Chief executives whose companies are acquired can find their personal futures looking extremely bleak. A study of the largest 100 takeovers shows that many lose their jobs. So how can they best adapt to changed circumstances?
What will become of Sir Rocco Forte now, after Granada's victory in one of the hardest fought takeover battles of recent years? It's unlikely that he gave much serious thought during the battle to life after defeat.
Hostile takeovers demand total commitment from the business leaders on both sides. Defeat cannot be contemplated if chief executives expect to convince shareholders, bankers, employees and the media of their case.
The ferocity of such battles is all the greater because chief executives have so much to lose. Although media interest in salaries and perks might suggest that loss of financial reward would be at the top of their minds, this is by no means so. Chief executives stand to lose much more than money. They could lose a kingdom, a position of power and influence which will be hard to recover. The demands of the job prevent them from investing time in effective safety mechanisms. For chief executives to be deposed is equivalent to their being banished into the wilderness - where, in the words of Yve Newbold of ProNed, 'They weep alone'.
Business leaders' reputations are linked to their company's performance.
A takeover bid is often taken to mean that the target company is underperforming.
It is therefore a direct challenge to the chief executive's guiding vision.
Indeed the conflict between Forte and Gerry Robinson was presented in the press as a battle of business philosophies. Besieged chief executives fear for their reputations. Their self-esteem is threatened. Their dream (as one ex-chairman described it), of having 'vision realised' inscribed on their tombstones, could suddenly evaporate.
If the bid succeeds, feelings of loss and reduced status will not be confined to chief executives. Boardroom colleagues and senior subordinates will, to a lesser degree, share their anxieties. Nor does it have to be a hostile take-over that triggers these feelings. Even if it follows an agreed offer, an acquisition tends to create an atmosphere of conquest.
The 'acquired' executives can rapidly be demotivated by reminders that they were on the losing side. They will sometimes respond by becoming locked in a struggle with the new owners. Demonstrations of dominance on the latter's part will tend to hasten their departure - even if they are not fired.
Any sudden change of ownership is likely to be followed by an exodus of senior managers from the acquired company. A 1993 study of major acquisitions in the US, by Donald Hambrick and Albert Cannella, found that 67% of all acquired senior executives had left within four years. Naturally, losses were greatest in the wake of hostile takeovers. An opposed takeover is typically conducted in an acrimonious atmosphere. Each side is highly suspicious of the other's motives. For bidders who win, to leave acquired top executives in place could heighten the risks of stonewalling or sabotage. Far safer to adopt Machiavelli's advice on how to deal with vanquished foes: eliminate them.
A look at the 100 largest 1990-94 acquisitions in the UK shows that British senior executives on the losing side are even more likely than their US counterparts to make an early departure. In 70% of these cases, chairmen whose companies had been acquired (private as well as public companies and their subsidiaries, that is) were no longer with the same group 12 months later. Frequently this was because the posts had become redundant, the companies having been brought under the wings of their new parents. But often the ousting of chairmen and chief executives carries a deliberate message to the acquired company and the world at large - there is to be a change in direction.
As for the chief executives of the UK companies which changed hands in these transactions, 57% were no longer in the same position two years later. A minority, valued for its expertise and knowledge, will have been promoted - like David McCall, now chairman of Anglia after its acquisition by MAI. Others will have been promoted for continuity's sake (but often in effect sidelined). Many more will have gone, having resigned, or had their services terminated. Typically their departure occurs in two phases: on the day after the takeover (as happened after Tomkins' acquisition of RHM), or a year or two later, after they have helped to integrate the two businesses.
The chief executive of a poorly performing company is most likely to be treated as a scapegoat. In a study of successful turnrounds, researchers Peter Grinyer, David Mayes and Peter McKiernan found that, in 65% of cases, the chief executive (or chairman) was replaced by the new owners. But generally the chief executive of an acquired company has a one-in-two chance of survival. However, this norm can vary considerably depending on the kind of merger. Much depends on the level of integration: on how much technology and manpower are transferred from the new parent, and how closely operations are meshed.
Where a parent company plans to integrate an 60e acquisition closely into its own operations, it is comparatively unusual for the latter's chief executive to stay on. A study of UK takeovers in the years 1989-94 shows that in only 14% of such cases did the CEO survive (see diagram).
The prefigured break-up of Steetley, for example, and the integration of its parts into Redland, contained a clear statement that the target's chief executive and his strategy were both regarded as redundant.
But if integration is low and the acquired company enjoys a fair degree of independence (maybe because it's a good performer or because of the nature of the business), the parent will be less likely to make changes.
There is then a 75% chance that the acquired chief executive will remain, according to the study just quoted. Datastream International, which supplies information to the financial markets, is an excellent case in point having been successively acquired, by Dun & Bradstreet and then by Primark Corp, without management upheaval.
A third post-acquisition option is for the acquirer to conduct a holding operation. Poorly performing buys may be kept at arm's length, to prevent them from 'contaminating' others. Or companies may be held speculatively while the parent decides what to do. In the latter case, the acquired chief executive tends to stay on, at least for a while, although a strategic limbo is generally bad for morale.
David Willis, ex-deputy chairman of Meggitt Petroleum Systems, confirms that 'lack of strategic direction from the new parent can be a source of great frustration to acquired businesses'. Lack of parental interest might easily persuade the acquired CEO that it's time to move on.
Chief executives on the losing side of a takeover battle may nevertheless occupy a fairly strong position, as the diagram shows. The importance and/or performance of their company - relative to the predator - will also bear heavily on their chances of survival. Even though theircompany's performance is no better than average, as long as it is superior to the acquirer's, their chances of staying in the job will improve greatly.
If the acquisition's performance is weak compared with its new parent's, the CEO in question is much less likely to be kept on.
For the chief executives who find themselves out of work following a takeover the first question is usually: how to get back in? The customary route today lies via the handful of executive search firms which act as gatekeepers to the recruiting boards. These are generally agreed that for chief executives to lose their positions as a result of a takeover does not necessarily reflect badly on them. But the way chief executives of a public company handled their exit could matter a great deal.
'What really counts', says David Shellard a managing director of headhunters Russell Reynolds, 'is the way in which the chief executive conducted the defence of his company.' Shellard quotes the example of Stuart Wallis who, as chief executive of Fisons, helped to double the group's share price before its acquisition by Rhone-Poulenc Rorer last October. Wallis, says Shellard, 'handled himself well. With no tarnish to his name there should be no stigma attached to his having been acquired.'
Some chief executives have gone to extreme lengths to defend their positions in takeover battles, resorting to poison pills or ramping up profits.
Actions liable to be damaging to the business will do executives' reputations no good, and media coverage could blacken their name further. In the aftermath of a takeover, perception becomes reality. If ex-executives are not soon approached by headhunters, it is all too probable that they will 'fall off the radar screen' and never be heard of again.
Four options the ex-CEO might want to consider
1 Return to the coal face The most popular option is to get back into a chief executive role as soon as possible. If former chief executives have not passed their mid-50s, they have probably not yet realised their business dream. While they will almost never consider a lesser job than CEO, they may be prepared to accept that role in a smaller company, perhaps in a related industry. Alan Jones, for example, succeeded in switching to a bigger company: after being ousted from Westland, he is now chief executive of BICC.
2 Enter the entrepreneur It could suit the style of many business leaders to adopt a more entrepreneurial role. Thus Michael Guthrie, who was chairman of Mecca Leisure before its acquisition by Rank, set out - with venture capital backing - to look for opportunities in the food sector. He is chairman of Pizzaland as well as of motorway service area operator Pavilion.
3 A pluralist role The ex-chief executive may have had enough of standing exposed on the parapet and prefer a portfolio of four or five non-executive directorships. The takeover by Nestle led Rowntree chairman Kenneth Dixon to add non-executive positions at Bass, Yorkshire TV and British Railways Board to his vice chairmanship of Legal & General. A collector of non-executive positions might find that the chairman's role itself becomes available.
4 A life of leisure After a career of high earnings, ex-CEOs might want to pursue leisure interests. They could, for example, devote time to realising some childhood dream. This could be combined with chairmanship of one or two charitable bodies, even the odd non-executive directorship. But from age 60, retirement is likely to be increasingly favoured. The CEO will by then almost certainly have 'fallen off the screen'.