WHY BOTHER?

David Merrefield

After all the excitement surrounding activities that lead to the merger of two companies fades away, and when some of the publicity quiets, a big question remains: How will the two companies be combined?

The question is also a complex one. It includes issues of change, direction and leadership. And, at bottom, the question begs the most basic explanation of all: Why did the merger take place and was it worth all the bother? More than a few mergers have occurred in the food-distribution industry in past years that seemed to offer no better rationale for the whole exercise than that maybe it's better to become a bigger company than to remain a smaller company. The penalty for failing to properly integrate management and operations of combined companies is that the acquiring company is reduced from an operating entity to a holding company that can accomplish no more than layer new costs atop old. Maybe that was acceptable during the 1980s, when cash flows were sufficient to mask inefficiencies, but it just won't do today.

A look at three recent mergers clearly shows that to have a shot at success in the current economic climate, companies must see that the immediate postmerger period is accompanied by changes of leadership and proactive searches for synergy. That's what happened when the Dutch-American operator Ahold obtained Red Food Stores, Chattanooga, Tenn., in May. Not long after ink dried on contracts, Ahold handed responsibility for the acquired company to the chief of its nearby Bi-Lo chain. The idea was that, under common leadership, the two chains could operate better and more efficiently. The executive previously in charge of Red Food took his leave.

Similarly, with July's closing of the merger between Fleming Cos. and Scrivner, the wholesalers based in Oklahoma City, topside executives of Scrivner retired. (Unfortunately, that also means that counsel rendered to the industry by Scrivner's Jerry Metcalf will be lost, since, in addition to his posts at Scrivner, he was co-chairman of the Joint Industry Executive Committee on Efficient Consumer Response. Jerry told me last week that he had to bow out of the ECR activity because since he isn't an operating chief executive officer anymore he simply isn't eligible for the ECR leadership post. "It really wasn't a question of resigning from the ECR co-chairmanship, it's just that I'm not eligible now. I'm still enthusiastic about ECR.")

Shortly after the merger closed, Fleming's Robert E. Stauth, chairman, president and chief executive officer, took over management of the newly combined companies. Bob remarked that "it's critical to have senior executives of the acquiring company in place and making decisions for the acquired company if you're really interested in bringing the two businesses together."

That done, profound change is in the air. In contrast to previous Fleming buyouts, it looks as though Scrivner and Fleming management and operations will be pared and interlocked quickly, yielding a bigger and more cost-efficient Fleming in months to come. Now let's look at another situation that arose when two companies were merged, evidently in the absence of a workable agreement about who would be in charge of the new company or about future directions for the merged entity. That's the example offered in the aftermath of last year's merger of Price Co. and Costco Wholesale Corp., two membership-club companies. It seems that in premerger days, thoughts of combining the companies were driven by outside forces instead of by logic about what postmerger results would be. Chief among outside forces was fear that Wal-Mart Stores might buy up Price and add it to the burgeoning Sam's Club empire. That might allow Wal-Mart to simply swamp the whole club industry. In any case and for whatever reason, the merger proceeded and Price/Costco was formed with Price's executive, Robert Price, remaining in southern California and Costco's Jim Sinegal remaining in Washington state, each with separate retinues. Now the impression the merger was little more than an ill-planned shotgun wedding is inescapable, since in July Price/Costco spun off another company, Newco, which will be concerned mostly with real-estate and international ventures. In Newco, Robert Price and other former Price executives have found harborage, leaving Sinegal to operate the club business. But the divorce means he'll do so without some of the assets and control that could have accrued to the benefit of Price/Costco. The lesson of the three mergers is plain: Postmerger leadership and intentions must be focused, operations must be combined and efficiencies must be found. If a premerger plan can't be formed to accomplish these goals, at minimum, why bother?