Preferred Issues: Crash Course in Communication for Financials

In some ways, navigating a recession is like navigating a merger, particularly when it comes to dealing with employees’ uncertainty about their jobs.

Wells Fargo & Co., which for now does not appear to be giving Wall Street much to worry about on either front, is certainly going to be tested in the coming months as it pushes forward with a pair of acquisitions even as the economy slows down.

In the most recent of these deals, for the financial, tax, and estate planning firm H.D. Vest Inc., Wells itself has set the bar fairly high. (See story on this page.) Not only would the merger need to exceed the market’s expectations for each of two merger companies on a stand-alone basis, it would also have to top the expectations created by the deal’s high price.

Indeed, judging solely by the agreed premium, it is clear that Wells Fargo expects a lot.

To be sure, the roughly $127 million that Wells plans to pay poses little financial risk to the company. But the fact that Wells would be paying essentially triple what H.D. Vest had been trading at when the deal was announced — and more than double H.D. Vest’s peak share price last year — speaks volumes about the potential Wells sees in the customers and the additional service channel H.D. Vest would bring.

The deal followed Wells’ considerably larger one for the insurance agency Acordia, in which it would pick up another point of contact with retail customers and in the process beef up a line of business that it expects to complement its core — again, all without raising much concern on Wall Street.

If it works according to plan — and the team at Wells has shown itself adept in this area — the follow-up to the deal announcement will involve an intense get-out-the-mission-statement drive to employees wondering where they stand

“One of the rules of an effective merger is that you can’t ever communicate enough,” said Jeffrey Schmidt, a managing director at the consulting firm Towers Perrin.

Mr. Schmidt, who edited the soon-to-be-published book “Making Mergers Work,” said most fail (a variety of studies have suggested repeatedly that fewer than half of all mergers achieve their stated goals for shareholder returns and revenue growth) because of how companies handle personnel.

Like the stock market, organizations cannot withstand uncertainty for long, Mr. Schmidt said. So anything senior management can do to spell out its vision for the organization after a merger will help offset the risk of lost productivity.

These principles might well carry over to how companies deal with the strains of the economic slowdown.

With many financial firms confronting sharp declines in lines of business, the possibility of layoffs looms in the minds of workers. As a result, many consultants — and investors, for that matter — seem to prefer quick dissemination of information as soon as possible after a decision is reached.

Of course, one of the rules of effective communication is knowing what not to say — or at least clearly signaling how much of your message is subject to review. Take Charles Schwab Corp., for example. For all its good intentions in pledging to avoid layoffs earlier this year, the brokerage company may now find itself saddled with a lot more uncertainty, both within its own ranks and on the Street, than some of its peers.

Schwab’s job cuts, which it estimated at 3,400, will amount to about 13% of its work force (though none of the layoffs will hit U.S. Trust, where results remain strong). And after the announcement, analysts were quick to suggest that the cuts might be only the beginning. Depending on how the market performs, Credit Suisse First Boston analyst Jim Marks said, the company might well find itself cutting thousands more jobs.

And given the reversal of Schwab’s message on its first round of cuts, worries about more down the road may be all but impossible to contain.

“The rule about communicating assumes you know what you’re going to say and you mean what you’re going to say,” Mr. Schmidt said. “You can communicate with people in a way that says, ‘We don’t have all the answers.’ That’s a lot better than making pronouncements that you have to go back on, which is where you lose all credibility.”