Cultural issues determine mergers' success

NATIONAL REPORT--Two proposed gaming deals that would create two giant companies by combining MGM Mirage with Mandalay Resort Group and Harrah's Entertainment with Caesars Entertainment [see story, page 1], are receiving shareholder, regulatory and governmental scrutiny.

Because the deals have not received final approvals, companies were reluctant to talk about how they would affect hotel operations. But industry executives who have been through the merger-and-acquisition wringer during their careers said that while cost and revenue drive deals, cultural issues determine their success.

"These deals are based on synergies and a large part of that is removing overhead from the corporate office," said Mike Leven, chairman and c.e.o. of US Franchise Systems. Leven was on the board of directors of Starwood Hotels & Resorts when it bought Sheraton from ITT in 1998. "Savings are even grander at the casino level because corporate overhead costs are enormous. You can remove more costs because you have more people and you pay them more. In gaming, it's also about buying customers."

The deals have a lot of synergies on the revenue side because the surviving entities will be trying to source customers coming to the same Las Vegas market, said Tom Storey, executive v.p. of development for Fairmont Hotels & Resorts. Storey was with Doubletree and survived the Promus/Doubletree merger in the late 1990s to become executive v.p. of sales-and-marketing for Promus. Promus was later acquired by Hilton Hotels Corp.

"They may be dealing with tour operators and they can say 'we will give you twice as much volume, but not discount the price as much,'" Storey said. "The challenge in the MGM deal is how you define the competitive set. If you define it as Las Vegas, you may have a hard time saying it isn't anti-competitive. If you define it as all gambling destination markets, the result is different."

Companies making acquisitions want them to be accretive to their balance sheets.

"If the purchase price is mitigated by the savings they achieve, the deal can be accretive to the stock price," Leven said. "They can finance the merger and still have a positive impact on earnings per share, so Wall Street likes the merger. Lots of mergers don't take place because they are not accretive, even though they might make sense in the long term."

MGM Mirage executives said they expect the Mandalay purchase to close by the end of the first quarter of 2005 and to be immediately accretive to earnings per share.

Saving money on operations alone is tough to do with large deals.

"Those kinds of savings already are available to big companies," Leven said. "They already are so big they are getting a great price. If they bought any cheaper they'd be getting it for nothing. There can be some marketing savings, but for a deal as big as MGM, that is peanuts." When one company buys another, surviving corporate staff members are determined by the needs of the surviving entity.

When Hilton bought Promus, most Promus corporate employees lost their jobs, Leven said. But when Starwood acquired Sheraton, more corporate jobs remained because Sheraton was a separate brand.

Cultural issues

Steve Porter was a survivor of Hilton's purchase of Promus, as well as Promus's merger with Doubletree. He's now president of the Americas for InterContinental Hotels Group and an executive director and member of the company's board. He was instrumental in IHG's acquisition of Candlewood Suites.

"Cultural synergies must be addressed at the point of combination," he said. "They often are forgotten and thought about after the fact. But it is a key component in the brand's plan and how the guest experiences it."

When IHG acquired Candlewood last year, IHG said it liked the Candlewood culture and wanted to preserve it.

"We liked its entrepreneurial spirit and high guest-satisfaction on a low number of employees," Porter said. "The guest can be private on site and not interact with the staff. At Staybridge Suites, we are more interactive with guests."

To preserve Candlewood's culture, IHG put in retention agreements with key personnel. Despite this, the IHG corporate culture prevailed.

But determining a corporate culture wasn't so easy in the Doubletree/Promus merger.

"The most difficult part of merging Promus and Doubletree was blending the cultures together," Storey said. "Doubletree's culture was formed by combining it with Guest Quarters and Red Lion. We rolled the three together and took the best of all three. Promus was built from scratch with very defined policies and procedures, and was very pragmatic in its operations. Promus was less entrepreneurial and opportunistic than Doubletree."

The Promus/Doubletree deal was defined as a merger of equals and its board was created by taking half its directors from each company.

"The board was split in its allegiance, which made the company vulnerable to Hilton," Storey said.

"The cultural awkwardness of Doubletree and Promus led to the Hilton acquisition," Porter said. "Lots of things got in the way of integrating the two companies. We missed on developing a clear vision of the emerging culture."

Speed, content and substance are key elements in combining cultures, according to Fred Kleisner, chairman and c.e.o. of Wyndham International. Kleisner was with Westin when it was bought by Starwood and was with Starwood when it acquired Sheraton. In 1999, he was hired by Apollo Real Estate to manage and lead Patriot American Hospitality, which was a real-estate investment trust. He arrived on the job 10 days after Patriot acquired Wyndham.

"We had 10 headquarters, nine presidents, two c.e.o.s, seven legacy accounting systems, and nearly $4.5 billion of debt," he said.

Within six months, the company had one corporate headquarters, one c.e.o., one president and one accounting system. Its current debt is about $2.4 billion, and it abandoned its REIT status in favor of being a C-Corp. Kleisner said he patterned that turnaround on what he learned at Starwood.

"There is no such thing as a merger of equals," Kleisner said. "There always is a predominant company, and getting everybody together helps drive that quickly. Time is absolutely precious. There are 1,000 excuses as to why to implement change slower, but not one good reason. The quicker it is done, the better. Every day you lose you are wasting money."

Consistency drives successful mergers.

"Set a course and remain consistent," Kleisner said. "Start changing courses and people figure out it is a flavor-of-the-month club."

The first thing to do is to begin a search to find the best practices among all the cultures of the organizations and set benchmarks that set the practices and measure against them, he said.

"Figure out who does what best and implement it in real time," he said. "The best won't all come from one organization."

Kleisner does not believe commuting is a long-term solution.

"Make sure everybody moves to the new headquarters city," he said. "The ability to perform efficiently requires you to be where the work is, not have a crash-pad apartment with a real home elsewhere."

badams@advanstar.com

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