How to merge two firms into one — the right way

A business merger, like a marriage, is tough to pull off successfully. But as the economy shakes off this recession, we’re likely to see more companies announce combinations.

John Stumpf

John Stumpf

Some will make sense (Delta-Northwest) and some won’t (Time Warner-AOL). Some will be done artfully and others by clueless CEOs armed with butcher knives.

Recently, I had the chance to sit down with Wells Fargo CEO John Stumpf, who’s not from that latter group. His No. 1 job is digesting Wachovia — a distressed bank Wells bought last fall at the height of the financial meltdown — to create one of the nation’s biggest banks with $1.3 trillion in assets.

Stumpf, 56, said he has been involved in about 90 mergers in his career, so he comes to this mega-merger — a $15 billion deal — with lots of experience.

Even with all those mergers, Stumpf said, “I can’t tell you how many deals we’ve walked away from.” But, he added, there were plenty of them.

Whether you’re an exec contemplating a merger, an employee affected by one or an investor weighing the pros and cons, what a CEO like Stumpf says may add to your understanding.

After all, he said, “You only get one chance to do it right.”

First, he said, it’s important for CEOs on the prowl to “stick with what you know.”

Second, he strongly believes mergers only make sense if revenue can grow over the long haul. Wells added 16 new states to its footprint in the Wachovia deal.

“You win on the field of revenue,” Stumpf said. Cost savings alone are not a strong enough reason to combine companies. In fact, he said, after the cost-cutting gets done, the short-sighted nature of it can result in larger revenue declines.

“I price deals that make sense” in terms of revenue growth of the combined firms, Stumpf said.

The other key pre-merger principle is to combine compatible corporate cultures.

“You can’t take enough costs out to cover a bad culture fit,” Stumpf said. “It will never work.”

After the merger deal comes together, Stumpf said it’s important to take your time melding the two firms.

“We believe it will take three years to complete” the Wells Fargo-Wachovia merger, Stumpf said. “It’s all about pacing.”

Rushing through it, so cost-savings can be realized sooner, which might please Wall Street, can backfire.

In the Wells-Wachovia marriage, Stumpf said he first assembled a top executive team of about a dozen people.

“The senior team is key,” he said. “Leadership is key.”

The next step was to set up an “office of integration” to handle the strategy and tactics of combining the two large banks. The office, made up of about 20 people from both banks, broke into teams to figure out different issues, including human resources, operations, technical and communications. That last piece — internal and external communications — is very important, he said, because customers don’t like change and employees are nervous about losing their jobs.

“The first two letters in merger are ‘m’ and ‘e’,” Stump said. If jobs are at risk, the CEO needs to be up front about it.

Finally, Stumpf sets timetables for phasing in the integration, generally with the simpler tasks coming first.

“It’s very much like building a house,” he said. Actually, given all the failed mergers, it’s considerably more difficult than that.

For instant updates, follow me on Twitter.

One comment Add your comment


December 8th, 2009
11:34 am

Thank you for the article. As a relative M&A novice, I appreciate hearing the thoughts of an experienced veteran delivered by an experienced writer.