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Merger advice from a man who's been there, done it right

Neal St. Anthony: Merger advice from a man who's been there, done it right
By NEAL ST. ANTHONY, Star Tribune

February 18, 2008

If Delta and Northwest airlines announce a merger, its success likely will depend on whether top executives establish their employees as the No. 1 stakeholders in what would be America's largest carrier. They also must focus more on increasing revenue than on cutting costs.

That's the upshot of a conversation I had last week with Dick Kovacevich, the chairman of Wells Fargo & Co. who is widely regarded as America's most successful banker and merger architect over the last couple of decades.

Kovacevich declined to comment directly on the Delta-Northwest merger talks or the CEOs involved. But his experience bringing together two banking giants with distinct regional personalities is instructive. After all, airlines and banks are both highly regulated businesses that deliver essential services to retail customers.

Kovacevich put together a string of mergers, capped in 1998 by Norwest Corporation's stunning acquisition of the larger Wells Fargo.

Most bank mergers were disasters because they focused most on short-term cost cuts that were designed to please Wall Street analysts and investment bankers. Too often, they aggravated overworked employees and shortchanged customers, many of whom fled to smaller competitors.

"Revenue is the gift that keeps on giving," Kovacevich said in an interview last week. "My belief is that you should never do a merger unless revenue growth of the combined companies in the future will be greater than the sum of the two had they remained independent.

"Many times you see cost cuts, but revenue goes down because you cut the heart out of the service. Many mergers have resulted in less revenue. In about 80 percent of mergers, the stock of the buying company goes down."

A lot of big bank mergers were premised on promises to Wall Street that the buyer would cut up to 30 percent of the acquirer's costs within a year. Running against conventional wisdom, Kovacevich, in his capstone Wells Fargo deal, told Wall Street he would cut 6 percent of cost over three years.

"The employee has got to be the No. 1 stakeholder," Kovacevich said. "You should have seen eyes roll when I would talk to employees [at the outset of a merger] about our competitive advantage," Kovacevich said. "And we reduced some positions over time. But they saw how we did it. And we listened to them. And we did stop some things that weren't working ... employees watch what you do, not what you say.

"I'm not expert in airlines, but it is about that pilot and flight attendant. We've proven in banking, if they don't like coming to work every day, it won't work."

Northwest CEO Doug Steenland, who ran the company through an acrimonious mechanics strike and 18-month bankruptcy that meant 30 percent pay cuts for employees, is expected to step down in favor of Delta boss Richard Anderson, a former NWA CEO.

Anderson, who is more extroverted than Steenland, dodged three punishing years at NWA. Anderson had taken an executive position at United HealthGroup before parachuting into the top spot at larger Delta Airlines after it emerged from bankruptcy last spring.

Steenland, who is given credit for navigating the airline through its reorganization, nonetheless carries a lot of baggage. His controversial, multimillion-dollar compensation package was disclosed just as NWA emerged from bankruptcy proceedings last May.

Anderson seems to be the better bet to turbocharge a Delta-Northwest merger into something bigger than the two separate airlines. That means improved revenue and employee morale.

But whatever their respective roles in a merged airline, Steenland and Anderson will have to be credible and communicative. Minnesota taxpayers, who have cut NWA a half-billion in loans and subsidies since 1991, are also key stakeholders, as are the passengers of both airlines.

This can be a great, globe-spanning carrier, but only if all the stakeholders believe in a greater future that transcends the deal.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com

Comments

I found this article very interesting because of 2 comments from Dick Kovacevich, former Wells Fargo CEO and architect of many successful bank mergers.

1) Kovacevich says "Revenue is the gift that keeps on giving….my belief is that you should never do a merger unless revenue growth of the combined companies in the future will be greater than the sum of the two had they remained independent.?
It’s easy to think about the synergy-related cost savings of mergers, but often these result in short term benefits or a lower level of customer service. The focus on whether a merger makes sense should mainly involve revenue creation.

2) Kovacevich says "The employee has got to be the No. 1 stakeholder….we reduced some positions over time. But they saw how we did it. And we listened to them. And we did stop some things that weren't working ... employees watch what you do, not what you say.?
Focus on the employee is often forgotten by executives among the hype and excitement of potential merger benefits. Once two companies agree to merge, it is the employees that end up performing the work and determine the success of a merger.