significantly larger. It might have something to do with the transaction, which involved a healthy amount of equity. In my opinion however, it mostly has to do with the goal of preserving the management teams from both firms to run the new combined entity, and to do so in a way that shares power. According to the article…

“Transocean Chief Executive Robert Long will continue as CEO of the new company, while GlobalSantaFe CEO Jon A. Marshall will serve as president and chief operating officer. GlobalSantaFe Chairman Robert Rose will be chairman of Transocean. The two companies will be equally represented on the new board.”

I think a merger of this type is a patently bad idea. When it comes to integration, sharing power across firms leads to conflicts over the appropriate way to go about the integration and results in delays in achieving synergies, slower integration times, greater staff defections, and ultimately, higher integration costs. It also can end in an ugly power struggle among senior management that can hurt the performance of the combined entity. Go ask folks at Daimler, Chrysler, AOL and Time Warner.

This is not to say it can’t be done. It just makes it much more difficult and much more costly to pull off. And given that synergies are difficult enough to achieve, adding another layer of complexity in the process of integration does not help. Integrations tend to go much better when one company clearly takes the lead. The more powerful partner (usually the acquirer) then has the latitude to rationalize, recombine, and redeploy assets as it sees fit, and in a more efficient manner.

The equity markets obviously don’t agree with me. When the deal was initially announced, shares of Transocean rose 7.9 percent while GlobalSantaFe shares rose 8 percent. Maybe the synergies present and/or the amount of pricing power this will give to the combined firm overwhelm any integration difficulty they will face by trying to make this a “merger”, and the market reaction may have reflected that. I reserve the right to remain unconvinced.

This entry was posted on Thursday, August 2nd, 2007 at 6:42 pm and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.