Former Tobacco Rivals Reynolds American, Brown & Williamson Prepare to Merge

Source from:  Winston-Salem Journal  08/13/2004

Behind the scenes over the months a small army of people have been planning the integration of former rivals R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Corp. Planning is critical to making a corporate marriage a success, merger experts said. Now that the deal has closed, employees are hard at work implementing all their plans. The full integration of the combined company, which is the main operating subsidiary of the newly created Reynolds American Inc., will take from 18 months to 2 years. As employees observe and go through another huge change, Reynolds American and Wall Street have high hopes that the deal will deliver on the promise of substantial cost savings and a stronger company that is better able to compete in the U.S. cigarette market. "We have been competing against each other for many years, but we've both brought a tremendous amount of creativity and innovation to this industry," Susan Ivey, the chief executive of Reynolds American said last week on a conference call with analysts and investors. "We have very similar values, we have very similar policies between the two companies and I'm really excited about the way they will come together." Jeffrey Eckmann, the executive vice president of strategy, planning and integration for Reynolds American, said that more than 350 Reynolds Tobacco and Brown & Williamson employees have been working on integration planning. Those employees, divided into 13 different groups, cover various parts of the business, such as finance and communications. Under those groups there have been 75 subgroups responsible for planning even more detailed functions of the combined company. Their job has been to examine how the combined company should operate, and what company's practices to adopt. In some cases, new practices will be implemented. Merging two large companies is never easy and merger success is certainly not a given. In fact, research shows that most deals do not live up to their billing. A 1999 study done by A.T. Kearney Inc., a management-consulting and executive-search company based in Chicago, said that only 42 percent of mergers create substantial returns for shareholders and 58 percent actually destroy value. A high number of acquired companies are shed by their purchasers a few years after a deal closes, said Jeff Krug, an associate professor in the Walker College of Business at Appalachian State University in Boone. But the good news for Reynolds Tobacco is this -- the A.T. Kearney study also found that the mergers of companies in related fields make up 75 percent of all deals that have a relatively high success rate. When a company is consolidating operations as in the case of Reynolds Tobacco and Brown & Williamson -- those mergers typically succeed. "They tend to work out fairly well," said Sheldon Balbirer, an associate professor and director of the master's of business administration program at the Bryan School of Business & Economics at the University of North Carolina at Greensboro. Brown & Williamson's headquarters in Louisville will be closed as well as its plant in Macon, Ga. The combined company's manufacturing and administrative operations will be consolidated in Forsyth County. Communicating with employees about the company's direction is critical to employees and for morale, experts said. "Employees do have to have some credible vision of the future that is communicated effectively to them," said Aneil Mishra, an associate professor of management at the Babcock Graduate School of Management at Wake Forest University. Mishra said that communication to employees has to go on before, during and after a deal. "Managers can't share enough information," Mishra said. However, that doesn't always happen. "I think they err on the side of not sharing enough information." One reason why deals do not work out sometimes is that there is a cultural clash between the companies. Krug experienced that first-hand when he went to work in finance at Kentucky Fried Chicken after it was bought by PepsiCo in 1986. The two companies were not alike, Krug said. PepsiCo, based in Purchase, N.Y., had an aggressive, hard-line, performance driven approach. In contrast, KFC, based in Louisville, had a more genteel personality. "I think that was one of the major integration problems that PepsiCo had with KFC," Krug said of the clash in cultures. "The two sides ended up not liking each other very much." PepsiCo spun off the KFC, Pizza Hut and Taco Bell businesses as Tricon Global Restaurants Inc. in 1997. Cultural clashes overall are not expected to be big problems at the combined Reynolds Tobacco. Eckmann said that there are more similarities than differences between the companies. Ivey, the Reynolds American chief executive, described it as "tremendous chemistry between the two companies." Enditem