When it comes to mergers in the US, it’s become a question of IR versus PR. Companies must choose whether to emphasise the public relations or the investor relations aspects of their planned marriages.
The IR approach, of course, is to stress those elements of a merger that will please investors, which nowadays means highlighting plans to slash the workforce. The PR approach is to calm any potential public outcry against the merger that could squash the deal, which means playing down the likelihood of huge lay-offs.
Thus corporate policymakers must choose, or find a compromise, between IR and PR. This new reality applies particularly to huge mergers, and especially to those involving heavily regulated companies. The pending merger of the two giant East Coast Baby Bells – Nynex and Bell Atlantic – is the most dramatic test so far of the new trend.
Until recently – actually, until AT&T’s announcement last January that it would lay off 40,000 workers – IR unquestionably ruled the roost. Knowing that the investment community loves lay-offs, merger announcements would typically tout as loudly as possible the number of jobs that were set to be lost. The result: a surge in the stock prices of the merging companies.
Little was at risk. Although such announcements sent the jitters through the ranks of the companies’ employees, and it was battering to morale, there was relatively little public criticism, and none of it terribly threatening.
So it became a macho thing for CEOs to fire as many people as possible, even where there was no merger involved. The more employees a company said it would fire, the more investors applauded and the higher the CEO could raise his compensation.
But public resentment and unease were quietly growing. At first the disquiet was muted, but it burst into the open when Pat Buchanan, the right-wing populist Republican, unexpectedly produced strong showings in some key primaries. Buchanan, for example, railed against the Chemical Bank/Chase Manhattan merger, pointing out Chase’s long ties to David Rockefeller, the icon of American wealth. He damned the banks’ promise that 12,000 jobs would be cut. (Buchanan didn’t reveal that he was a Chemical shareholder.)
It was widely believed that Buchanan’s surprising strength reflected the growing anxiety among the public about the massive lay-offs. So alarms went off throughout the political system, among both Republicans and Democrats. No longer was brazen talk of lay-offs risk-free.
Even giant AT&T learned this the hard way. It had to back off from its stated plans to fire 40,000 workers, or at least find a way of presenting the numbers in a more palatable fashion. Following the public uproar about the massive job cuts, the company began distinguishing between ‘voluntary’ and ‘involuntary’ layoffs, saying that of the 40,000 people to be let go, only 18,000 would be involuntary. But in most cases, voluntary meant that employees accepted departure plans that were, in effect, forced upon them.
Few people took the revised cosmetics seriously, and The New York Times ridiculed AT&T’s numerical shenanigans in a front page story. Public reaction, of course, depends heavily on how the numbers are presented. This was apparent in Chemical’s merger with Chase. The announcement that 12,000 jobs would be eliminated pleased investors and pushed up the stock price, but riled the press and the politicians. To mollify the press and the public, the banks held a press conference to say that a third of the lost jobs would be through attrition and that only 8,000 people would be fired.
The growing political sensitivity was especially evident in the proposed merger of Nynex and Bell Atlantic, which as a gigantic regulated utility, had to appease not only investors but politicians, government officials and the public.
The proposed merger of the two geographically abutting regional telephone companies would create a company with combined annual sales of $27 bn, a market value of $21 bn and a workforce of 134,000. Heavy stuff. And, as might be expected, the political reaction was immediate. Within a day, New York State Attorney General Dennis Vacco announced an inquiry into the anti-trust implications of the proposed merger. In Washington, the Justice Department was reported to have started its own investigation.
Nynex and Bell Atlantic clearly were aware of the political sensitivity. According to Business Week, the day before the two companies announced their planned merger, Nynex CEO Ivan Seidenberg called Labor Secretary Robert B Reich to assure him that there would not be sweeping lay-offs. Reich is the administration’s most vocal foe of job-slashing and Seidenberg reportedly promised him that the job loss created by the merger would be more than offset by future growth. At a press conference following the announcement, reporters were told that attempts would be made to assign new jobs to those people whose positions had to be eliminated.
In appeasing the general public, however, Nynex and Bell Atlantic upset the investment community. Investors had been anticipating the deal for about a week before the official announcement on Sunday, April 21 and expectation had driven up the value of both companies’ shares.
Bell Atlantic’s stock soared 11.4 per cent between April 16 and April 22, to $67.125 from $60.25. But following the official announcement when it became known that ‘only’ 3,000 jobs would be eliminated, the stock price began dropping. By the end of the month it stood at $65, a decline of more than 3 per cent.
As for Nynex, in the week before the announcement its stock rose 8 per cent, to $53 from $49. But following the weekend release it dropped back to $50.375. And it continued to drop, ending the month at $49 – more than 7 per cent below the $52.875 it stood at when April began.
Most analysts attribute the declines to investor disappointment that the combination failed to eliminate more jobs than the companies were predicting. The companies estimated that the merger would reduce the joint workforce by only 2.2 per cent. But 3,000 jobs out of 134,000 is practically meaningless. Attrition alone could easily accommodate that number.
But the vagaries of employment at huge companies allow a great deal of leeway in interpreting numbers and the figure can be presented in ways to please different constituencies. The question is whether to play the IR or the PR gambit.
Nynex and Bell Atlantic obviously concocted a mixture, trying to find a middle way. The hard reality is that, if anything, the Baby Bell merger will probably lead to far higher net employment. Both companies had done so much cutting already, they were down to the bone, as any customer of Nynex knows only too well. It’s certainly very strange to call the business office of one’s telephone company only to get a busy signal for most of the day; or to get a recording that keeps the customer hanging on for what feels like hours; or to call to order a new service only to find that the ‘Nynex’ person actually works for an outside marketing firm and knows nothing about the product being sold.
In reality, Nynex and Bell Atlantic could have taken a totally different approach, forgetting staff reduction and stressing instead that the merger would create thousands of new jobs and far greater profits.
In the prevailing environment, however, that might have caused the stocks to plummet even further. ‘Wall Street would have loved to have seen deep job cuts,’ Richard Klugman, an analyst at PaineWebber Inc, was quoted as saying. ‘Unfortunately, once Pat Buchanan made the poster child’ of corporate downsizing, ‘you can’t get away with statements like that any more.’
Finally, under intense pressure, and realising they were losing the IR battle anyway, the CEOs did an abrupt about-face. They gave up on the job-cutting tactic altogether and, in trying to bolster not only the PR side but the stock price as well, began emphasising growth prospects and job-creating possibilities.
In an interview with The Wall Street Journal on Wednesday, April 23, when it was clear the stock market wasn’t happy with the deal, Raymond Smith, Bell Atlantic’s chairman, and Nynex’s Seidenberg predicted that the new company would grow, winning up to 30 per cent of the $20 bn worth of long-distance traffic in their combined region. They also predicted that the new Bell Atlantic would get as much as 4 per cent of the long-distance business outside regional boundaries.
‘I’d be laying off people right now if we hadn’t done this deal,’ Seidenberg told the Journal. Nynex would have been boxed in, he said, and predicted that as a result of the merger, the two companies’ long-distance business alone will need several thousand additional workers. ‘Growth,’ Seidenberg concluded, ‘is what this merger is about.’
Too late. From a public relations perspective, Seidenberg and Smith erred the first time around. The job-reduction face they tried to apply to the proposed merger backfired in terms of investor relations as well as public relations. In seeking a middle ground between their PR and IR concerns, they failed at both. With hindsight, it’s pretty clear that greater profitability for the Baby Bells lies in growth, not retrenchment.
The question is whether, or when, the market will catch up to the concept of growth. That is an issue that will have to concern all IR and PR people in the coming years.
