Mating Markets With CulturesFor a Better Deal: Merger-threatening culture clashes may be rooted in significantly different ideas of how acquiring and target managements should attack their marketplaces.

The right or the wrong moves in the areas of market strategies, culture, and integration are among the most commonly cited reasons for the success or failure of a merger or acquisition. Analysts and acquirers, however, tend to treat them as isolated factors when in fact all three are inextricably interconnected. This article explores the connections between markets, organizational behaviors, and integration strategies and how understanding and managing these connections can help “make the deal real.” It is often stated that differences in corporate cultures doom an acquisition or a merger. Our experience is that the organizational culture is secondary to how the managers of the two firms view their markets. Another way of putting it is that many mergers fail because integration strategies focus on the requirements of the acquirer without accommodating the powerful and often different market demands of the acquired business. The seemingly obvious statement that an integration strategy must take into account the market demands of the target is not as simple as it appears. The purchaser’s market demands may, in fact, conflict with the market demands of the target. This is the real source of conflict between the two companies which needs to be addressed and resolved at the earliest time. One way in which that conflict may develop is when, after closing, managers of the acquiring company, usually those a couple of levels below the top-executive dealmakers, impose certain requirements or behavior changes on the newly acquired business. The demands may be expressed in financial terms, such as revenue targets, return on investment criteria, or net income goals, or in non-financial terms, such as financial reporting frequency or format, changes in operations or business practices, hiring decisions, policy shifts, or new product introductions. The acquired business has operated under practices that have made it successful because it was aligned with its market demands. Now, the target is told to change these practices or add others which may throw it out of alignment with its market. Reaching decisions that result in beneficial changes while eliminating those that unbalance the target requires compromise. If the purchaser is to meet the financial targets of the deal, it will have to compromise or accommodate at least some of the target’s traditional operating or policy practices. The challenge is to isolate which of the acquirer’s practices will impede the target’s market performance and, without ceding control or authority, shelve them to provide the newly acquired business with freedom to maneuver. Second, even before the issue of compromise on individual practices is dealt with, the more critical question is how to determine whether there indeed are different market environments that require different organizational behaviors. Often, market demands are articulated in organizational themes such as a difference in the cultures of the combining firms. That may paper over the real root of the conflict. For instance, if Exxon Corp. were to acquire Pfizer Inc., one would quickly conclude that they operate in different markets that axiomatically require different organizational behaviors. Gasoline giant Exxon, with few opportunities to differentiate its product, operates in a cost-conscious environment, while pharmaceuticals producer Pfizer, with great opportunities for differentiation, stresses innovation. So, if Exxon began imposing a cost-oriented structure on Pfizer, such as cutting its biggest cost area of research and development, Pfizer’s new product introductions would slow down, with negative consequences to earnings and the success of the acquisition. Contrasting firms like Exxon and Pfizer that are in extremely different markets is easy. But a far greater number of acquisitions involve firms in related businesses. Many that seemed to have been proper fits were unsuccessful because of failed integration efforts that were blamed on culture clashes. But with companies that appear to be in the same market environments, how could there be conflicts? Our experience in more than 25 acquisition integrations with one global financial services company that has acquired similar financial services firms revealed that assumptions about similar markets environments are often wrong. Similar characteristics of the combining firms does not necessarily equate with similarities in the immediate markets they attack. Unfortunately, acquirers lack objective data to discern these often subtle differences, frequently prompting them to map the wrong postacquisition strategies and leaving their managers frustrated over the slow pace of progress and value creation. A Uniform Model to Compare Markets and Organizational Behaviors The aforementioned financial services firm was on an acquisition binge with a spotty record. We were assigned to figure out why some acquisitions were successful while others were not. DELTECH used a Strategic Thinking Model (DSTM) to uniformly link markets, organizational behaviors, and integration strategies. According to the model, there are four discrete market environments and each company competes substantially in one of them. The classifications relate to whether there are few or many potential sources of competitive advantage, or how many ways offerings can be differentiated as well as whether the differentiation can result in a large or small Potential Cumulative Advantage. The environments are defined as Market Area, Product Attribute, Cost-Oriented, and Volume Growth. The opportunities under each environment are: Potential PotentialMarket Sources CumulativeEnvironment Of Advantage Advantage Market Area Many SmallProduct Attribute Many LargeCost-Oriented Few SmallVolume Growth Few Large There also are specific characteristics for each environment, such as:Market Market ProductEnvironment Size QualitiesMarket Area Small, constrained SimilarProduct Attribute Medium to large Individual, uniqueCost-Oriented Large, slow growth IdenticalVolume Growth Rapid growth, Similar but changing changing An additional exercise is to link each environment with its exact source of competitive advantage and the corresponding pay-off: Source ofMarket CompetitiveEnvironment Advantage Pay-OffMarket Area Customer service Customer loyaltyProduct Attribute Product uniqueness Price premiumCost-Oriented Low cost Cash flowVolume Growth Market Market share preeminence Each market environment demands certain organizational behaviors in order for a company to be successful in capitalizing on its primary source of competitive advantage. These organizational behaviors also may be defined as strategic cultures. They are enmeshed in beliefs, values, compensation systems, what the finance department measures, conversations in meetings, budget reports, “how to grow the business,” how strategic plans are prepared, how risk is assessed, the philosophy on product introduction, who makes it to senior management, and so on. If the source of competitive advantage dictates a certain strategic culture, the resulting values are:Strategic Culture ValuesCustomer Service Loyalty, service, collaboration, consensusProduct Uniqueness Innovation, distinctiveness, problemsolvingCost Orientation Control, reliability, analysis, accuracy, predictabilityPreeminence Growth, competition, size, aggressiveness, strength, speed We believe that acquisitions fail when the acquirer imposes financial requirements on the target and simultaneously demands corresponding organizational behavior changes that are in conflict with the market demands of the acquired business. The resulting upset of strategic cultures and values may be too great for the target to hack. That concept will be illustrated in two acquisitions with dramatically different integration strategies. In one, a cultural change had to take place at the target. Although both firms saw a similar market, their organizational behaviors were completely different. Some harmonization was needed. In the other, the acquirer made a number of accommodations on operational practices at the target because their markets were different. In each case, we brought together the management teams for an “acquisition integration workout” with the goal of developing the “correct” integration strategy. We used a simple formula to highlight the potential conflicts in markets and behaviors and to make the problems real. The acquirer was asked to produce a list of “non-negotiables” the financial and operational results it requires from all acquisitions. These are the deliverables the acquisition managers have to meet if they want to keep their jobs. Using DSTM as a guide, we plotted the differences in market and organizational views of the companies, using surveys and other sources of data. Finally, we asked the target to develop a list of the “binds” or problems the non-negotiables would place on them, either in their markets or in their operations. Then we went to work on those binds so that the non-negotiables would be met with minimum disruption at the target. The first case involves an insurance company with three lines of business: direct response marketing of health insurance, third-party benefits administration for credit unions, S&Ls, and insurance brokers, and group employee benefits. Having doubled its insurance business through marketing, the company sought to expand its strength nationally through acquisitions, complementary product offerings, and increased market share. One of the key acquisitions was an insurer serving the populous Middle Atlantic states which was targeted for national expansion. The acquirer was willing to bankroll the expansion that was to be driven by new product introductions and additional acquisitions. However, due diligence revealed that most of the target’s net income was generated by a limited number of customers and that most contracts were classified as “underperforming” accounts because their returns on equity were below the acquirer’s standards. After the deal, the buyer grew frustrated because the target was not moving fast enough and was still holding on to underperforming customers. One core problem was that the managers of the two businesses had diametrically different views of their markets. Responses to a survey question on how they defined their market environments broke down this way: Acquirer Target Growing fast we have to stay 76% 38% ahead Very competitive it is hard to 24% 62% grow The managers of the target thus saw a small, stable market that could not sustain the growth the acquirer had assumed. As a result, their policies and control systems were geared toward keeping costs down and providing low-cost services, as underscored in these responses. We then moved on to determine the operating methodologies that grew out of these contrasting views with this question: We have policies, practices, systems, and reports designed to help us control: Acquirer Target The focus and growth of our 86% 39% business Things that might increase our costs14% 61% These control systems directed their values and behaviors, according to these responses. In our business: Acquirer Target You have to be aggressive and 97% 32% defend your market People who try to grow too fast 3% 68% get in trouble The different perspectives on the market reflected the “correct” behaviors at each company in the managements’ day-to-day jobs. For instance, the acquirer had separate business development and risk management departments. By contrast, target personnel described their managers as “risk managers first, then business people second.” The target managers saw multiple product offerings as reckless, whereas the acquirer regarded them as a way to raid and capture a market. Consequently, the target management would debate for weeks about what was the most efficient product that would not offend current customers. However, in the workout that we conducted, the management teams agreed that the market environments of the future for the two businesses would be the same and that the acquirer’s aggressive approach would predominate. Consolidation in the domestic insurance industry was leaving less room for niche players and was favoring firms that appeared “big” and had multiple product offerings. The target was stuck with organizational behaviors more appropriate for a small market. The acquirer then concluded that a massive cultural change effort had to take place at the target so it could meet the goals of the deal. Some changes included: * Reorienting every manager from “risk managers first” to “business developers first;” * Creating a “customer profitability list” so that managers would spend most of their time on high-impact customers; * Changing risk management practices to substitute a higher-risk/higher-return formula for a low-risk/low-return approach, while redefining quality, customer service, and other operations facets; * Redirecting the sales force to high-impact customers and aggressive marketing as opposed to “waiting” for customer referrals; and * Hiring outside business developers to focus solely on acquisitions. As a result of the workout, the purchaser understood why the target managers were having difficulty adopting growth strategies, and was able to set the correct integration strategy, institute the massive cultural change needed to make the deal work, and adjust financial targets to a “more realistic” timetable. In the second case, the target was the equipment leasing subsidiary of a London-based investment bank, a profitable operation that was divested because the parent wanted to focus on its core business. The leasing unit was founded 25 years ago to provide equipment financing services to smaller customers of the bank. Over time, these contracts grew as their customer base grew. The base included counties and municipalities, boards of education, and a host of small and midsize companies. The firm finances the purchase of computer systems, software systems, copiers, and audiovisual equipment. It is service-oriented, rather than technologically oriented. The business starts when a customer expresses a need. Then, the sales team helps the customer narrow the scope of that need and negotiates with manufacturers for a suitable product. The firm purchases the equipment and leases it at a markup. Although its prices are higher than those of other vendors, it provides a range of services not offered by competitors, such as training and repairs. Its reputation is based on reliability, quality, and customer service. Business is dependent on repeat requests from customers or customer referrals. Often the firm loses money on the first contract but makes money on subsequent business. The market is stable but erratic. Many vendors enter the market, only to exit quickly because of unanticipated losses. Customers have numerous options to choose from and routinely change providers. The U.S.-based acquirer saw the deal as a chance to enter a foreign market, become a big player in the U.K., and press a Pan-European strategy. Its long-term goal is to become the dominant global equipment lessor. Until it did the acquisition, its equipment leasing business engaged in a captive strategy buying the equipment leasing and financing functions of a manufacturer and then servicing the customers who had purchased the products. The U.S. market for equipment leasing is highly fragmented. The acquirer’s market share of 6% makes it the biggest player and another 15 competitors all hover around 4% in market share. The U.S. accounts for half of the equipment leasing market, but with the global expansion of U.S. businesses and the development of global technologies and economies, the majority of future growth will be overseas. As a result, the acquiring firm opened a Pan-European operations center staffed 24 hours a day by multilingual customer service representatives. It has the capacity to grow several times without straining the system, enabling the firm to gain economies of scale and avoid multiple “back room” installations. Personality clashes between the two organizations developed quickly. Fears arose that the target’s managing director would leave and take his management team and most of the customers. Among the flash points were the financial goals set for the target, which were similar to those of prior acquisitions, and the requirements that the target shift operations to the buyer’s Pan-European center, transfer existing contracts, and be more aggressive in reaching the financial targets. The conflict worsened as the operating goals became harder to achieve. The acquirer had paid a premium for the acquisition, which necessitated aggressive earnings goals, but it was stuck with a management team that seemed hostile. According to the survey results in our workout, the hostility stemmed from a sharp disagreement on how to succeed in the market, underscored by these results: If we succeed it will be because we successfully deliver on: Acquirer Target Customer satisfaction 68% 21% Outsmarting our competitors 19% 59% (Note: Numbers do not add up to 100% because there were other choices available.) This contrasting market view resulted in a different orientation for the managers demonstrated in the following questions: We have distinct departments that enable us to: Acquirer Target Keep close to our customers 56% 22% Closely control the growth of 32% 61% To support our business plan, we collect information: Acquirer Target From customers about their 55% 19% satisfaction with our service About our industry to monitor 22% 58% competitors’ growth and market penetration This strategic orientation conflict also was revealed in the different critical success factors (CSFs) of the two organizations. The purchaser’s CSFs were to develop more creative risk management approaches to reflect different acquisitions, execute a Pan-European approach starting with the operations center, and become the world’s largest captive lessor through acquisitions and matching the geographic expansions of their customers. The target’s CSFs were to develop quicker speed and turnaround time in customer requests for products and financing, create a deeper relationship with current customers by anticipating their needs, and change its information systems to more accurately track costs. As it got bigger, its cost structure grew slightly more than its revenues. Although the companies were in basically the same business equipment leasing they were in different market environments and had different competitors. Moreover, the characteristics of their customer bases dictated differences in organizational behaviors. The acquirer was focused on global competition and increased market share while the target was focused on local customer needs. The target’s finance department helped the sales teams develop the proper customer financing while its counterpart at the acquirer focused on measuring market size, operating efficiencies, productivity increases, and other market-based data. The target controlled risks by having a deep understanding of the customers’ financial conditions and management practices. Its sales manager could start a contact with a handshake. By contrast, the acquirer’s risk managers focused primarily on the volatility of the market and its concentration of assets in that market. Its risk analysis included industry and market data accompanied by a detailed financial risk model. When brought together, the management teams agreed that they competed in different markets and that the target’s organizational behaviors were perfectly suited to its market. The acquirer’s non-negotiables were focused on hitting certain financial targets, but they were struggling with understanding which of the target’s organizational practices they could accommodate. The teams developed an integration strategy that accommodated both the target’s market demands and the financial demands of the acquirer. It featured: Joint Board. A joint operating board composed of sales, finance, operations, and risk executives and chaired by the general manager meets monthly to resolve conflicts in market demands. The main conflicts were between the finance teams of the two organizations and the needs of their sales teams. Risk Management. Risk, credit, and operating practices of both organizations were rewritten. The target received greater authority to sign contracts with existing customers without a formal review process. The acquirer also developed special customer risk profiles based on the target’s data. Sales Strategies. Control of the sales teams and contracts shifted from the acquirer to the target in regions where both had a presence. Merger and Acquisition Team. An m&a team with members from both organizations was created. The target’s knowledge of the different demands between a “captive” strategy and a “new business” strategy allowed the parent to make more informed judgments on the growth prospects of potential acquisitions. Several deals were dropped because of this insight. Network of Centers. The acquirer closed its Pan-European operations center and focused on having multiple operations centers close to their customers as acquired companies expanded. This was more appropriate for a market in its infancy that demanded a higher degree of service than a mature market in which operating efficiencies are important. The management team stayed on and “signed up” on the growth targets, but they got to do it their way and were able to reach the first-year income goals without losing any existing contracts. There are a series of critical success factors for integrating acquisitions. In our experience, matching integration strategy to the demands of the marketplace is the single most important criterion for success. If the market environments of the combining firms are the same and the organizational behaviors are different, success depends on helping the target change its organizational behavior. However, if the market environments are different and the organizational behaviors are different, getting the target to change will be met with resistance and will frustrate the vision of the deal. The acquirer has to figure out which organizational behaviors at the target are necessary for success in the market and design a plan to accommodate them. The marketplace doesn’t care who acquires or who is acquired. It demands certain behaviors. The challenge for a buyer is to get what it wants from the acquisition without disrupting the delicate balance between market, organizational behavior, and strategy. The Same Page Culture clashes in m&a often don’t materialize from thin air or unreconcilable egos. Frequently, they are rooted in business practices that require different behaviors to compete in different markets. The biggest flash points may develop when the acquirer’s and target’s markets look similar but have subtle differences. Blending markets, cultures, and integration requires compromise and delicate handling that should be sought by bringing the two sides together early one. If too heavy-handed, the acquirer may dictate changes that would put the target out of alignment with its market. But a tepid target that overlooks market opportunities may be a prime candidate for a major shake-up.