Is This Marriage Made IN HEAVEN?

For years Don Marron expressed little interest in merging PaineWebber, and turned his company's many suitors away at the door. But then UBS AG came a'courting and convinced Marron to give married life a try. Here's what this CEO says he's learned.

On a Friday evening Last July, I telephoned the board members and senior executives of Paine Webber Group to report on a meeting I'd had that day with a Swiss banker named Marcel Ospel. I was reluctant to intrude on their weekend. But I knew that the importance of what I was about to tell them merited the interruption. I was confident they would agree.

Marcel, who was CEO of UBS AG, had flown in from Zurich to advance a preliminary discussion he'd initiated that spring about the possibility of merging our companies. That in itself wasn't newsworthy: Our company had been courted by many suitors in recent years, and while many of those proposals were not without appeal, I've always believed that our clients, employees, and shareholders were best served by our steadfast independence and by our singular focus on serving affluent investors in the U.S.

But, as a public company, we also had an obligation to those same constituencies to weigh any reasonable offer put before us. I valued our firm's independence, but at the same time, I didn't view it as an end in itself. I'd been saying for years that if a truly interesting offer came along, I would pursue it. That summer evening, I told them this was that offer--the real deal.

When the PaineWebber-UBS merger was announced a few weeks later, a number of reporters reminded me of my often repeated insistence that PaineWebber would prefer to remain independent. What changed my mind, they wanted to know. What made UBS different?

It was a valid and critical question--one that came up during my initial conversations with PaineWebber's leadership that weekend. From where I stood, the merger made eminently good sense. For one thing, it seemed clear that the deal would enhance our employees' productivity and morale by expanding the menu of resources and support functions available to them. Our clients too would benefit through a greater choice of financial products--especially in private banking--as well as new access to international investment opportunities and research. And if the deal was good for those two groups, it would probably yield increased value for our shareholders.

But that isn't to imply that we said yes to UBS before meticulously parsing its proposal and weighing its implications for each of our three constituencies. And UBS, for its part, was no less rigorous in sizing up PaineWebber. Evaluating merger proposals is not an exact science: No matter how much thought and analysis go into the due diligence process, the picture will always be clouded by variables not readily quantified, as well as by external market forces not even the most prescient CEO can anticipate or control. Nor is there anything like a universal benchmark; every offer must be evaluated on its own merits. A troubled company that must merge to survive will apply a different set of criteria than a strong company looking to build on its success. Likewise, companies in different industries will have different expectations.

Still, sizing up a merger is neither guesswork nor voodoo science. By asking the right questions--and answering with unflinching honesty--a company can stack the odds in favor of success.

Here are some of the issues we took into account:

What's your gut feeling? I had first met Marcel Ospel two months earlier, when he broached the idea of closer cooperation between UBS and PaineWebber. I liked him from the outset. He was both frank and a good listener--and refreshingly direct. Merger discussions often have a way of dragging on before either party gets to the point. Marcel and I were discussing issues of substance 15 minutes after we sat down. That boded well, I thought.

Is the timing right? Granted, timing an upturn in the financial markets is never easy. But it certainly makes sense to be cognizant of pricing cycles when considering an offer. Under the terms of the UBS deal, PaineWebber was paid $73.50 a share--a 47 percent premium and three times the stock's book value.

Do both parties understand the importance of discretion? UBS and PaineWebber were on the same page with regard to the need for keeping our discussions under wraps until we had something concrete to announce. With the outcome still uncertain, the last thing we wanted was for the media to get wind of our discussions. Leaks can not only wreck a deal, they can stir needless anxiety among your workforce, clients, and shareholders.

Does the potential acquirer understand your client? What set UBS's proposal apart from others that we've fielded was the company's fundamental understanding of our client base. Like our own firm, UBS has served affluent clients for more than a century, so they are keenly aware of this type of clients' needs and goals. With this kind of shared awareness, success is possible. Without it, failure is inevitable.

How compatible are you? No matter how close the match between the sell- and buy-side companies, discontinuities are inevitable: diverging corporate cultures, management styles, languages, accounting standards, and technology platforms, to name a few. The question isn't whether there are gaps, but whether the gaps are bridgeable. Geography can pose a problem or, as in our case, it can work in your favor. There was virtually no overlap between our markets, products, or capabilities and those of UBS. In any event, the idea is not to homogenize viewpoints or cultural perspectives. Diversity of viewpoints can be a key competitive advantage in today's global environment.

Will you be able to preserve your identity? Often the identity of a merged company is subsumed into that of the acquiring company and vanishes without a trace. This can be detrimental to employee morale as well as confusing and off-putting to clients. Built up over 120 years, the PaineWebber brand represents an asset of immeasurable value to our clients, shareholders, and employees. UBS's clear recognition of the intrinsic value of our brand and willingness to continue investing in it were important factors for us.

Will layoffs result? Cost reduction is a valid driver of many mergers- painful repercussions notwithstanding. By eliminating redundancy, a profit-squeezed company can streamline its workforce and achieve the cost efficiencies it needs to stay in business. But that isn't to suggest that every merger is geared toward that result, nor should it be. The fact that PaineWebber would be able to retain 98 percent of its workforce argued strongly for the merger.

What are your company's motives-and what are the buyer's? It's essential to fully understand your own motives and expectations and those of your suitor and to share them with complete candor. Do you view the merger as a way of entering new markets? Achieving critical mass? Cutting costs? Whatever your specific agenda, full disclosure is critical. Even during early exploratory talks, don't hold back on expressing concerns, clarifying misperceptions, or acknowledging gaps in your capabilities. Once you re deep into negotiations, it's very difficult to unscramble the egg. And surprises, especially if they're leaked, can seriously undermine stakeholder confidence.

Can you afford not to merge? Like many entrepreneurs, my top priority has always been to build profitable, independent businesses. But independence is not an absolute ideal: No matter how successful the company, it cannot expect to shield itself indefinitely from market forces and shifts in the economic climate. You've got to scan the horizon constantly for signs of change and make sure you're prepared to deal with them. Often that means being open to the possibility of joining forces with a larger organization.

PaineWebber spent years building a powerful franchise in the U.S. But times are changing. If the 1990s was the decade of the individual investor, then the new century marks the dawn of the global individual. And we therefore recognized a need to provide our clients with full access to world markets and capabilities.

Will it create shareholder value? Before saying yes to UBS, we gave careful thought to the needs of three constituencies: our employees, clients, and shareholders. From the evidence we had, we forecasted that, by expanding the resources and support functions available to them, our employees would be more productive and enjoy higher morale.

Before UBS approached us last summer, I knew very little about its markets or inner workings. The more my colleagues and I learned about UBS, the better we felt about it. By every standard--logic, chemistry, the intangible, and the quantifiable--the more the match made sense. We may live in an uncertain world. But I am confident this combination will succeed.

Donald B. Marron is chairman of UBS PaineWebber, a full-service securities firm headquartered in New York City.

Merger COUNSELING

PaineWebber's experience notwithstanding, some marriages are just made in hell. Often the expected synergies fail to surface, or become buried beneath cultural issues, lackluster due diligence, or poor integration. "When that happens, the situation can be confusing and chaotic for employees at all levels," says Jeff Schmidt, managing director for innovation and research at New York City-based management consulting firm Towers Perrin and editor of Making Mergers Work: The Strategic Importance of People. "You lose good talent because people don't know where they stand. Customers become confused or frustrated and become susceptible to overtures from competitors. All your potential synergies quickly unravel."

In a Towers Perrin survey of 450 HR executives, more than half identified cultural integration, or lack thereof, as a major factor in the success or failure of a merger or acquisition. This is especially true in cases of cross-border M&A such as PaineWebber's with UBS. "Not only are you dealing with the corporate culture, you've probably got significant differences in management style, pay philosophy, language, and national culture." This was dramatically demonstrated with the DaimlerChrysler merger, where the salaries of U.S. executives were embarrassingly inflated compared to those of their German counterparts.

Synergies may also be curtailed by an unexpected regulatory climate. The free-for-all feel of the mid- to late-'90s shifted in 2000 to more stringent anti-competitive scrutiny. The BP/Amoco merger was effortless compared to BP's more recent acquisition of Arco, where the FTC required BP to divest some of Arco's crown jewel holdings in Alaska's northern slope before approving the deal.

"Sometimes your problems begin with the deal itself," cautions Schmidt. "Companies may get into a bidding war and pay too much. It's what's known as the winner's curse: You simply pay too much for the economics to work out. AOL and Time Warner, for instance, are banking on virtually every kind of synergy you can think of. They've got a steep hill to climb. You need to do smart deals. Once the deal is struck, our research shows the successful companies are those able to address the people, organizational, and cultural issues. The unsuccessful companies are those that are not."

Sonja Sherwood