Merger-of-Equals? Progress Energy Learns the Answer


[author: Kathleen Wailes]

It’s a truism in the world of mergers and acquisitions that there really is no such thing as a merger. There are only acquisitions, in which one company acquires, dominates, and survives the other. Many deals are billed as a merger-of-equals when announced, only to subsequently have most of the executives of the acquired company leave, albeit usually with a generous severance package and a golden parachute.

Progress Energy’s CEO and employees have learned this lesson the hard way. When Duke Energy CEO James E. Rogers approached Progress Energy about a merger, he assured Progress CEO, William D. Johnson, that Rogers was ready to take on the position of executive chairman and that Johnson would run the combined company after the $26 billion transaction closed. Progress’ Board approved a small premium on the assumption that their CEO would lead the new enterprise.

Eighteen months later, the merger closed after receiving approval from six regulatory entities, all of which expected Johnson to run the company. However, hours after the deal closed, the Duke Board ousted Johnson and put Rogers in charge. Coincidentally, in past mergers that Rogers negotiated, he was always the surviving CEO. This time he stated that the Board had lost confidence in Johnson, despite the fact that Johnson never got his shot at being in charge. Three more senior Progress executives have already followed Johnson out the door.

Now, the State Utilities Commission in North Carolina is investigating the situation, and could impose penalties ranging from fines to rescission of the transaction based on misleading information. Duke’s shares have fallen significantly, and S&P has put the company’s debt on a negative credit watch. Progress employees have been told that their numbers will be reduced – in fact, most all employee cuts from the two companies will fall on the heads of Progress employees.

What are the ramifications of this bait and switch maneuver for companies considering entering into a merger agreement? This is a crucial question when one considers that 83 percent of mergers and acquisitions are considered to be not only without benefit – but even worse, to destroy value. Successful integration of combined companies is essential if there is any chance of success, and employee concerns – or social issues, as they’re euphemistically known – can derail that integration.

Planning for a merger announcement involves careful analysis of work force changes and timely notification of the employees. The first question employees will have upon hearing of a deal is, “What about my job?” That question must be rapidly addressed in order to gain employee support and confidence. Employees should understand the rationale for the deal and the strategy for the new company.

A successful merger communications plan also involves building trust and credibility for the new executive team. When the company’s first act following a merger is to fire the CEO designated as the new leader, how can employees believe anything they are told? How can executives of a company endorse a transaction with a team they cannot trust?

In the future, it may be more difficult to induce any company to agree to a combination because of the Duke-Progress experience. This is far from the first time that a merger-of-equals clearly became something entirely different, and it won’t be the last. It does endanger, however, Duke’s ability to realize the value envisioned when the deal was struck.

Kathleen Wailes is a Senior Vice President at Levick Strategic Communication, the nation’s top crisis firm. She is also a contributing author to Bulletproof Blog™.


Published In: Business Organization Updates, Energy & Utilities Updates, Mergers & Acquisitions Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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