Merger of Packaging Makers Can Face Cultural Challenges

Delivering on the promise of a $16 billion paper merger may require some precision. Stockholders in the packaging giants Rock-Tenn and MeadWestvaco will share their combined company evenly, with a roughly balanced board.

Investors are already expecting $300 million of promised annual savings, pushing up the stocks of both companies. But mergers that look equal can still provoke business and cultural upheaval.

The deal seems finely tuned to avoid suggesting a takeover. Stockholders in Virginia-based MeadWestvaco will trade their shares for 50.1 percent of an as-yet unnamed new company. Investors in Rock-Tenn will get the rest.

Steven C. Voorhees, Rock-Tenn’s chief executive, will run the combined group, with MeadWestvaco’s John A. Luke Jr. serving as non-executive chairman. Rock-Tenn will also hold two more board seats than its smaller rival, an arrangement that should counterbalance MeadWestvaco shareholders’ slightly larger economic stake.

The combined firm could be a formidable No. 2 to industry leader International Paper. Management says it expects to wring out some $300 million in annual savings over three years through better procurement, more efficient use of mills and the like.

After taxes, that’s worth about $2.1 billion in present value, the same amount the combined market cap of the two companies increased by after investors heard about the deal. Rock-Tenn shares rose 10 percent and MeadWestvaco stock 18 percent in early trading on Monday.

The increases fit a recent trend of investors giving transactions a favorable reception. But they also obscure challenges ahead. In 2011, for example, Rock-Tenn’s $3.5 billion purchase of container-board maker Smurfit-Stone stumbled initially over a “cultural difference,” according to Morningstar. Mr. Voorhees, who was promoted to chief executive in 2013 from chief operating officer, eventually got the combined businesses on track. The MeadWestvaco merger is, though, a far bigger project.

The Rock-Tenn chief executive says it makes a difference that Monday’s deal is a merger rather than a takeover. But shareholders should be skeptical.

Recent transactions like Omnicom’s failed merger with rival advertising agency Publicis and Glencore’s acquisition of the mining giant Xstrata show that power struggles and politicking can be fierce, even in so-called mergers of equals. In deals where one party has the upper hand, the rules can be a lot clearer.

Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.