Guest Article – Subtle Conflicts that Wreck Merger Visions: Issues like competition among newly merged firms or divergent cultures can undermine even the most strategically sound deals.

The marriage of the banks looked great…on paper. In the marketplace, the combined organization ran into serious problems that threatened its success. Under the plan, a regional bank acquired a handful of smaller community banks. All of the banks involved had built prestigious histories and solid reputations over the years. All had loyal customers and respectable balance sheets. The acquisition was a key component of the regional bank’s long-term marketing strategy. It wanted to expand into the affluent residential areas serviced by the community banks without the capital expense of constructing new facilities. Furthermore, it wanted to capitalize on the longstanding reputations the community banks enjoyed with their respective customer bases. The community banks’ names as well as product offerings and services would be retained. In fact, by design, the only difference customers would notice was a reference to the acquiring bank’s name in all marketing materials from the community banks. Autonomy of the community banks was a priority and was even promoted as a perceived value, in order to assure customers that nothing would be lost in the acquisition and that the individual identities of each of these banks, a critical part of their appeal, would be retained. Indeed, stability was a key message that the larger bank would convey to all customers to assure them that this change was good and that the larger entity of the combined banks would offer them greater stability and security for their accounts and transactions. Perhaps most critically, this autonomy extended to the banks’ sales forces. Management remained largely untouched, sales territories were kept intact, and the respective incentive programs for each sales team were retained. Again, the logic behind this decision seemed sound: Competition among the banks still would be welcomed, even encouraged, so each bank could continue to grow its customer base and add to the revenues of the combined institution. Best practices would be adopted and passed along to other members of the new banking “family.” The Conflicts Not long after the deal was completed, numerous subtle yet altogether important problems arose that threatened to compromise the cohesion of the newly merged sales forces and the ultimate degree of success of the venture. The disappointing early results were rooted in these troubles. Ironically, differences had been anticipated in the design of the acquisition plan. But conflicts that had not been so readily apparent began to surface as the combined sales unit emerged under the new banking system. These conflicts included: * Competition between sales forces that had not been given clear goals under the new system; * Longstanding competition among community bank presidents who were now part of the same “family” of banks; and; * Competition among the sales forces of the acquiring bank and the community banks, all of which shared some overlapping territories under the new system. Anticipating and then identifying sales force conflicts – overt and subtle – in advance of the actual closing date is essential so that the new organization can minimize the time involved in bringing disparate sales forces together and zero in on the marketplace as fast as possible. But for this scenario to succeed as envisioned, the larger bank would have to reconsider the typical “hands-off” approach in such acquisitions, wherein the acquiring firm leaves the structure and management of its smaller targets virtually intact. In this instance, some consolidation was vitally needed as a means of easing people conflicts. But the pledged autonomy backfired because potential conflicts were overlooked as a result of the acquiring bank’s zeal to expand, the lure of enhanced revenues, and the prestige of an association with a long-established institution. The story of the two banks has a happy ending. A program was implemented to provide a clearer marketing focus for the entire organization, not just the individual banks, and the overriding vision has been redirected to concentrate entirely on the customer. Indeed, better, more competitive products and services, with consistent process and structures, have emerged as a result of this redesign, including better estate planning, improved business planning and services for commercial customers, and enhanced retail services, such as mortgages and investment services. Nevertheless, resistance to these changes has been substantial. Memos from several executive offices, calling these changes “bad ideas” and describing them as “overt power plays,” have flown throughout the organization. Those who stood to lose power and authority because of the changes have presented the greatest resistance; some have quit altogether or have been asked to leave. But the overall health of the banking family has improved markedly. It is not unusual for merger partners to be blinded to potential conflicts. Typically, organizations working through the myriad issues of mergers and acquisitions address the financial issues and even certain compensation issues yet fail to address critical issues of organizational style, business process development, and structure. Experience suggests that the active creation of a new cultural context for all affected parties produces the best long-term results. Considering the Not-So-Obvious In the case of the banks, the following issues were neglected: Key style differences and history of competition among the community banks. The entrepreneurial spirit that launched each of the smaller community banks had never faded. The banks had competed aggressively with one another for years and ultimately found it difficult to share their best practices with the combined bank if their long-time competitors would benefit. Incentive systems for each bank’s sales team. None of the incentive programs designed for each of the banks was effectively integrated under the acquisition plan. That resulted in a highly fragmented sales force that, not coincidentally, also competed with the acquiring bank’s own salespeople and further undermined any efforts to convey a message of cohesion to the customer base. Overlapping and conflicting sales territories. The acquisition actually made several sales positions redundant. The acquiring bank should have consolidated these positions, which would have added directly to the bottom line but would not necessarily have negatively impacted the community banks’ identities. The Case for Autonomy Autonomy generically is considered beneficial in most transactions linked to a strategy of allowing acquired people to operate and perform as they know best. However, there are limits to autonomy based on an acquirer’s overall strategy and acquisition strategy and invariably there must be some management and variation in the basic concept. Consider the experience of Johnson & Johnson, a world leader in providing health care products and services that has grown through acquisition. Johnson & Johnson long ago concluded that allowing acquired businesses to maintain their individual identities results in the most effective “marriage” for both organizations. But the company allocates autonomy within a finely conceived strategic framework. Johnson & Johnson buys businesses that are winners – companies with well-established positions and strong brand identification in their marketplaces. Their products are complementary to the Johnson & Johnson product line and tend to be on the cutting edge. In addition, Johnson & Johnson may acquire businesses whose organizational cultures are well defined, and often differ radically from other Johnson & Johnson companies. For example, a business with a strong interest in emphasizing technological innovation could be incompatible with a firm whose culture stressed market differentiation through service excellence. However, Johnson & Johnson distills the best practices from each business it acquires and attempts to “graft ” these practices onto the other companies in its family. The individual companies do not lose their identities as a result of the “marriage.” Lessons Learned An important difference between Johnson & Johnson’s strategy and the autonomy approach used by the banks was product dissimilarity. Johnson & Johnson never buys businesses that compete with its own product line. By contrast, the banks never consolidated their own competing product lines and pricing structures or, for that matter, their customer databases. Moreover, all sales metrics for the various banks were kept separate, so there was virtually no frame of reference for comparison of sales revenues and related data. Beyond the “nuts-and-bolts” issues between two organizations involved in a merger or acquisition, one critical question that must be addressed to effect a relatively smooth transition is the degree of similarity or divergence between the two predominant organizations. This question generally was overlooked in the bank acquisition scenario. Say the overall cultures are more dissimilar than they are similar, and their market successes have at least in part been attributable to the culture and its associated values. Then it is important for these organizations to maintain separate identities, capitalizing on some level of difference while carefully structuring what they will do together. In the matter of the banks, for example, the individual banks’ cultures were so competitive that they conflicted with the very heart of the sales management goals. Certainly, the individual identities of each bank were preserved, but, to whatever extent possible, the individual sales forces needed to be integrated and focused on the common goal of higher revenue for the new system. If the level of competitiveness made this goal unfeasible, then the deal should have been scrapped. Key approaches to easing conflict include: Communicating the strategic context of the merger. An overlooked part of many mergers is putting into perspective the reason for bringing the two companies together which the press may not have perceived or reported. Creating a communications plan to clearly position the merger to the employees is critical. The top performers, particularly in sales, need to be assured of their importance. Establishing an organization structure and its key players. Almost immediately, the new organization structure needs to be created and the leaders need to be identified. In the sales area, key executives with strong track records can be used to rally the troops. Looking for opportunities to consolidate overlapping functions. Shareholders expect there to be improved revenue opportunities, reduced overall costs, and increased profits. But sound consolidation also can simplify the marketing plan. Redundant functions need to be consolidated so that the company can center on the best people and functions available. Installing common metrics and measures. Ways to measure the improvements and key ratios must be identified. This enables the newly merged company to track the success of the organization and its processes. The system also creates universals benchmarks for sales force performance. Building an integrated sales management discipline. Executives of the combined company must establish the ways that the new company will operate, including how centrally controlled or decentralized the decisions will be. This is also an important time to establish how individuals will treat one another, to open the lines of communication, and to forge trust between the management team and the employees of the new organization.