Looking Beyond the Obvious in Merger Integration

According to a recent study by Right Management Consultants, 77% of mergers and acquisitions do not achieve their original purpose. The finding is consistent – give or take a few percentage points – with numerous other studies by respected consulting firms done over the last several years. Right Management’s study, “Creating Value Through Mergers and Acquisitions,” went on to probe the differences between the way successful and unsuccessful m&a integrations were conducted. The most telling results were that: * There is a dramatic correlation between the effectiveness with which culture issues are managed and the combined company’s long-term business results – based on revenues, profitability, and stock price. * Nearly three out of every five acquirers, or 58%, don’t plan effectively for the cultural integration of the two companies. In fact, many acquirers lack even a vague conception of what it might mean to plan for cultural integration. While they would never consider buying another company without conducting a thorough, rigorous financial and operations due diligence, it doesn’t occur to their managements to scrutinize the human side of the equation with as much care. Rather than concentrating on integrating the two cultures, post-merger integration efforts are generally geared toward combining the tangible assets – finances, IT systems, real estate, etc. – to achieve maximum cost reductions. What goes unrecognized is that, as Right Management’s study shows, the way the so-called “soft” issues are managed can have a dramatic impact on the success of a merger. After all, business objectives can be achieved only when good people are there to achieve them, and when those people feel committed to getting things done. Insurance Against Failure With that issue in mind, we developed a new concept, organizational due diligence, or a systematic approach to evaluation of culture and people issues. As analytical in its way as financial due diligence, this process is designed to uncover and identify both the strengths of the two cultures and the potential pitfalls that will need to be negotiated before they can be successfully combined. It’s specifically designed to identify often subtle and less visible behavioral and cultural facets in a combined company and determine how they impact business performance. When properly performed, organizational due diligence is as effective a form of risk management as the financial investigation – an insurance policy against the failures that frequently mar the best-intentioned mergers. Organizational analysis promotes not only cultural fit but also smoother transitions for the groups and individuals affected, the retention of key talent, and higher levels of morale and productivity during and after the integration. Our research has shown that three human resources issues are highly correlated with achieving value and growth after a merger: * Accurate assessment of cultural differences and similarities; * Alignment of culture with strategy; and * Effective change management. Organizational due diligence is structured to address each of these issues. Accurate Culture Assessments In both interviews and open-ended questionnaires, the executives surveyed by Right Management frequently mentioned differences in organizational culture as an integration problem and source of frustration. Interestingly, although 64% of the mergers represented in the study were international in nature, mergers that spanned geographical boundaries were no more likely to encounter cultural difficulties than those involving two companies in the same country. This strongly suggests that differences in organizational culture, rather than national distinctions, are most likely to present problems that need to be addressed directly if integration is to succeed. A company’s culture cannot be reduced to its operating practices and processes. Rather, it’s “the way we do things around here” – or the sum of all individual behaviors over a long period of time. So the first thing the organizational due diligence team must do is to note the ways in which the underlying beliefs, assumptions, and values of the target company manifest themselves. That means finding out how decisions get made, how hierarchical the company is, what degree of teamwork exists, which modes of communication are used, and how high or low the level of employee satisfaction is. While much of this information can be gathered through formal and informal discussion with employees, surveys, and focus groups, there are also other clues, such as: * The way employees address supervisors and managers; * How they relate to people at higher levels of the company; and * Even the sizes of the executive offices. One acquirer executive remarked that she could tell a lot about an organization’s culture if the due diligence team was “shuffled off to the executive lunchroom” during discussions, pointing out that just the opposite – openness in communication – is what’s needed most at this time. An experienced member of Cisco Systems Corp.’s deal team was quoted as saying, “Sometimes it’s what they don’t talk about that seems most significant, the points that they don’t bring up. Have they asked what the transition will mean to their people, or only what it will mean to the executive team?” How can these concerns be handled through systematic organizational due diligence? Involving HR staff For optimum results, the team an acquirer assembles to conduct the organizational due diligence should include HR people. They are too often left out of the integration planning even though they are trained to be sensitive to issues like how people interact with their bosses and their peers. HR people may also be more attuned to grasping the relationship between the different cultural elements. For example, in a company in which senior executives hoard information, decision-making at lower levels will be hindered. When decisions are made at the top, there will probably be less teamwork throughout the firm, since teams are essentially decision-making bodies. There will probably also be fewer two-way communication processes in place. HR people are likely to be skilled interviewers who can ask the sorts of questions that will reveal areas of resistance that must be dealt with. Sometimes, people without direct power can have a strong influence on how others perceive an acquisition. Bringing these key influencers on board and gaining their commitment (issues dealt with in more detail below) can contribute enormously to the success of integration. Culture compatibility If the merging companies have similar cultures, it obviously makes the job of integration easier. But differences do not necessarily mean incompatibility. Competitors deliberately develop distinctive cultures to differentiate themselves. For example, one company may value highly independent, hard-driving executives, while the other values a slower, more cautious management approach. If these two styles are combined in a merger, the differences must be addressed if a truly combined culture is to be achieved. Compatibility need not mean sameness, however. The two firms may be able to keep some aspects of their distinct cultures and still be successful. In that case, what the organizational due diligence team needs to determine is whether the underlying values of the two companies are aligned. Take customer focus, for example. One company’s customer focus may take the form of delivering products on time, every time. Another’s may be expressed by working with customers to clarify and explore what they require and then figuring out how products and services can be modified or developed to satisfy those requirements. Because the underlying value is the same, the companies could still be compatible, even though the cultures may remain different. Conversely, two companies could seem to have the same values while really maintaining very different values. Just as the culture may not be accurately reflected in the vision statement, you can’t always judge a company’s values by what it says on the banners in the elevator. Both companies, for example, could claim teamwork as one of its chief values. For one company, teamwork might mean allowing groups of non-executive employees to make joint decisions affecting their work (similar to the circle of quality approach). Yet, the other might regard teamwork as “doing exactly what the boss says!” – hardly a view of teamwork to the naked eye. The key is to get behind the language and determine whether the words and the practice are the same. Culture/Strategy Alignment To successfully execute the strategy that the newly merged entity has chosen to pursue, it’s crucial to make sure that the culture of the combined company is aligned with that strategy, and positioned to support it. The organizational due diligence team’s findings on the target company’s culture can be very useful in determining what changes may be needed and where resistance is likely to come from. Obviously, the strategy chosen will depend on the purpose of the acquisition. If a company is bought for its markets only, and the acquirer intends to shut down facilities and eliminate much of the workforce, aligning the culture with the strategy will mean, in effect, integrating the target into the acquirer’s culture. In that case, the organizational due diligence’s findings will be useful if they indicate just how difficult such a melding is going to be, and where the pitfalls lie. But if the merger is designed to create a genuinely new company out of the merged strengths and assets, the acquirer will need to understand the cultures of the two partner companies at a behavioral level and to recognize what behaviors and practices will need to change to affect the strategy driving the combined operation. In such instances, it’s wise always to assume that both businesses, not just the one being bought, are going to change significantly, and that some elements of the target’s culture will be better suited to help the combined company operate in its new market environment. Otherwise, the buyer may lose an opportunity to capitalize on the very strengths that made the other company an attractive target in the first place, thereby jeopardizing the profitability of the merger. The information gathered by the organizational due diligence team should, therefore, be used to help assess not only what cultural aspects of the target should be changed but also what would make solid business sense to preserve. The ideal in this type of acquisition is to combine the strengths of both companies to create a more competitive entity. For example, when a large IT outsourcing company bought a firm that had been started by a group of defectors from its own ranks, it performed an organizational due diligence and found that the smaller firm was much more responsive to its customers. On the other hand, it wasn’t as profitable as the buyer, which was a highly efficient company, expert at driving out costs. Based on the findings of the organizational due diligence team, the acquirer established a strategy under which the new company would focus on finding ways to maintain as much of the target’s customer responsiveness as possible without sacrificing the cost efficiencies the acquirer had achieved. Leadership issues A successful merger is largely dependent on effective leadership at all levels of the company, not only in top management positions. Often, because the strategy of the post-merger entity is different from the stand-alone strategy either company had pursued, leaders who were effective in the pre-merger organizations will need to learn new skills. If that’s not possible, they may need to be replaced. The information gathered during the organizational due diligence can help the acquiring company to identify leaders who seem best equipped to succeed in the merged company – people who already have demonstrated the kinds of competencies that will be critical for implementing the new strategies. For example, in the case of the IT outsourcing company cited above, what kinds of competencies will leaders need to support the strategy of being simultaneously cost-efficient and responsive to customers? Since the strategy itself calls for a balance between two seemingly contradictory goals, the leaders best suited to support it will help their people make balanced decisions, be able to demonstrate balanced decision-making for them, and recognize when that type of decision has been made. Leaders who show a great need for control and who can’t tolerate ambiguity are less likely to demonstrate those delicate skills. Assessing HR systems The organizational due diligence team also will surface evidence on what changes may be required in the combined company’s human resource systems – i.e., performance management, training and development, and compensation and reward systems – to ensure that the post-merger culture will be aligned with the strategy. Some potential questions that may arise: * Are people currently being assessed, developed, and rewarded in terms of the kinds of behaviors that the new strategy will demand? * Is the message about what behaviors will be expected of them contradicted by the systems currently in place? * Are there elements of the target’s HR systems that will need to be changed? * Are there elements that the buyer should make a special point of preserving? It’s important to analyze the target’s HR systems in terms of parity and compatibility with the acquirer’s in order to determine, for example: * Whether there are obligations at the target that the buyer may be reluctant to meet. * Whether target employees will be faced with a decline in development opportunities or in compensation that could give rise to resentment. Identifying potential problems during the organizational due diligence phase enables the merged entity to develop solutions before the success of the merger is jeopardized. Effective Change Management Often, the members of the organizational due diligence team will have broader knowledge of the target employees than anyone else. In a sense, they are the buyer’s in-house experts on the target’s climate, culture, and personnel. The team’s input thus will be uniquely valuable when it comes time to plan and implement the change management process – identified in the Right Management study as key to the success of a merger – for the combined company. Their observations of the target’s organizational structure and decision-making style, their interviews with people at various levels of the target, and their analysis of the acquired company’s HR systems, will provide crucial insight into what the key issues and likely pitfalls will be. This is particularly important in light of the fact that Right Management’s latest study shows that the target’s employees generally have a much less positive view of the merger than the acquirer’s. They rate the handling of culture issues dramatically lower than their counterparts in the acquiring company. Again, this finding was consistent for both international acquisitions and those involving companies in the same geographical location. Obviously, the buyer is not going to get the highest level of performance out of demoralized employees, which means that the deal synergies it hoped to achieve are not as likely to be realized. In some cases, the acquirer actually winds up losing the talent it paid for, because target employees leave or are recruited by competitors. Effective change management is absolutely essential to avoid an erosion of the skills base. Communication issues Whatever the nature of the two cultures to be merged, communication is a key tool in engaging employees – gaining their commitment to, and preparing them to deal successfully with, the changes that will take place. It’s impossible to overestimate the importance of frequent, direct communication with employees at all levels, explaining the nature of the changes that will be made, the rationale for them, and the strategic rationale for the deal itself. The message should begin on the day the merger is announced and continue throughout the integration period and beyond. The findings of the organizational due diligence team can be used to identify key points for the acquirer to focus on in the communications program. Throughout the integration process, and particularly when hard business choices need to be made, the buyer must reinforce the message that the target represents real value, and that measures will be taken to preserve that value. The message can be effective, however, only when the buyer’s perception of the company reflects the perception of those who work in it. If target employees don’t recognize the entity the acquirer describes, no amount of communication will achieve the desired commitments. The data gathered during organizational due diligence also will help to determine what media should be used to get the message across. Should the formal announcement of the acquisition, for example, take the form of a simple e-mail to all employees? Or would a town meeting format in which the new employees meet the acquirer CEO and air their questions and concerns be more appropriate? The decision may depend on what type of communications the workers are used to – another priority finding for the team. Other information might pertain to specific groups in the company and how to communicate with them most effectively. In particular, the acquirer will need to understand what form of communication should be undertaken with the sales force. Neglect of these key revenue producers during integration can have disastrous results. Sales people often reject new products outside of their comfort zone and are reluctant to approach new buying centers in existing customer companies. They must be properly reoriented to sell more and handle more product. Meanwhile, customers may have negative feelings about the merger, and this opens the door for competitors to take advantage of any uncertainty to try to improve their own position. This negative combination of responses among the sales force, the customer base, and the competition can cut into revenues at a time when the goal is to increase them. In order to keep morale high and misunderstandings at a minimum, communication with the sales force should begin as soon as the planning for integration gets underway and should continue throughout the integration process. Sales people will require both reassurance and a steady, ongoing supply of information and updates on what’s happening, what changes will affect their role, what is expected of them, and who they can go to for help and support concerning new products and initiatives, including selling customers on what benefits they can achieve from the merger. Finally, the organizational due diligence team can identify key people to enlist in the communication effort. Ideally, these should include middle managers, who are often overlooked during the integration process even though their commitment is vital to the success of any merger. Middle managers tend to have extensive influence networks, which can include people at all levels of the company. They can “spread the word,” both formally and informally, and if they’re enthusiastic, they can convert others to the cause. Often, however, they are merely lumped together with front-line employees, and no special effort is made to communicate with them or to enlist them as communicators. To Change or Not to Change Sometimes what looks most important to the outsider, or to the senior executive on the financial due diligence team, is not what matters most to the average employee. There’s a danger that buyers will change or get rid of things that seem unimportant to the outsider but that are highly valued by employees. They may be symbols of the company’s beginnings, or part of a long tradition, or associated with a well-loved figure. Maybe an employee would rather have a free turkey at Thanksgiving than a seminar on productivity. Maybe a softball game between two divisions whose friendly rivalry has spanned 30 years gives people more of a sense of company spirit than a framed and laminated mission statement. In the case of acquisitions involving two different national cultures, of course, the possibilities for misunderstanding can be even greater. But whether the acquisition is national or international in scope, the data-gathering activities of the organizational due diligence team should prove helpful in determining the symbolic value of various aspects of the company’s culture. By conducting an organizational due diligence, and then ensuring that the people issues identified as significant are directly addressed during integration, merging companies can significantly increase the probability of achieving their profitability goals. That’s why savvy buyers are beginning to pay more attention to the human side of the equation, rather than focusing on the numbers. Stephen J. Wall is the Global Business Leader for the Organizational Assessment practice at Right Management Consultants, a Philadelphia-based firm specializing in career transition and organizational consulting. 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