from ACG HUB NEWS
October 29, 2004 FEATURE ARTICLE
Merger & Acquisition
"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,
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.
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.
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
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
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.
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
Surrounded by incomplete information, people
try to make sense of the world around them.
minimal facts, they make up the rest to build a
complete story. Any truth originally present is
lost among more interesting additions that develop
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.
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
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
customers and lost vital employees represent the
two most often cited causes of M&As that disappoint
parties to the deal.
Rumor Avoidance and Management
Executives and managers must take a proactive
approach that begins by acknowledging they can
what people will worry about nor what they will
believe. Management credibility offers a powerful
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,
must acknowledge a rumor’s existence and respond
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