Article from ACG HUB NEWS
October 29, 2004 FEATURE ARTICLE

Merger & Acquisition Rumor Mongers

"The trading floor of an exchange is an environment where a higher concentration of people is subjected to more incomplete information bits flying around than anywhere else."
F. Koenig, Rumors in the Marketplace, 1985

A Case In Point
In January, 2000, Cisco Systems, Inc. acquired another New England telecommunication company, Altiga Networks. Following their routine practice, they performed due diligence and avoided information leaks by holding most executive meetings off-site. The few necessary on-site analyses did not go unnoticed in the small firm (75 employees). Cisco analysts were recognized, and the rumors began.

Two years earlier several key Altiga employees left Microcom when Compaq acquired that company. They "knew the drill" and passed it on. Before the deal was announced, not only were many of these key Altiga employees gone, but their rumors had increased the trading and price of Altiga stock. Increased stock prices drove up the acquisition price and led the SEC to initiate an investigation for insider trading.

Departing employees included some who successfully imbedded RSA Data Security making Altiga’s Virtual Private Network (VPN) the most trusted security technology in the industry. (See The Tolly Group, 07/02/99) Others from sales took valued customers with them. Though Cisco had the technology, they had nearly doubled the costs, a looming SEC investigation and the loss of valuable employees and customers.

Most people today have worked for an organization involved in an M&A. Everyone knows "horror tales" of lost jobs and disappointed employees. Although the numbers of M&As dropped off during the recession, these deals are picking up, but with a difference today. The margins for error that the economy could absorb before the recession now can mean not only the deal fails, but the entire organization faces failure.

Rumors are a fact of life, no less so in organizations. People, natural storytellers, love to hear rumors and pass them along, even faster with the computer.

" Hearsay" includes rumors and gossip and has been around as long as human communication. (See R. Rosnow and Fine, G.A. Rumor and Gossip: The Social Psychology of Hearsay, NY, 1976) Gossip is always about people; rumors may or may not involve people but are always speculative. Rumors are packaged with presumed backing often in a preamble like, "You can’t repeat this." Or "A source at the top said..." People misrepresent others’ comments, reading things that are not there into what they hear.

While some people do better than others with change, few do well with uncertainty. Fears of the unknown, worse than fears of known specific change, arouse concerns of losing control. When people face uncertain situations, they exercise control with rumors, drawing conclusions without checking accuracy. They take a grain of truth and infuse it with their own fears and anxieties. Fueled by anxious uncertainty, these rumors pop up anywhere and spread along interpersonal relationships.

Surrounded by incomplete information, people try to make sense of the world around them. Knowing minimal facts, they make up the rest to build a credible, complete story. Any truth originally present is lost among more interesting additions that develop through distortion. The contrived story typically describes the worst case scenario as fact, in an effort to play it safe. People do all this as a protection from further loss of control.

Costs of Rumors to M&A Deals

In any organization rumors cost time wasted while people contrive and spread these stories, estimates of at least 15%. Wasted time translates into lowered productivity and increased production costs.

With an M&A in the works, the costs of rumors escalate. Employee rumors filter out to customers, stock owners and other stakeholders. They react by withholding orders, buying/selling stocks, etc. Business news media capture any story big enough to attract readers’ attention.

People involved at the grass roots of M&A deals know that such leaks disrupt the timing before due diligence. The acquirer looks to an early, unencumbered exploration for a beginning sense of whether the deal is worth pursuing with an expensive due diligence. Information tainted or biased by rumors brings little to no value.

Leaks during the due diligence phase have consequences like those described in the opening case. Employees, valued for certain unique contributions, hear rumors about their company being sold and rush to protect their own interests. The uncertainty of what will happen to them exerts a powerful force. In addition to time lost while preparing to leave, their less focused attention on work results in diminished productivity and quality.

Customers who fear changes in service levels or accustomed product quality seek out competitors, even ones rejected in the past. In their view, it is preferable to control things while they still have control. Lost valued customers and lost vital employees represent the two most often cited causes of M&As that disappoint parties to the deal.

M&A Rumor Avoidance and Management

Executives and managers must take a proactive approach that begins by acknowledging they can control neither what people will worry about nor what they will believe. Management credibility offers a powerful tool for this as it can both quell rumors and limit their formation. The best advice we know is to be clear, be early and be right.

If management belittles or discredits a rumor, the believers interpret this response as a criticism and cling more strongly to the story. Instead, managers must acknowledge a rumor’s existence and respond without defensiveness.

Planning all communication about the M&A well ahead and in detail provides another crucial step. Executives and managers who have not planned what will be communicated, to whom and when tend to "shoot from the hip." They say whatever comes to mind when questioned. Statements from someone with positional power carry more weight than others.

The costs of the Cisco deal, nearly double those projected, have yet to be recovered, almost 5 years later. Can a large, successful company absorb such these costs in today’s economy? The jury is still out.



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