Effective Mergers and Acquisitions
EFMD Learning Group 2000
Report prepared by
Valerie Garrow and Linda Holbeche
Roffey Park Institute
With special thanks to
Sari Jokisalmi
Sonera Corporation
Other contributions from
BPAmoco
Citicorp
Deutsche Bank
ESADE
Monsanto
UBS Warburg
PDI
Roffey Park Institute
SKF
TXU
ISBN No: [0 907416 71 3]
© Roffey Park Institute, 2001
Contents
Page
EFMD Effective Mergers & Acquisitions Report
Introduction
Members of the Learning Group
1
1
Chapter 1:
3
Why Merge?
Resources:
Toolkit – The Monsanto Workshop
9
Chapter 2:
The Run Up
HR Role in Mergers and Acquisitions
15
17
Chapter 3:
The Transition
Transition and Integration Management
Communication
23
25
27
Resources:
Chapter 4:
Literature Review - Communication
Toolkit – The SKF Acquisition Integration Process
Case Study – Compaq EMEA and PDI Merger Integration
27
33
39
The Integration
Integration Planning and Strategy
Staff Retention
41
41
43
Resources:
Chapter 5:
Literature Review - Managerial Turnover During the
Post Acquisition Phase (Santiago Simon del Burgo)
Literature Review - Cultural Integration (Sari Jokisalmi)
Case Study – The PDI-WBB Acquisition
44
47
57
The New Organisation
65
Resources:
Appendix:
References
Toolkit – Checklist for People Management During an Acquisition
67
Personnel Decisions Checklist
73
77
EFMD Effective Acquisitions Report
Introduction
Many research studies confirm that most mergers fail to realise their value. What is also
commonly agreed is that the main reasons for failure are generally to be found in the people
issues which often arise from mergers. These include job loss, restructured responsibilities,
derailed careers, diminished power, and much else that is stressful. Another common
problem is the lack of commitment from top management to drive through the merger and
little clear understanding of the cultural dimension of the merger.
While value often appears to be created in the transaction itself, successful implementation
and integration is usually where the real and sustainable value lies. If consolidation through
merger and acquisition is currently on the increase in various marketplaces, addressing the
people aspects of M&As is likely to grow, rather than diminish in importance.
Members of the EFMD Learning Group on Mergers and Acquisitions have a special interest
in exploring the people aspects of M&As, whether from a deal maker, general management
or HR perspective. For most participants, acquisitions rather than true mergers were the
main focus whether from the acquired, or the acquiring perspective. For this reason,
‘mergers’ and ‘acquisitions’ are used interchangeably throughout this text.
This report is based on the issues discussed in three meetings, and incorporates material
supplied to the learning group by various group members. Each meeting focused on a
different time phase of the merger process, namely the ‘run-up’, the transition and the
longer-term integration period during which the success or otherwise of the merger is
assessed. As such, the report does not claim to be an exhaustive study of the topic. Rather,
it draws upon the organisational practices in use in group members’ organisations and the
earlier research into the human implications of M&As carried out by Roffey Park Institute to
offer a range of perspectives on this complex field.
Members of the Learning Group
EFMD
Carolyn Dare
Gerrit Knodt
Timothy Phillips
Facilitator
Nick Kelly, Shamba Management Consultancy
Research Advisor
Linda Holbeche, Roffey Park
Knowledge Manager
Valerie Garrow, Roffey Park
Effective Mergers and Acquisitions
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Participants
BP Amoco
Esade
Sonera
PDI
Deutsche Bank
Siemens
TXU
SKF
Deborah Smart
Santiago Simon del Burgo
Pijro Mai, Sari Jokisalmi
Joy Hazucha
Oliver Florschuetz
Ulrich Gerndt, Bodo Winkler
Lesley Chesterfield, Molly Monroe
Hans O Jonsson
Special contributors
Tony Awcock
Terry Lockhard
Alan Wyatt
Michael Sweeney
Monsanto
Citibank
TXU
UBS Warburg
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Effective Mergers and Acquisitions
Chapter 1 - Why Merge?
Definitions
Acquisition and merger. Although in the literature, acquisitions and mergers are often
treated synonymously, they are legally different transactions. When an organisation
acquires sufficient numbers of shares to gain control of another organisation, acquisition
is in question. Merger, on the other hand, is often agreed in co-operation with the
merging partners. However, the degree of co-operation differs. Consequently, mergers
are not always a combination of two equal partners. Acquirer or acquiring organisation is
an organisation which acquires another organisation, and acquired or target organisation
is the one which has been acquired by another organisation. Integration refers to the
combining processes and activities of the acquiring and the acquired organisations and
can take place at different levels.
(Jokisalmi, 2000)
Drivers of M&As
M&A activity appears to be on the increase in most sectors, especially in mature sectors
such as manufacturing and financial services. For group member companies, typical drivers
include:
•
•
•
•
•
•
•
•
•
•
•
•
•
Market share
Economies of scale
Government policy
Deregulation
Economies of scope
Imitation
Buying out competitors
Potential business synergies e.g. expanding product lines
Having a succession pool
Acquiring specific competence
Globalisation/market access
Access to closed markets
Access to distribution channels
Buono and Bowditch (1989) divide the strategic purpose of an acquisition or merger into
five different categories:
1. A horizontal merger –
when two organisations have the same or closely related products in the same
geographical market
2. A vertical merger –
when the organisations involved had, or could have had, a buyer-seller relationship prior
to the combination
Effective Mergers and Acquisitions
Page 3
3. A product extension –
where the variety of products increases but the products are not competing directly
with one another
4. Market extension –
where the firm is producing the same products or services but in different market areas
5. Unrelated acquisition –
where the firms involved are unconnected.
The different types of M&A purpose will require varying levels of integration and will
therefore have different effects on employees. Similarly, the level of co-operation between
organisations will affect how employees feel about the merger. In an organisational rescue,
collaboration is likely and the aim is to get a good deal for both firms. Even so, employees
may demonstrate passive resistance. In a more hostile or contested acquisition, or a
perceived raid, there is likely to be a lot of resistance by the acquired firm. The more the
acquired company’s value depends on the quality and commitment of the people employed,
the more carefully the integration has to be handled.
Reasons for merger failure
1. Lack of clear M&A strategy
While people-related issues are generally thought to be the major reasons why M&As fail,
other common problems stem from the lack of a structured approach to M&As. This is
often demonstrated in the failure to think through the strategic logic of any specific deal.
Logic suggests that management teams would typically approach M&As in the following
manner:
Assess our position
Strategy
Grow organically, in partnership, or by acquisition?
Acquisition/Merger
Realise the Value
In reality, many management teams acquire or merge businesses without really having
thought through the dynamics of their market. This alarming but all too common approach
can always be identified when senior managers, three months into trying to implement
rationalisation or other operational changes are reported as saying, “Just remind me why we
actually bought this company!”
To avoid these dangers, SKF the Swedish international engineering company, has developed
a clear acquisition process linked to a defined acquisition strategy. This involves the following
steps:
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Effective Mergers and Acquisitions
SKF Acquisition Process
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•
•
•
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Identify the target company
Scan target company
Develop project plan
Evaluate target company
Develop business plan
Due diligence review
Follow-up (including incorporation into SKF)
TXU identified the following key issues when establishing clarity in a deal.
Learning from TXU
Strategic Intention
Clarity of the ideal position the buyer is striving for must be understood by the
managers of the process. The kind of compromises likely to be faced which will
move the buyer away from this ideal position should also be understood and
discussed before or early in the process. The most important criteria will centre
around control.
Will the ultimate entity be a JV or not? If it is likely that the entity will be a joint
venture a whole raft of new issues and need for clarification will arise.
eg. Is it clear what the parties want out of the deal? Many different checks must be
made before embarking on the expense and effort of forming a JV.
Outside Help
It is realistic to keep top quality internal resources on the process, this should be
pursued since the learning can be invaluable. Outsiders may be required where
there is a lack of expertise.
There are significant benefits in terms of cost and speed resulting from keeping top
consultants on the process from the start to the end. This may seem expensive
but top partners will often actually work out cheaper because they are able to
retain the knowledge throughout the process. This will be especially valuable if
there is a likelihood of several campaigns being launched in a similar business area,
for example an acquisition process of several privatising utilities in Europe.
Cultural Exchange
The need to understand the culture of the two or more companies involved in a
JV, alliance or merged entity is clear. The recent TXU purchase of 51% of a
communally owned multi utility was an example of a potential clash of cultures
where a lack of trust could hamper change and productivity. Workshops allowing
all employees to discuss and practice innovation techniques have proved a speedy
and inexpensive way of opening up the working relationship of the very different
companies.
Source: Allan Wyatt, TXU
Effective Mergers and Acquisitions
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2. Incomplete strategies
All too often strategies are incomplete, focusing on the requirements of the purchaser,
without integrating the different market demands on the acquisition.
Monsanto Workshop
To avoid these problems, Monsanto uses a three-day workshop with key
functional leaders to align the company’s acquisition strategy with the business
strategy. This involves a marketplace comparison, discussing non-negotiables,
comparing organisational culture, processes and practices, identifying and resolving
gaps and major issues and developing project plans for integration. The output of
the workshop is integration implementation plans. Plans are built around the ‘3Cs’
of Integration i.e. Clarity, Conflict Resolution and Consensus Building.
Further details at the end of this chapter
Other reasons for merger failure, include a lack of clear process for handling the merger
implementation and an over emphasis on cost-cutting (1+ 1= 1) as opposed to revenue
enhancement opportunities (1+ 1 = 3). In other cases, business managers are unwilling or
unable to adapt to integration strategies which vary according to the market of the business
which has been acquired. Strategy and organisational culture need to be consistent if they
are to succeed.
3. Type and level of integration
Mistakes are often made in judging the level or depth of integration required. The following
is an extract from Masters Thesis of Sari Jokisalmi (2000).
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Effective Mergers and Acquisitions
Levels of Integration
‘Integration of two organisations after an acquisition can take place at several levels.
The continuum of the desired level of integration can spread from total autonomy to
total absorption, with a number of points in between’ (Buono and Bowditch, 1989).
Napier (1989) distinguishes three types of mergers: 1) Extension 2) Collaborative 3)
Redesign mergers. In extension mergers, the acquired is left untouched or only
slightly changed with regard to its management or operation. Typically it is important
to retain managers in this type of merger. Collaborative mergers occur when two
organisations blend operations, assets, technology or cultures. This can take place in a
synergistic way, when both organisations make compromises, or when exchanging or
transferring knowledge or something else between the organisations. Redesign
mergers mean that the other organisation widely adopts the other organisation’s
policies and practices.
The types of merger may strongly affect employee reactions. In extension mergers,
employees remain generally unaffected, and, if they are informed about it, they are
likely to maintain performance and satisfaction. The situation in redesign or
collaborative mergers could be totally different. Changes in management, policies and
direction are likely to occur. Decisions are made about which managers are to leave
and which are to be retained. Human resource planning involves incorporating the
remaining managers of the acquired organisation. Employees may suffer from anxiety
about job security and adapting to the new situation.
Shrivastava (1986) distinguishes three levels of integration: 1) procedural 2) physical
3) managerial and sociocultural integration. Procedural integration is maybe the
easiest level of integration, including integration of accounting systems and creating a
single legal entity. Physical integration involves integrating physical assets such as
technologies and product lines. In order to achieve synergies, resources have to be
shared. This usually requires concerted efforts such as communicating a long-term
strategy for exploiting synergies throughout the organisation.
Managerial and sociocultural integration is considered the most difficult to achieve. It
includes for instance selecting and transferring managers, changes in organisation
structure, the development of a compatible organisation culture and a frame of
reference to guide strategic decision-making. It also involves gaining commitment and
motivation from personnel and the establishment of new leadership. Its purpose is to
merge cultures and managerial viewpoints. However, sociocultural integration does
not always take place, nor is it even necessary.
Source: Jokisalmi (2000)
Effective Mergers and Acquisitions
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A key reason for failure in the M&A context is a mismatch between the level of integration
required for the specific purpose of a merger or acquisition. An assimilation usually has
tangible goals such as volume and growth, where culture is considered unimportant, and
acquired managers are required to adopt the ways of the purchaser or leave. An integration
strategy has as its goal to create synergies or to establish a third company, and managing
organisational cultures is therefore seen as critical. Conflict resolution and team building
have high priority. The tendency of managers is to drive an assimilation strategy, resulting in
cultural in-fighting, when an integration strategy may be called for.
Companies that have amassed a good deal of cross-border merger management, have a clear
understanding of merger success factors.
In the case of UBS Warburg, which has grown rapidly by transformation and acquisition
since the late 1980s, business strategy matches the desired level of integration.
Factors in matching strategy and integration at UBS
1.
How integrated will the new organisation be?
• Standalone unit
• Partial integration
• Complete integration
2.
How much of the organisation will be impacted by the deal?
• Technology/infrastructure
• Single business unit
• Single location
• Entire company
3.
Who will the controlling parties be in the new organisation?
• Acquisition
• Full merger
• Joint venture
Source: Presentation at EFMD Group (November 2000)
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Effective Mergers and Acquisitions
Chapter 1 - Toolkit
The Monsanto Workshop
The following workshop was held in January 1999 to facilitate the integration of Monsanto
(the purchaser) and Plant Breeding Institute/UK (the acquired). Prior to the 3-day workshop
a series of individual interviews and focus groups were held with managers and employees
from both companies. The results of these provided material for the workshop.
Letter to participants
Dear Colleague
Seed Integration
As you know, PBI is the premier wheat seed asset in Europe. It is the
fusion of PBI’s capabilities in breeding technology and germplasm
together with Monsanto’s growing expertise in genomics, plant
transformation, and biotechnology, that makes the acquisition so
compelling in creating a global leading-edge wheat improvement
company.
The purpose of the Integration Workshop is to examine similarities and
differences between Monsanto, PBI and Hybritech concerning
marketplace, organisation and culture: to develop a common vision going
forward, and to address the top 3 to 5 integration issues.
The goal is to develop an agreed integration plan, which is aligned to the
business plan, to accelerate change and attain our agreed vision. Your
personal involvement and contribution to this workshop will be important
to the achievement of these goals.
In preparation for the workshop, we enclose some reading material, which
gives some background information on our companies. Also, we plan to
spend some time on Wednesday 6th to better understand our respective
companies (Monsanto, PBI and Hybritech). Please take a few minutes to
consider what accomplishments you are most proud of, and what has
made your company distinctive and successful.
Outline agenda
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The Market/Business Environment – similarities and differences
Critical Success Factors for a Successful Integration
Monsanto business leader – Non-negotiables and Expectations
Effective Mergers and Acquisitions
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•
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Organisation and Culture – similarities and differences
Behaviours to support our new vision
Dealing with Barriers to a Successful Integration
Research to provide material for the workshop:
Questions for Monsanto Leadership – The Purchaser
1
What would the successful integration of PBI look like?
1.1 What are the financial and strategic goals?
1.2 What are the major milestones over the next 24 months?
2
What do you see as the main strengths/weaknesses of PBI?
3
What are your main concerns about the acquisition integration?
4
How have integration activities been handled so far?
5
What are the stumbling blocks to a successful integration with PBI?
6
What do you see as Monsanto’s source of competitive advantage?
7
As a leader, what will you do personally to make the seed integration successful?
8
Is there anything that we should be aware of as we do the acquisition integration
workshop?
9
Is there anything that we have missed? Is there anything else you think we should have
talked about?
Questions for PBI Leadership – The Acquired Company
1
What would a successful integration with Monsanto look like?
2
What do you understand are the non-negotiables? What’s expected of you?
3
What do you understand are the main strengths/weaknesses of Monsanto?
4
What are your main concerns about the acquisition integration?
5
How have integration activities been handled so far?
6
What are the stumbling blocks to a successful integration with Monsanto?
7
What do you see as PBI’s source of competitive advantage?
8
As a leader, what will you do personally to make this integration successful?
9
Is there anything that we should be aware of as we do the acquisition integration
workshop?
10 Is there anything that we have missed? Is there anything else you think we should have
talked about?
Questions for Focus Groups
1
What is your company known for? What is it’s source of competitive advantage?
2
Who are your company’s competitors? Who are your customers?
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Effective Mergers and Acquisitions
3
How is your organisation structured? Are you organised functionally, regionally, around
products or product lines around industry segments or markets?
4
What are most communications about? Are they customer oriented, product oriented,
performance oriented in terms of cost or throughput, or competitor oriented?
5
Why are people dedicated to the success of this business? What evidence of dedication
is there?
6
How is management practised in this company? What kind of managerial expertise is
rewarded? Is it technical, interpersonal, political or some combination?
7
How clear is the company about it’s goals and purposes?
8
What does the senior management of this business emphasise? How do you know?
Where is it stated?
9
How do business decisions get made in the company? Is decision making delegated
effectively so that the appropriate decisions are being made at the right levels?
10 Who has influence to get things done in this organisation? What does influence depend
on?
11 What do you get rewarded for? Are rewards individual or team based?
12 What characteristics does the person who is successful in this business have?
13 How is your organisation different from Monsanto / PBI?
Effective Mergers and Acquisitions
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Outcomes from the workshop
Characteristics identified for success
Monsanto
PBI
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Open to change, open to discussion,
flexible
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Expertise
– perceived as industry expert both
internally and externally
Goal oriented – producing to a deadline
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Living in ambiguity (stressful), and still be
able to get things done.
Expertise together with practical
application
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Commitment, dedication
Team player
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Insufficient reward / people
development culture – highly dependent
on the head of the crop group (need
help from HR)
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Interpersonal skills, ability to improvise,
adapt and help move forward
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Dealing with other countries and
nationalities to come to a balanced
decision
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Strong networks: good communication
linkages, ability to navigate in the
organisation, understand process thinking
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Be good at saying no – strong
prioritisation skills, know how to set
expectations
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Risk-taking
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Independent thinkers, questioning
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Problem solving, not identification
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Credibility
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Not sharing information is contrary to
success in the organisation
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Effective Mergers and Acquisitions
Cultural differences
Monsanto
PBI
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Flat structure
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Hierarchy
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Team-based, collaboration,
empowerment
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Command-and-control
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Open communications
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Trickle-down communications – not all
info’ is shared
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Informal, approachable
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Stiff, ”English”, arrogant, Government
institute
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Innovative
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Very clear responsibilities
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Profit oriented
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Market share oriented
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Future tense
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Past tense
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Review decisions and move on as
necessary
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Many decisions linked to historical
reasons
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Profit-oriented
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Cost-oriented
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Decisions made on a whim (Sage)
Criteria for success
Monsanto
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Public company
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Net income focus
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Chemical company ESH
standards
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Future tense
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Change, innovation
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Flat organisation
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Empowerment
PBI
Core business
Biotech
Dedication
Team work
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Fully owned subsidiary
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Market share
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Ag ESH standards
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Past tense
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Long tenure
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Hierarchy
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Command and
control
Shared services
Importance of R & D
pipeline
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Size
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Nationality
Distribution
Effective Mergers and Acquisitions
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Effective Mergers and Acquisitions
Chapter 2 - The Run Up
The run-up period is relatively ambiguous to define. For some group members this was the
period of deal-making up to the announcement of the merger. In this period, the people
generally involved are the deal-makers – typically chief executives, financial and legal experts
and a range of advisors. Activities focus around assessing the value of the deal and various
kinds of ‘hard’ due diligence are carried out. In publicly-held organisations, only a tiny group
of people are involved, to avoid impacting the stock of the companies. As a result, often HR
and many key general managers are excluded from this process. For other group members,
the run-up phase included the closure of the deal and ‘day one’ of the new organisation. This
phase usually involves a wider range of people in gathering data, carrying out a variety of
forms of due diligence and developing business plans and integration plans, often referred to
as ‘100 day’ plans. Management attention often focuses on one or other type of plan, while
both need to be developed and implemented if the deal is to realise the predicted value.
The group felt that during the overall run-up phase, it was essential to identify the key ‘soft’
issues which would affect the merger and establish the relationship between the ‘hard’ and
‘soft’ factors of the deal. Measures should be established around these and activities to
address the soft issues should be incorporated into the integration plan.
Soft issues included:
• Top team dynamics
• The trans-national nature of the deal
• Levels of trust
• How people are motivated
• The range of stakeholders and their expectations
• Competencies of personnel
• Sources of synergy
• Levels of control (tight/loose)
• Brand value (people)
• Innovation
• Knowledge
• Management style
Measures included:
• Staff turnover
• Productivity
• Willingness/ability to change
• Customer satisfaction
Effective Mergers and Acquisitions
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Tools for assessing these included:
• ‘Soft’ due diligence
• Process mapping
• Working climate analyses
• Culture audits
• Psychometrics
• Focus groups
• Desk research
SKF use a mergers and acquisitions checklist to assist non-HR managers in identifying actual
or potential problems in the people domain. The audit looks at:
SKF M&A Checklist
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Vision and values – to determine the degree of synergy between the visions of
SKF and the target company
Political environment – to anticipate any actual or potential political dimensions
which might affect the HR aspect of the operation
Religious and ethnic environment
Language competencies
Legal base
Company structure
Management team
Trades Unions
Skills and availability
Workforce profile
Employee representation
Company procedures
Employment contracts
Contract termination
Redundancies
Health and safety
Security
Learning and development
Quality
Pay
Benefits
Working hours and time off
Retirement and pensions
Performance management
Equality
Expatriation
Main issues arising – immediate, medium term and long term.
Source: EFMD Group 2000
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HR role in mergers and acquisitions
Being prepared
More often than not, HR is not included in deal negotiations and is in a ‘catch-up’ situation
once the merger is announced. This may be made more complex when EU legislation
prevents acquirers gaining access to the ‘people’ information before closure. However,
members of the group felt that HR teams should effectively equip themselves for managing
the people aspects of integration, especially if their organisation is on the acquisition trail.
Partly this is about developing specific expertise within HR teams so that, when the moment
comes, they can contribute effectively to integration teams. It also involves making sure that
HR has its own house in order with regard to systems, information and organisation. Given
the speed with which data is required during the run-up process, having to gather relevant
information about your own organisation’s human resource from a variety of sources simply
slows down the whole process.
Nick Kelly suggests, from his experience in handling divestitures and mergers at JP Morgan,
UBS, BZW and Sedgwick, that HR should be able to quickly provide answers to the
following:
•
Who are my company’s high potential employees?
•
Is my communication system working?
•
What proportion of people in this company represent 25% of the salary bill?
•
What part of our cost structure is variable?
•
What proportion of staff are directly adding to the business?
In addition, HR can prepare the ground by:
•
Creating a checklist for due diligence
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Carrying out a risk analysis on key jobs
•
Finding out which central overhead people ‘belong to’ i.e. which HR/IT and other
functional people would go with the business in case of divestment – reduce grey areas
•
Preparing algorithms for all benefit costs in different countries
•
Preparing due diligence database
•
Enabling experienced transition managers to learn from each other
•
Identifying key people in own organisation
•
Targeting specific communications for different groups.
Focusing on key priorities
With so many possible human resource issues to deal with, it is very easy for HR teams to
act in a passive, data providing way and fail to provide any strategic input to the process of
creating the integrated organisation. To avoid this trap, the HR team needs to be very
focused on the most imperative business/organisational priorities. Some organisations apply
a 70:30 rule i.e. rather than attempting a ‘perfect’ solution to every issue, special attention
should be paid to the most critical issues and others should be dealt with as part of a
strategic framework over the coming months.
Effective Mergers and Acquisitions
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Leadership Selection at BP Amoco
In the BP Amoco merger, getting the selection of the leadership right was the key priority
since this was seen as pivotal to the success of the merger. The philosophy underpinning
this was a belief that if you get the leadership right, the detail will fall out of that. The top
500 were agreed in the first hundred days post announcement and pre- sign off.
Guidelines for the selection of other employees were developed during this period.
Speed was of the essence. It was agreed that all the direct reports of the top 500 would
know whether they had a post in the three months following.
On the other hand there was a conscious decision not to attempt to solve everything
within a short time. Aligning compensation and benefits systems for instance was
deferred until a year after the merger. This allowed time for a complete regrading of the
organisation to take place, an activity which was extremely complex in a global company
with many different grading levels and where unions were involved on a regional basis.
Source: EFMD Group (February 2000)
Due diligence
In a wider sense, when mergers take place amongst organisations where the business relies
on people, Human Resource audits focus on what the acquirer is really buying i.e. the
knowledge and competence of employees. Due diligence is carried out to validate the value
of the deal, to identify potential risks and opportunities. With regard to people, due
diligence is often limited to numbers and roles of staff, together with compensation details.
In fact, retaining talent and building trust are key elements of ensuring that the value of the
deal can be realised. Experienced acquirers, such as GE, recognise the need for a more
extensive ‘soft’ due diligence. They carry out a systematic cultural due diligence of both
companies with a high degree of detail to identify differences in attitude, and related risk.
‘Soft’ due diligence involves building a template for a health check on people issues. It probes
the qualitative HR and people issues critical for success such as:
•
Do employees expect to be in their role forever? (Measures such as turnover, especially
whether this is random or whether there are clear patterns can be indicative)
•
What competencies are currently necessary and what new competencies will be
necessary when change is introduced? Who has these competencies? (A critical
competency is can people learn?)
•
What are the sources of synergy?
•
How do the organisational/cultural/managerial styles fit with the merged business
strategy?
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Effective Mergers and Acquisitions
Key employees
Many acquirers, often through arrogance, fail to make contact with key people in the
acquired company once they are able to do so. Cisco, on the other hand, recognises that
employees are the key asset being acquired in any given deal. Members of the management
team, including the CEO, talk with software developers in the acquired company. A
risk/impact assessment should be carried out with regard to the key people in the acquired
company. Many would argue that, in the case of complete integration, the same should apply
to key employees of both organisations. The impact on the business of their departure
(high/low) should be considered in the light of the employee’s skills, knowledge, behaviours,
reputation in the marketplace, client base and income generation. The risk of their leaving
(high/low) should be considered in the light of marketability, ‘golden handcuffs’ and
willingness of prospective employers to buy them out, mobility and response to culture
change.
Roffey Park’s research (1998) suggests that early involvement of effective HR teams in
preparing for integration during the run-up period is a major factor in merger success.
HR involvement in the Norweb Energy acquisition
HR began to be involved well after TXU had identified Norweb as an acquisition target
but prior to commencement of the due diligence process. The first task was to produce
(from very limited information) a high level view of the financial implications with regard
to staff of merging the business and potentially relocating it. It was needed as a guide for
deciding which potential location options might be worth considering if the purchase
went ahead. This also provided a maximum severance cost to TXU of making all the staff
redundant, which became part of the acquisition model.
A couple of days in the Norweb data room were spent with an employment lawyer
engaged by TXU. A template was produced of key issues to check and subsequently the
HR section of the data room report was written. The next few weeks were spent
working with other managers on an implementation plan assuming the deal went ahead.
Once TXU became the ‘preferred bidder’, HR worked with the negotiation team, fielding
HR issues, estimating costs and risks of decisions with HR implications. Some of this
activity was in support of the dealmakers; at other times it was face to face with
Norweb’s Personnel Director. During this time HR staff spent a couple of days at
Norweb’s offices in meetings with their Board, clarifying some outstanding HR issues.
The HR elements of the Sale/Purchase Agreement were agreed and two letters of intent
were written confirming how we would deal with staff and unions if our final bid was
accepted. Overlaying this time period, HR helped build the communications plan for a
successful deal, concentrating on internal communications. Work on this was intense in
the last few days. This led to HR being one of the key communicators on the day of the
announcement, presenting on behalf of TXU to one of the main staff groups in Norweb.
Since then, two or three days a week has been spent with the Norweb HR team
facilitating the integration process and leading or supporting union consultation.
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HR added value
The acquisition team were clear about their need for HR involvement at the earliest
stage. Norweb employed some 300 people so they wanted specialist support in their
discussions. The only way to do this was to become one of the team. By understanding
the questions and issues which needed immediate resolution or risk assessment, it was
possible to identify those areas on which to concentrate. The value came from speed of
response and being able to provide answers in the context of knowing the deal structure.
Looking at the financials around staff was essential for the acquisition business case and
later for ensuring the appropriate provisions were made against potential integration
costs. By providing more detail and using assumptions from previous experience of largescale change, it was possible to scale down initial provisions.
During the course of the negotiations, advice was provided on the operational
implications of some clauses being drafted by our employment specialists. This allowed
the risks to be assessed of agreeing to clauses preventing appropriate consultation as
required by TUPE. Initially a sticking point, a way was found that was acceptable to both
sides. HR was also on hand to field, and eventually remove some last minute
requirements safeguarding Norweb staff which, had they been agreed, would have left the
operation very exposed.
Throughout the process, the role was seen as providing commercial HR support while
reminding everyone of the people issues implicit in the acquisition i.e. the degree to
which integration failure is attributed to poor people practices.
Source: Input by Alan Wyatt and Richard Stokes at the
EFMD Group, November 2000
Culture audits
Cultural issues are frequently cited as the most common cause of merger failure. Best
practice shows that explicit programmes to manage cultural integration reduce the risk of
failure. Members of the group agreed that it is essential that merger managers have a good
understanding of their own organisation’s culture(s) and that they are able to assess the
likely ‘hot spots’ between the two organisations’ ways of doing things. This is part of a
detailed risk assessment and involves looking at issues such as:
•
Management styles – matrix, consensus, centralised?
•
Hierarchy
•
Acceptance of accountability
•
How are people motivated ?(e.g. through reward, promotion, other)
•
How do the meanings of e.g. ‘teamwork’ and ‘direction’ differ between the companies?
•
Impact of redundancy in local cultures
•
Decision-making styles
•
Perceptions of time
•
Perceptions about what can and cannot change
•
Willingness to change
•
Legislation
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Effective Mergers and Acquisitions
This also means identifying aspects of organisational culture which are effective and should
be kept.
Organisations use a variety of tools to carry out a cultural audit. Some use working climate
analyses, employee opinion surveys and pre-deal inter-cultural workshops.
Cultural Assessment at Deutsche Bank
Deutsche Bank used a cultural assessment tool developed by OCI in its integration of
Bankers Trust. The tool was used, along with standard interviews and focus groups, to
measure existing cultures in both companies by line of business and geography. The
information gained was then used to develop a programme for integration activity in the
businesses, engaging staff and helping them focus on the new Deutsche Bank. While the
audit found significant cultural differences between the two companies, there were
sufficient similarities to make synergies possible. Surprisingly perhaps, Bankers Trust
culture seemed closer to the new Deutsche Bank culture than the old Deutsche Bank. The
integration philosophy underpinning the transformation to the new company was to take
the best of both companies’ cultures, incorporate external best practice and new company
practices to create an integrated new company.
Source: Presentation to EFMD Group at Deutsche Bank, February 2000
Proactive and ongoing management of the cultural issues associated with the integration is a
critical component in ensuring post-integration business results.
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Chapter 3 - The Transition
The transition time is the period immediately following Day 1 of the merger. Research by
Roffey Park (1998) identifies the characteristics of this period as:
•
Widespread anxiety
•
Heightened response to every nuance
•
Suspicion – searching for signs
•
Pre-occupation with new appointments.
Employees seek to interpret the signs of new appointments, allocation of offices, plans for
closure and relocation. Worst-case scenarios are rife as re-structuring takes place and new
networks and alliances are forged.
For many organisations, closing the deal has absorbed most of the company’s energy and,
where the emphasis has largely been legal and financial, the real work has to begin on the
delivery of promises. HR teams often find themselves in the front line in meeting
commitments they have not been party to making, while also being uncertain about their
own jobs.
Transition periods vary in length and intensity but it is estimated that around 80% of all
changes occur in the first 3 months of a merger. Perceived wisdom in many sectors,
particularly among the financial organisations within the working group is that ‘speed’ is the
most important factor in post-merger re-organisation. For example, UBS uphold 7 key
success factors:
1. Board level structure must be defined at announcement
2. Publish an integration communications plan
3. Have very clear business and financial targets
4. Keep integration time as short as possible
5. Make decisions swiftly – speed is critical
6. Involve as many employees as possible
7. Make selection process transparent.
Current wisdom in confirming the new organisation favours speed over optimisation. They
consider people to be candidates for the position closest to their previous one, and do not
allow them to be candidates for other jobs or promotions. As each level is confirmed, they
begin the selection of their own teams, and it cascades down the organisation. To prepare
managers to take decisions about their own team, one organisation trained 2400 managers
in both organisations to profile position requirements and interview for the required
competencies. They executed this in the five months between the announcement and the
final approval and close.
Speed, however, is only effective where adequate groundwork has been completed in the
‘run up’ phase. An excellent example provided from the EFMD Group is the creation of a
100 day plan illustrated below, provided by SKF.
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SKF Foundation - Meet, Greet, and Plan
Target: Create and execute 100 days plan
SKF Business Executive, Integrator, management team of acquired company, and
possible SKF counterparts to meet to:
• socialize
• exchange information
• share the acquired companies feelings, reactions, fears, and expectations
• present the acquired company’s organization, products/services, market, people
and plans
• present positive aspects, strengths, synergys, what the new company brings to SKF
• opportunities and improvements
• identify what has made the acquired company successful
SKF Integrator and line management to describe what it means to be a member of
SKF:
• values
• responsibilities
• challenges
• rewards
• standards, policies and practices
communicate relevant SKF strategies and markets served:
• compare market place
• communicate changes in strategy, structure, systems and philosophy
• make the hard decisions within days:
– management structure
– reporting roles
– layoffs
– restructuring
draft the 100 days plan and communicate non negotiables:
• financial compliance
• procedures and systems
• compensation and benefits
• managing customer relations
• business plan review and adaptation
• form cross-company teams for business plan implementation
• set milestones for 100 days plan achievements
• build in urgency
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Effective Mergers and Acquisitions
communicate to SKF the “fingerprint” of the newly acquired company - who is who:
• create a two-way communication forum
• dialogue and interaction to overcome cultural differences and problems in
implementing the 100 days plan
• openness, trust and teamwork
100 days plan - implementation and progress:
• address critical cultural differences and create bridges
• safeguard values in the acquired company which are critical to business success
• close 100 days plan with WCA. Implement actions wherever necessary to bridge
cultural conflicts with SKF members in team
The above transition plan illustrates many of the key issues which need to be tackled from
Day 1 of the merger with a strong emphasis on sharing, socializing and exchanging
information. Hard issues are not side-stepped and ‘non negotiables’ are clarified and put on
the table.
Key Elements of a Transition Plan
Socialise
Present the vision
Deal with the ‘non-negotiables’
Create 2-way communication
Transition and integration management
The Integration Manager
The role of the manager during the transition and integration phase is critical. Many of the
skills required are simply excellent change management skills. There are, however, other
aspects of the role which focus more particularly on integration skills. The profile provided
by SKF in the toolkit at the end of this chapter, outlines a role dedicated to promoting
mutual understanding and integration.
Performance management
Restoring the focus on performance is not an easy task against a background of uncertainty
and Roffey Park research (1998) identified a management style described as a ‘primus stove’
approach. Essentially this refers to a flexible management style, able to provide and appraise
short term goals and objectives against a rapidly changing backdrop of organisational restructuring and new appointments. Line managers must be able to respond to the
developing needs of the business as well as the needs of employees.
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Citicorp issued Guidelines and Principles to managers regarding the transition which they
describe as a ‘window of opportunity… to demonstrate the new leadership and to achieve
credibility with the acquired staff’.
Citicorp Transition Management Guidelines
1
Clearly define and establish some goals and objectives
Because both the acquisition team and the acquired managers are on unfamiliar
terrain during the initial stages of the transition period, these goals and objectives
will necessarily be short term.
This is okay because the credibility of long-term goals and objectives rests, to a
certain extent, on short-term performance. Where possible, it is a good idea to
make some visible physical improvements in the work environment. As one
Citicorp manager put it, ‘Get them a good work space’.
2
Synchronise these goals carefully
What we want to do is build a reputation for crisp planning and execution. We can
do this best by not wasting people’s time and goodwill on activities that are
counterproductive or quickly aborted.
This unfortunate story was heard in more than one acquisition: ‘We went through
a long period when we worked our butts off on a project, under terrific pressure to
deliver, only to be told to stop what we were doing and start something else. The
Citicorp guys simply didn’t know what they were doing’.
3
Communicate and publicise these goals broadly
Doing so positions us as managers who communicate openly on important issues
and who believe in the importance of communications.
It also helps allay some of the stress of the acquisition by reducing the uncertainty
that goes with it. It gets people focused on the future and moving ahead. And, it
establishes the desired action-oriented image of the new Citicorp management.
4
Give broad and frequent feedback about progress on established goals and objectives
Feedback should give bad news as well as good news. The feedback itself reinforces
the value of communications, and its candor builds additional credibility and
reinforces the open communications norm.
5
Avoid losing credibility
This is best accomplished by managing expectations and not promising what you
can’t deliver.
Remember, the acquired staff may expect miracles! Let them know that change and
improvement will take time and cost money. Be very clear about this.
Source: Organization Integration in Citicorp: some guidelines and principles
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Communication
The first part of this section provides an overview of the literature from the PhD thesis of
Santiago Simon del Burgo of ESADE, Spain. It forms part of a study of managerial turnover.
In a study carried out in 1998 by Hewitt and quoted by Tetenbaum (1999), communication
with the workforce was identified as one of the key factors in the success of M&A
operations. 57% of human resources managers interviewed said that communication with
the work force was the aspect of integration that was worst managed, that insufficient
resources were devoted to it, that it was done too late and that top managers did not attach
enough importance to it.
The key factor that seems to differentiate between a successful and a failed M&A is
recognizing and facing the cultural issues through open communication including the
management teams of the acquiring and the acquired company (Odell y Stenhouse, 1996).
The communication strategy should be thought out during the due diligence process and the
negotiation phase so that it is does not have to be improvised later when the operation is
completed. This enables the communication plan to be put into action in an ordered and
structured way at the appropriate time. A communication plan should include four aspects:
the audience, the timing, the form, and the message (Ashkenas, 1998).
Communication should not be confused with merely giving information. It should answer
the questions that people in the organization are asking. Communication needs to be at all
levels: with clients, suppliers, and internally. There is nothing more stressful for a manager
than the knowledge that the company has been taken over.
As Marks (Marks y Mirvis, 1997) observes, the operation has to be sold within the company:
“we recommend that our clients deal with their employees in the same way as they deal
with the Wall St analysts when presenting the projects and forecasts related to mergers. In
the same way that managers have to convince financiers to invest money in the operation
managers have to convince workers to invest their professional careers and their lives in the
project. This means selling the employees the benefits and advantages they will get out of the
deal not just informing them of it.”
Some recommend that communication should be a formal process. For example, a company
presentation is handed to the members of the company being taken over informing them
about the acquiring company in detail. In this way the acquired company can have immediate
access to reliable information that otherwise it would take years to get. It is presumed that
this type of communication speeds up the cultural integration process since knowledge of
the other company’s culture can bring them closer together and demonstrates their desire
to communicate. (Kransdorff, 1993)
Communication, however, is much more than this. It should be more personalized, more a
part of the operation, more face to face. Richardson (Richardson & Denton, 1996)
recommends face to face communication rather than memos when dealing with change
situations.
It is worth recalling that a danger that M&A operations entail is the formalization of
communication and the breaking down of informal channels with the result that everything
becomes more structured. (Mirvis y Marks 1986). This formalization is experienced by the
employees as a loss of confidence and status.
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The managers of the acquired company are usually surrounded by lawyers, advisors and
consultants who are responsible for the successful outcome of the operation but not for
making it work afterwards. They have a heavier workload than usual and so have less time to
talk to subordinates (Gutknecht y Keys, 1993). It is thus important to encourage
communication between levels in the company and make sure it does not break down.
Communication has to be focused on answering the question: “and what about me?” People
are concerned about the future of the company but first and foremost about their own
future. Communication concentrating on the company, its future, its mission and so on is all
very well but if it does not answer the questions about people, those people will be worried
and productivity will fall. De-motivation, staff turnover, and a whole series of problems will
arise as a result of the lack of information.
In addition, a lack of communication tends to pave the way for rumours, which are
considered to be among the main causes of failure in change processes (Richardson y
Denton, 1996), and which take the place of missing information and always take the worst
form (Marks 1985, Galpin 1997).
Communication is the best way to combat uncertainty (Bastien, 1987), and reduce employee
resistance in the acquired company. (Larsson y Risberg 1997).
When there is a lack of information people usually have recourse to sources of doubtful
credibility and, as well as rumours, the views adopted are based on previous experience of
people, press handouts and so on. According to Marks: “managers should counteract
unreliable sources with correct formal information” (Marks, 1985)
A study based on mergers in England found that in two-thirds of successful operations, a top
executive of the acquiring company, usually the managing director, made a point of giving
essential information to all levels of the acquired company directly and personally by means
of meetings in factories, conferences and social events. Worker opinion in the acquired
company is strongly in favour of this approach (Marks y Mirvis 1993).
The dictum “no news is good news” does not apply in M&A situations. On the contrary the
absence of news means bad news to the employees of the company taken over (Marks y
Mirvis, 1997).
Employees want to know about the operation at a personal level but also what is the
purpose behind it, who is the driving force, how the integration will be carried out, the new
objectives of the organization, the time line for meeting them and so on. A failure to provide
this kind of information is seen as a lack of leadership, management and control. Clearly
silence and a lack of information is the most worrying message and must be avoided at all
costs (Galpin, 1997). Communication is the best way of strengthening worker commitment
to the acquiring company’s operation (Newman y Krzystofiak, 1993).
Sometimes cultural differences between the two companies make communication difficult
especially when the acquiring company has higher power distance, uses more autocratic
leadership methods and tends to communicate much less (Brock, 1998).
How can communication problems be solved? Many methods have been tried ranging from
having a person continuously accessible to answer questions to the use of e-mail as a channel
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Effective Mergers and Acquisitions
for seeking information. What seems to work best is high visibility of the person leading the
M&A operation so that people can see their “new boss”.
People expect changes after an M&A and to say that nothing is going to change engenders
distrust (Dixon, 99). There will be changes and it is much better to treat the employees as
adults and keep them up to date with news as soon as possible, whether it is good or bad. It
is much better to say that a decision has not been taken than to say that nothing is going to
change. Saying that nothing will change can easily destroy workers’ faith in the new
management (Dixon y Marks, 1999)
Efforts to communicate informally by managers of the acquiring company have been shown
to be directly related to the success of M&A operations (Calori, 94). This demonstrates
that attempts by the acquiring company to communicate have a positive effect on the
motivation of the team in the acquired company, which in turn is reflected in higher
productivity.
There is also a clear relationship between communication and people’s faith in the new
management. It has been empirically demonstrated (Bastien 87) that there is a relationship
between communication and staff turnover: where communication is well planned and
appropriately transmitted staff turnover is lower.
One phenomenon often quoted is workers’ “selective deafness”. Even though some
messages are communicated a number of times workers still do not seem to have heard
them as a result of the anxiety typically experienced post M&A. The message has to be
repeated until it is heard and understood (Tetenbaum, 1999).
At the same time and quite apart from the level of communication or the efforts made by
people in the acquiring company there will always be a feeling that information is incomplete
and there is something missing (Marks y Mirvis, 1985). This is a perfectly natural feeling and
has been found in various studies
People are more critical in stressful situations and examine information much more closely
so more care has to be taken in making sure that the message put over makes sense
(Bastien, 1987). Any inconsistency or contradiction will be interpreted as an attempt to
deceive.
Legal restriction may be a serious problem in communication (Gutknecht y Keys, 1993).
When Boeringer was taken over by Roche relevant information could not be given in the
first six months because the operation was being examined by the restricted trade practices
tribunals. During this period the staff of Boeringer knew that there might be a take over by
Roche but nothing else. Looking back at this period they see that time as one of fear and
complete uncertainty, during which they tried to work out strategies to resist the “enemy”
in an atmosphere where rumours proliferated.
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Communication, then, is a common theme in Merger & Acquisition literature but the EFMD
Group gained valuable insights into communication in high risk/low trust situations through a
video lecture by Dr Vincent Covello. There were inevitably many parallels between the
principles of communication in scenarios where something valued was threatened and a
merger situation. The key theme was on re-establishing trust and providing information so
that people hear the message in spite of their emotional response.
The work highlighted 4 theories:
Trust determination:
Trust is built up over a long period but can be destroyed very quickly. Employees are the
people who decide when to trust. The essential message of this theory is that, “When
people are upset they want to know that you care before they care what you know”. Senior
executives are often too eager to share their organisational vision and business plans before
they have dealt with the ‘me’ issues of their employees.
Risk perception:
Where trust is determined by the recipients of communication, facts and figures will have
little impact unless there are perceived benefits and there are options and choices.
Unfortunately first impressions can be lasting and this has implications for first contacts
between merging organisations.
Mental noise:
When people are upset there is a limit to the amount of information that can be processed.
It is often said that one cannot over communicate in a merger but it is perhaps more
important to focus on high quality communication which focuses on the most important
messages. The theory suggests that 3 key messages are the most that people can process in
high concern situations.
Negative dominance:
When people are upset they think very negatively. It is therefore advisable to avoid negative
words such as ‘no, not, never, nothing, none’ which eliminate options. In merger situations
positive messages about the future may be overtaken by the possibility of redundancy,
relocation or re-structuring.
A practical example of the application of some of these principles is supplied by Citicorp in
their guidelines on Organisational Integration.
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Communicating with the Acquired Staff
Effective managers use every opportunity to reinforce the changes they are trying to
make. Some communications activities can be planned and programmed. Others simply
have to become part of each manager’s individual style. Here are a few suggestions:
A1 Communicate proactively
Insofar as possible, communicate decisions as soon as they are made. Get the
message out ahead of the rumor mill.
A2 Communicate strategically
Decide what you want to say, but before you say it, find out what the audience’s
reaction to the message is likely to be. Your message should address these probable
concerns as well.
A3 Communicate candidly
It is usually best to give as much information as possible. It is also best to transmit
bad news as soon as it is practicable. Also, if an answer to a concern is not available,
it is okay to say so.
A4 Communicate face to face as much as possible
Written communications are useful and necessary, but in emotionally charged
situations, face-to-face communication is more effective, if for no other reason than
you can gauge the immediate effect of your message on the other person.
A5 Communicate openly
Encourage questions and comments. Use all opportunities to ask questions as well
as to deliver messages. Listen to both the content and the emotional tenor of
questions and comments.
A6 Communicate continuously
What people hear is distorted by the stress they are experiencing, so messages have
to be repeated over and over again until it is certain they are understood.
A7 Focus communications on what the audience cares most about
For example, staff members are generally much more interested in what is planned
for the short term than what is planned for, say, 1990. They need communications
that steady and reassure them and bring order to their work situation. Firm,
consistent information that answers the question, “What next for me?” is best.
A8 Refer to Citicorp as a worldwide corporation
To some people, ‘New York’ has negative connotations, so if possible, refrain from
referring to Citicorp’s New York headquarters.
A9 Dress for the audience and the occasion
Reports one Citicorp manager. “We called one of our first meetings with the
managers for a Saturday morning. They showed up in casual clothes and our guys
showed in blue pinstripe suits”. Remember that dress is also a form of
communication.
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A10 Be aware that the medium of communication carriers its own message
In one acquisition, the use of overhead transparencies was seen as very ‘high-tec’.
A11 Be aware that the communication site delivers a message, too
Going to the branch offices, for example, to give a presentation and to meet the staff
is an effective way to say that we care about them as individuals.
A12 Use off-site meetings to set a new management style and show who’s important
This method is a powerful tool and sends a clear message to the select few invitees,
but be aware that some business cultures view such meetings as an extravagance.
A13 Don’t promise what can’t be delivered Building credibility is absolutely essential to the
integration process
A14 Don’t promise that nothing will change or that jobs won’t be affected
There are two good reasons for this statement: First, people in an acquisition
expect changes. What they want to know are the extent and nature of those
changes. Second, such statements generally aren’t true. They fall in the same class
as:
• The check is in the mail
• We are from the Government and we’re here to help you
• Your job will not be affected by the acquisition.
A15 Communications are critical in setting the tone of the acquisition
Their content, style and candor are powerful precursors of change in the integration
process. An appropriate communications program is a powerful tool for establishing
the norms of participative management, open disclosure and concern for the
individual. It also can help build the credibility of the new management team.
Source: Organization Integration in Citicorp: some guidelines and principles
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Chapter 3 – Toolkit
The SKF Acquisition Integration Process
This process describes the appointment, activities and responsibilities of an Acquisition
Integration Manager. It focuses on the process of incorporating a new business after the
acquisition. The overall responsibility for driving the process lies within the unit/division
which will have operational and financial responsibility for the acquired business. However,
support is throughout the process both available and required from various other functions.
This process will be continually improved through the experience of the Integration
Manager.
Pre Acquisition
Business Plan
AI 1
AI 1.1
AI 1.2
AI 1.3
AI 1.4
AI 1
Post Acquisition
AI 2
Appointment of Integration Manager
Basic responsibilities
Timing of appointment
Candidate profile
AI 1.4
Responsibilities during Due Diligence
AI 2.1
AI 2.2
AI 2
Development of the 100 day plan
A2 2.1 Development of the 100 day plan
A2 2.2 Optional items within the 100 day plan
AI 3.1
AI 3
AI 3.1
48 Hour Blitz
48 Hour Blitz
AI 4.1
AI 4.2
AI 4.3
AI 4
AI 4.1
AI 4.2
AI 4.3
100 Day Plan Execution
Execute 100 day plan
Communications brief
Six months Integration Plan
AI 5
9-12 Month Integration Planning & Execution
AI 5.1
AI 5.1
9-12 month integration Plan
AI 6.1
AI 6
AI 6.1
Integration Audit
Integration Audit – to be conducted after
12, 18 and 24 months post acquisition
AI 3
AI 4
AI 5
Follow Up
AI 1
AI 1.1
AI 1.2
AI 1.3
A1 6
Close
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The Acquisition Integration Process
AI 1.1
Integration Manager - Basic Responsibilities
1. Facilitate and manage integration activities
•
work closely with the new company to make its practices consistent with SKF's
requirements and standards, implementing the non-negotiables
•
create communication strategies to quickly communicate important information
about the integration effort to employees and feedback from employees on
problems, successes and new synergy opportunities
•
manage the 100-day plan, the 9-12 months integration plan and the
assessment/adjustments after 12/18/24 months
•
identify cultural barriers, build bridges and resolve conflicts
2. Help the new company understand SKF
•
reporting and business planning
•
use of SKF Trademark
•
connect to SKF Intra net and GMS
•
understand SKF's Vision, Mission, Values, Strategy, culture and organization
•
helping managers to understand changes in their jobs
•
introducing relevant SKF business concepts and training programs
•
make sure non-negotiables are understood and implemented
3. Help SKF to understand the acquired company
•
brief SKF executives and managers about the new newly acquired company to help
them understand what it does and why it works the way it does
•
make sure managers of the new company are not swamped with requests for
information from SKF and be the receiver through which all information is channeled
•
channel all information to SKF about progress in 100-days plan and integration plan
4. Safeguard that unique values are conserved
•
Protect culture, values and competence's to be conserved in the acquired company
from SKF attempts to influence and change.
5. Accountability
•
creation of the 100-days Plan and 9-12 months Integration Plan
•
reaching the plans' milestones and goals
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The Acquisition Integration Process
AI 1.2
Timing of appointment of Integration Manager
There will be occasions when the ideal 'Integrator' is also the sponsor of an acquisition and
is therefore involved very early in the acquisition process.
When this is not the case, the Integration Manager should be appointed:
•
after completion of the Business Plan for the acquisition as this is input for his work.
•
before Due Diligence work starts as he should be actively involved in this phase, A11 in
the Acquisition Process, as a basis for learning about the Company.
The Acquisition Integration process
AI 1.3
Candidate Profile - Integration Manager
Ideal candidate for appointment as an Integration Manager would be or have:
•
Geographically close to the potential acquisition
•
Some empathy and understanding of the line of business involved
•
Solid experience of SKF methods, processes, accounting and reporting
•
Good communication links and capabilities within the Group
The Acquisition Integration Process
AI 1.4
Responsibilities of the Integration Manager during Due Diligence
The principle responsibilities during the Due Diligence phase is not to assist in the
negotiation or completion of the acquisition but to:
•
learn as much as possible about the company, its products, people, processes, markets
etc.
•
assess the culture of the company to identify any barriers to integration success
•
assess the strengths and weaknesses of the key people and determine any important
activity required within the integration plan
•
from the output of the Due Diligence identify any special integration activity required
within the 100 day plan or 48 hour blitz
The Acquisition Integration Process
AI 2.1
Development of the 100 Day Plan
The integration of any acquisition will necessarily include some common items to be
included in the plan, some optional items depending on the type, size and location of the
company and some specific items limited to an individual acquisition.
Effective Mergers and Acquisitions
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Standard Items for inclusion
•
Definition of non-negotiable issues
•
Financial compliance and potential for cash pooling
•
Procedures and systems, including IT
•
Compensation and benefits
•
Managing customer relations
•
Forming cross-company teams for business plan implementation
•
Ensuring commitment to the business plan from the rest of the SKF Group
•
Set milestones for achievement of the plan with appropriate urgency and priorities
•
Develop 48 hour blitz program
•
Develop Introduction Packages, SKF to the Acquisition, Acquisition to SKF
•
Decide and implement any change to company image
•
Introduction of missing or inadequate policies
•
Introduction of SKF reporting and planning requirements
•
Cultural adjustments (two way)
•
IT networking integration
The Acquisition Integration Process
AI 2.2
Optional Items within the 100 Day Plan
•
review of investment plans and adjustment
•
integration of Research & Development programs
•
compliance with SKF Environmental policies
The Acquisition Integration Process
AI 3.1
48 Hour Blitz
The purpose of this phase of the process is to ensure that employees, suppliers, customers
and if necessary, competitors, together with any other interested parties, are left in no
doubt about the key decisions surrounding the acquisitions:
Communication agenda:•
Changes in strategy and confirmation of unaffected strategy
•
Management structure - who is in new organisation
•
Non-negotiables and operating philosophy
•
Reporting roles
•
Manpower changes
•
Web pages limited with additional messages
•
Policies to be changed or to remain
•
Objectives of the acquisition
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Effective Mergers and Acquisitions
The Acquisition Integration Process
AI 4.1
Execute 100 days plan
In addition to carrying out the plan developed during I2, tracking the results and rectifying
variances the integrator must ensure that the SKF Business Executive, Integration Manager,
management team of acquired company and possible SKF counterparts meet to:
•
socialize
•
exchange information
•
share the acquired companies feelings, reactions, fears and expectations
•
present the acquired company's organization, products/services, market, people and
plans
•
present positive aspects, strengths, synergies and what does the new company bring to
SKF
•
opportunities and improvements
•
identify what has made the acquired company successful
•
identify eventual extra synergy for other parts of SKF
The Acquisition Integration Process
AI 4.2
Communications brief
SKF Integration Manager and line management to describe what it means to be a member of
SKF:
•
values
•
responsibilities
•
challenges
•
rewards
•
standards, policies and practices
•
communicate relevant SKF strategies and markets served
•
leave a welcome package including documentation on SKF presentation
•
compare market place
The Acquisition Integration Process
AI 4.3
Six months Integration Plan
Target:
•
To move from the few to many, cascade the integration
•
Focus on business plan implementation and business integration
•
Identify and solve conflicts
•
Ensure clear and consistent direction
•
Create a shared image of the future
•
Identify the gap between where the new company is today and how it is intended to be
Effective Mergers and Acquisitions
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•
Identify the gap between the new company and SKF today and how it is intended to be
including the two way transferof knowledge and competences
•
Implement the new joint business plan
•
Communicate actions and milestones in joint acquired and SKF teams
•
Communicate results achieved
•
Implement further actions to bridge cultural gaps/transfer good behavior and practices
to SKF and vice versa
•
Identify and solve conflicts - base on business sense
The Acquisition Integration Process
AI 5.1
9-12 month Integration Plan
Target:
•
Focus on Business plan implementation to achieve synergies and protection for identified
areas
•
Identify and solve conflicts
•
Ensure clear and consistent direction
•
Protect culture, values and competence's to be conserved in the acquired company from
SKF attempts to influence and change
The Acquisition Integration Process
AI 6.1
12 month Integration Audit
Target:
Make sure that action results are in line with the goals set in the business plan
•
identify hidden obstacles - audit
– systems
– processes
– teams
– culture
•
business understanding
•
implement actions to rectify and adjust business plan
•
communicate results achieved and actions to be implemented
– within the acquired company
– to respective SKF counterparts
– to Division management
•
document learning points to improve the process
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Effective Mergers and Acquisitions
Chapter 3 - Case Study
Compaq EMEA and PDI Partner to Prepare for a Successful
Merger Integration
The challenge
In January 1998, Compaq Computer, pursuing its goal of becoming one of the top three
computer companies in the World by 2000, announced its intention to acquire Digital
Equipment Corporation. For Compaq Europe, Middle East, and Africa, this meant going from
$5.7 billion and 5 000 employees to $12 billion and 25 000 employees, across a wide range
of countries and with new product lines to integrate. Compaq had acquired Tandem
Computers in 1997, so the “new Compaq” would include people from three organisations.
This was clearly an acquisition, but the objective was to create a new company with a new
culture, leveraging the strengths of each organisation. Lessons learned from other merger
integrations show that speed in designing and announcing the new organisation is critical to
not losing focus on the daily business during the integration.
The solution
PDI and Compaq worked together to design a process for teaching line managers how to
make more effective placement decisions. We designed a process and a tool built around
Compaq’s Individual Contributor and People Manager competency models that made it
easier for line managers to make business-based and fair placement decisions, based on the
following steps:
Step 1:
Identify position requirements and competency profile, based on the business needs
Step 2:
Select the most critical competencies and choose or write interview questions to get at
them
Step 3:
Profile candidates’ competencies through using a structured interview
Step 4:
Select the candidate(s) and send your recommendations to Human Resources
2400 Managers from across the two organisations participated in the half-day training in the
month preceding the shareholders’ vote. Communication and rollout were facilitated
through a network of trained facilitators and through the preparation of a cascade pack for
the facilitators to use. The tool was then put onto the Intranet for easier use.
Effective Mergers and Acquisitions
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Compacq Change Roadmap
Integration
Teams
Position Profiling and
candidate assessment
• 100 x 0.5 day
• 2400 managers
26-01-98
Proposed acquisition
announced
Change Management
• 50 x 1 day
• 600 managers
The Road to New
Compaq
• 1 or 2 days
• All 20,000 employees
Culture Discovery
• As required
• 50 sessions to date
11-06-98
Digital shareholder
approval
18-11-98
Today
7. Internalisation
2. Denial
1. Numbness
6. Search for
meaning
3. Self doubt
5. Testing
4. Letting go
18th November 1998
Change 98
The result
The immediate outcome of these sessions is that they made the acquisition “real.” In
working through how they would profile a position, choose interview questions, and select a
candidate, managers realised that there were real choices to be made in creating the new
organisation. The process also reassured people that the placement process would be
business-based and objective, and that they would be responsible for choosing the best
qualified people for their team. Managers in both organisations were also relieved to know
that the other organisation was going through the same process. One measure of success is
that most teams, starting at the top of the organisation, include people from both Compaq
and Digital.
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Effective Mergers and Acquisitions
Chapter 4 - The Integration
The period of integration is largely determined by how much integration is required and
how much of the organisation is involved. According to research by Roffey Park (1998) this
phase is characterised by:
•
Pressure to deliver with performance under scrutiny
•
New work processes and teams
•
Cultural sensitivity
•
Reassessment of values
Managers should be:
•
Helping people to focus externally and on the job to be done
•
Supporting teams
•
Feeding upwards communication from employees
•
Identifying gaps in training and development
•
Demonstrating cultural understanding and facilitating integration
These elements are addressed in the SKF integration plan.
SKF - Six months Integration Plan
Target:
To move from the few to many, cascade the integration. Focus on Business plan
implementation and business integration. Identify and solve conflicts. Ensure clear and
consistent direction.
•
create a shared image of the future
•
identify the gap between where the new company is today and how it is intended to be
•
identify the gap between the new company and SKF today and how it is intended to be
•
implement the new joint business plan
•
communicate actions and milestones in joint acquired and SKF teams
•
communicate results achieved
•
implement further actions to bridge cultural gaps/transfer good behavior and practices
to SKF and vice versa
•
identify and solve conflicts - base on business sense
Effective Mergers and Acquisitions
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Course assessment and adjustment
Target:
Make sure that action results are in line with goals set in the business plan - identify hidden
obstacles – audit:
•
systems
•
processes
•
teams
•
culture
•
business understanding
•
implement actions to rectify and adjust business plan
Competence Development and Transfer
Target:
To accelerate business growth through shared competence and transfer of competence
•
short and long-term assignments in sister companies
•
formalized projects for new business and competence transfer
Citicorp guidelines demonstrate how integration goals of Knowledge Building, Credibility
Building and Behaviour Building are translated into strategy and action:
Citicorp Integration Strategies
The strategies fall within three goals:
In Knowledge building, the two strategies are:
•
•
Understanding the acquired company – Learning about its organisational structure, its
systems and processes, its personnel, its culture.
Clarifying the new direction – Charting the acquired company’s new course, making
short-and longer-term plans.
In Credibility building, the two strategies are:
•
Communicating information
Establishing and using two-way communication systems to share new directions, plans
and accomplishments with staff.
•
Building consensus and two-way trust
Creating a sense of motivation and teamwork in doing the job better.
In Behaviour building, the two strategies are:
•
Staffing and training
Assessing human resources, making changes and providing needed skills.
•
Installing systems and processes
Implementing organisational changes and establishing follow-up procedures.
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Effective Mergers and Acquisitions
The types of activities carried out in the acquisition/integration process correlate closely
with the six strategies. Here are some examples:
Strategy
Understanding acquired company
Clarifying the new direction
Communicating information
Building consensus/2 way trust
Staff training
Installing systems/processes
Example of Activity
Gathering information
Planning/making decisions
Setting up communication systems
Developing teamwork
Developing human resources
Implementing MBO plan
Source: Organization Integration in Citicorp: some guidelines and principles
Staff retention
Many mergers involve heavy redundancies through rationalisation and cost cutting measures
to achieve targets. This is not always the case, however, particularly in organisations where
the value of the company lies in its employees’ knowledge. The Roffey Park research
suggests that a second wave of resignations often follows the initial loss of staff and occurs
between 6 –12 months of the merger at a time when employees reassess their position in
the organisation. Unfortunately it is inevitably the key talent who are poached during
merger uncertainty and a real challenge for the new organisation is how to retain those who
are still assessing their new roles.
The case study at the end of this chapter, provided by PDI (Personnel Decisions
International), describes how they have retained talent post acquisition while aggressively
growing the business. In consulting, the people are core to the business, as they hold the
intellectual capital and the production capacity. Therefore, retention is important, not just
for its own sake.
A key group of employees who often experience high turnover during and post merger are
the managers. The following section is a literature review provided by Santiago Simon del
Burgo and forms part of his PhD thesis.
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Managerial Turnover during the Post Acquisition Phase
(Santiago Simon del Burgo)
Incompatibility between management teams
One of the reasons for abandoning an M&A operation is incompatibility between the
management teams. This incompatibility may be detected prior to the acquisition if the
negotiation has been particularly difficult and the management teams have not been able to
agree on how to manage the new company (Callahan, 86).
The size of the problem depends on the particular features of the operation. In the case of a
merger between equals the problem may be insurmountable; in the case of the take over of
a small firm in the same sector the problem can be resolved by changing the management
team of the company taken over. In any case incompatibility between management teams is
considered one of the main causes of failure. A symptom of this is a high turnover of
managers, which is a sign that a suitable working climate has not been created.
One factor that can mitigate problems between managing teams is where managers are
prepared to accept multiple cultures and differences; the greater the degree of tolerance in
the acquiring company’s management team the less is the likelihood of clashes between the
management teams. (Chatterjee, 1992).
Stanley (1992) makes a distinction between “perceived” and “real” consensus between
management teams. This distinction is important since there is often confusion between, on
the one hand, the will to make things work and being prepared to listen to the other side,
and on the other, cultures and values that coincide. If we have different ways of managing the
company whether in terms of delegation of power and authority or of attitudes which are
rewarded or penalized, a favourable attitude can create a climate in which apparently
everything is going well. Nevertheless, the real level of consensus may be very low so that
the situation is one of disillusionment. Managers believe they have the same objectives and
want to achieve them in the same way when in fact this is not the case. When both the
perceived and real consensus is strong, collaboration takes place and synergies appear.
How differences between real and apparent consensus affect integration
Perceived Consensus
Low
Low
Real Consensus
Conflict
Negotiation is avoided
High
Disillusionment
Opportunities lost
High
Cooperation, synergies
Unnecessary Conflicts
Source: Shanley, 1992.
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Effective Mergers and Acquisitions
Problems arise except where both perceived and real consensus is high. Effective integration
takes place in that quadrant. The best way to do this is through communication. Contact
and communication between the management teams make it possible to develop respect and
tolerance of different points of view. (Haspeslagh y Jemison, 1991).
Most power conflicts will occur in cases where the two managing teams are of similar
strength. Where they are obliged to negotiate, discrepancy in strength reduces problems
because one is stronger than the other. In cases where the two teams are well matched in
strength there is a likelihood of power struggle, attempts to favour their own teams and the
appearance of antagonism between them. An example of this in Spain was the Bilbao Vizcaya
merger in which the strength of the two teams was practically identical. A power struggle
resulted in which it seemed that Pedro Toledo’s team was winning until his death led to a
complete reversal of the situation and his group was completely overpowered by the Bilbao
managers. The two management teams never succeeded in integrating, with the result that
good managers left to work for the competition and the new organization lost a significant
part of its human capital.
For Callahan (1986) the chemistry between the managing teams is as important as the quality
of product, market positioning or financial statements, given that a lack of understanding
between them can destroy the operation. The term “chemistry between the management
teams” can be understood as their ability to work together, cooperate and give way for the
good of the company.
Difficulties between teams may stem from their managing directors. We may find for
example a very methodical managing director in one company where his counterpart in the
other is of the intuitive type. Indeed all cultural differences can be exacerbated at managing
director level. An M&A situation implies that they have to be coordinated and cooperate and
this can be the source of a management turnover problem.
When assessing the management team of the company to be taken over emphasis should be
placed on three points: their values, their personalities and the role they will have in the
future combined company (Callahan, 86).
A study carried out by Chatterjee (1992) empirically tests the relationship between the
capital market’s reaction to a merger and the attitude of the management team of the
company taken over to their compatibility with the other managing team. Where
incompatibilities are detected the market is sceptical about the outcome or the operation.
There is an inverse relationship between the degree of culture shock and shareholder return
in the securities market.
Commitment
An M&A operation may lead to a decline in managerial commitment in the company taken
over (Weber, 1996). Commitment is defined as the manager’s identification and involvement
with his own company in particular, which induces him to make efforts on behalf of the
company and continue being part of it (Weber, 1996).
The following four steps must be considered in any attempt to foster commitment:
(1) Employees need to know that someone is in charge and that the merger process is being
controlled fairly and efficiently by the acquiring company. (2) An important part of the
process is frank and honest explanation of what the consequences will be. (3) Likely changes
Effective Mergers and Acquisitions
Page 45
in the reward system must be explained as well as what kind of attitudes will be rewarded
and those which will be seen as unsuitable. (4) Finally the new management must create an
image of fairness and present the acquisition as a step in the life of the company which can
bring new opportunities. (Newman y Krzystofiak, 1993).
Complementarity in management teams
There are two approaches to complementarity. One assumes that having similar knowledge
and history makes integration of the management teams easier since there will be fewer
cultural problems and communication will be easier. The other means having different
knowledge and experience which make synergies possible since the weak points of one team
can be corrected by the other (Krishnan, Miller y Judge 1997).
A review of the literature suggests that differences of knowledge and experience, even
though they may lead to more conflict, can give rise to lower managerial turnover since
there are fewer redundancies. There is also a greater likelihood of the managing team of the
acquired company being retained to make use of their particular knowledge (Haspeslagh and
Jemison, 1991). In the light of this and since high managerial turnover leads to losses in the
productivity and profitability of the company, we may conclude that it is desirable for the
management teams to have different knowledge and skills to minimize the turnover of
managers and improve profitability (Walsh, 1989).
Complementarity of management teams should also be seen in the light of the relationship
between the sectors of activity of the companies involved in the M&A. In horizontal
mergers, where there is a high degree of integration and, as a result, if the two teams have
similar knowledge and skills, high manager turnover. On the other hand in the case of
diversification, since the teams will be interacting very little and we expect little integration,
the degree of similarity of the teams is much less important since there will be fewer areas
of overlap and consequently fewer managerial redundancies likely to arise. (Krishnan, Miller
y Judge, 1997).
It has been found that complementarity in the sense of different knowledge and experience
is positively correlated with the profitability of the company after the merger. The greater
the complementarity the greater the profitability of the company. Complementarity thus
creates synergies and value for the shareholder (Krishnan, Miller y Judge 1997). Jemison y
Sitkin (1986) refer to this type of complementarity as “organizational fit”. The correlation
between profitability and the degree of complementarity is independent of the degree of
similarity of the companies concerned and not only in the case of horizontal integration
(Krishnan, Miller y Judge 1997).
It has also been shown that complementarity is inversely correlated with manager turnover.
That is to say that the higher the degree of complementarity the lower the turnover of
managers in the company acquired. (Krishnan, Miller y Judge 1997). It seems integration is
easier where knowledge and skills are different since there are fewer redundancies and
consequent power struggles.
Another conclusion that can be drawn from Krishnan’s work is that managerial turnover is
inversely related to the financial success of the operation, that is the lower the managerial
turnover the better the financial results of the operation. (Krishnan, Miller y Judge 1997).
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Effective Mergers and Acquisitions
Cultural Integration
It is often reported that mergers fail due to unresolved cultural issues. These may be either
organisational or national or a complex combination of both. The EFMD group had a variety
of cross-cultural experiences to share and the benefit of a research project conducted by
Sari Jokisalmi of Sonera. The literature review which is reprinted in full below on culture,
helped the group to understand in more depth some of the issues faced during international
mergers.
“Mergers are primarily the coming together of two organisations on a human and cultural level.”
(Nahavandi and Malekzadeh 1994,)
As two organisations are integrating at some level, people with different cultural
backgrounds are obliged to co-operate. According to Bastien (1987), “coping with cultural
differences is an essential part of accommodating to an acquisition.” In this chapter, the
cultural issues are discussed both at the organisational and national level to show what kind
of differences there may be between the integrating organisations. Moreover, cultural
integration, acculturation, and issues that affect it are discussed. Finally, some discussion is
held about how to deal with cultural issues after acquisition.
Organisational culture
“Operating in a corporate culture is a lot like breathing. You don’t notice you are breathing, you just
do it. If someone were to approach you from behind, cup their hands firmly over your mouth and
nostrils, threatening your ability to breathe, then you would certainly pay attention to breathing.”
(Marks and Mirvis 1998,)
There are many concepts that relate to culture, such as norms, values, behaviour patterns,
rituals, and traditions. A culture of a group is “a pattern of shared basic assumptions that the
group learned as it solved its problems of external adaptation and internal integration, that
has worked well enough to be considered valid and, therefore, to be taught to new
members as the correct way to perceive, think and feel in relation to those problems.”
Culture, therefore, brings structural stability in the group. Culture covers behavioural,
emotional, and cognitive elements of the group members’ total psychological functioning
and, therefore, is the accumulated shared learning of a group. (Schein, 1992). Hofstede
(1991) defines culture as “the collective programming of the mind which distinguishes the
members of one group or category of people from the other.”
Schein (1992) suggest that there are different levels in which cultural phenomena manifest
themselves. These are artifacts, values and basic assumptions. At the most visible level of
culture are artifacts which include everything that one sees, hears and feels of an unfamiliar
culture. Artefacts can be a culture’s physical environment, its language, its technology and
products, myths and stories told about the group as well as the visible behaviour of the
group. At the next level there are values. “All group learning ultimately reflects someone’s
original values, someone’s sense of what ought to be as distinct from what is.” At the
conscious level, values predict much of the behaviour seen at the level of artefacts. But in
order to understand the behaviour of the group members correctly, it is important to
understand the basic assumptions underlying that behaviour. These basic assumptions form
the third level of culture. Basic assumptions are taken for granted and are, therefore, very
difficult to change. However, the essence of culture is in the basic underlying assumptions.
Effective Mergers and Acquisitions
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According to Schein (1992), “culture and leadership are two sides of the same coin in that
leaders first create cultures when they create groups and organisations. Once culture exists,
they determine the criteria for leadership and, thus, determine who will or will not be a
leader.” Consequently, it can be assumed that the leadership style reflects strongly the
culture of an organisation.
According to Nahavandi and Malekzadeh (1988), in addition to a dominant culture in
organisations, many subcultures may coexist and interact. In order to understand the culture
of an organisation, various subcultures should be identified and assessed according to how
they interplay to influence organisational behaviour and decision-making.
National culture
David and Singh (1994) suggest that the wider culture cannot be ignored when assessing the
impact of culture on post-merger integration, because individuals have first been socialised in
their national cultures and, possibly later as well, in professional cultures before socialising in
the organisational culture. National cultures have a strong impact on an individual’s perception
and understanding, affecting him throughout his lifetime.
David and Singh (1993) have introduced the concept cultural distance referring to potential
misunderstandings between the acquiring and target company. There always exists a cultural
distance between the target and acquiring firms, because of differences in organisational and
maybe in professional and national cultures, too. In figure 1, a triple socialisation and cultural
distance is presented.
National culture
• ethnicity
• gender
• generation
• region
• religion, etc
Professional culture
• academic culture
• business culture
• engineering culture
• government culture
• legal culture, etc
Organisation culture
Consisting of different
department cultures
Progressive socialisation occurring during a person’s life
Figure 1. Triple Socialisation and Cultural Distance
(A revised version of the model of David and Singh 1994).
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Effective Mergers and Acquisitions
The findings in the field of social anthropology in the first half of the 20th century indicate
that all societies face the same basic problems. Margaret Mead (1901-1978) and Ruth
Benedict (1887-1948) have played a remarkable role in spreading this message. Social
scientists have also identified these common problems. Sociologist Alex Inkeles and
psychologist Daniel Levinson suggested in 1954 that there are three basic problems involved
in all societies: relation to authority, conception of self (including the relationship between
individual and society, individual’s concept of masculinity and femininity), and ways of dealing
with conflicts, including the control of aggression and the expression of feelings. (Inkeles and
Levinson 1969, 447ff; ref. Hofstede 1991)
Twenty years later Hofstede (1991) conducted a study of values of people working for the
same multinational organisation, IBM, in over 50 countries worldwide. The study revealed
that the values of people from different countries represent almost perfectly matched
samples, being similar in all respects except nationality. He distinguished between four main
dimensions: (Hofstede 1991)
•
Power distance index
•
Individualism – collectivism index
•
Uncertainty avoidance index
•
Masculinity – femininity index
This study’s case describes a cross-border acquisition of a Finnish company acquiring a small
Dutch company. The acquired organisation was later fully integrated into the existing
subsidiary of the acquiring organisation in the same country, but in a different location.
Although both organisations consisted of mainly Dutch people, there were Finnish people
involved in the integration project and also working as expatriates in Organisation A’s
subsidiary in the Netherlands. Therefore, at this point it is appropriate to examine these
four dimensions of culture comparing Finnish and Dutch cultures in the organisational
contexts.
Power distance is defined as “the extent to which the less powerful members of institutions and
organisations within a country expect and accept that power is distributed unequally.” In other
words, it is about dealing with social inequality and relationship with authority. In both the
Netherlands and Finland, the power distance index (PDI) is low. It is a little bit higher in the
Netherlands than in Finland. The social inequality is, however, almost the same. In small
power distance countries there is considered to be existential equality, interdependence and
preference for consultation between boss and subordinate. In large power distance
countries, e.g. Malaysia and France, on the other hand, the subordinates are dependent on
their bosses, and they consider themselves as unequal. Subordinates are expected to obey
the superiors. (Hofstede 1991)
The dimensions of individualism and collectivism refer to the relationships between the individual
and group or society. Typical for individualistic societies is that the task prevails over any
personal relationship, and the relationship between subordinate and superior is based on
mutual advantage. Management is management of individuals. On the contrary, in the
collectivist societies, personal relationships should be established before the task is
conducted, and the relationship between the boss and subordinate is perceived in moral
terms, as a family link. Management is directed to groups. Both the Netherlands and Finland
belong to individualistic countries, the Netherlands being somewhat more individualistic.
(Ibid)
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In masculine societies the gender roles are clearly distinct, so that men are expected to be
assertive, tough and focused on material success, while women are supposed to be more
modest, tender and concerned about the quality of life. In feminine societies, both the men
and women share the latter qualities. In feminine cultures, equality, solidarity and quality of work
life are important values; managers strive for consensus, and conflicts are resolved by
negotiating. Work is the way to earn a living. In masculine societies, on the contrary, equity,
competition among colleagues, and performance are important issues. Decisiveness and
assertiveness is expected from the managers, and the conflicts are solved by fighting. “Live in
order to work” describes the mentality at the workplaces accurately. Both the Netherlands
and Finland are feminine countries. For example, the UK and the USA are both masculine
countries. (Hofstede 1991)
Finally, the fourth dimension in Hofstede’s theory is the uncertainty avoidance. It is defined as
“the extent to which the members of a culture feel threatened by uncertain or unknown situations.”
Nervous stress and the need for predictability, e.g. in the form of rules, are symptoms of this
feeling. In weak uncertainty avoidance countries, uncertainty is a normal feature of life.
People work hard only when necessary and they are tolerant to innovative ideas and
behaviour. Motivation comes from achievement and esteem of belonging. In strong
uncertainty avoidance countries, on the other hand, uncertainty is a continuous threat.
There is an emotional need to be busy and work hard, since time is money. People are more
likely to resist innovation, and motivation stems from security and esteem of belonging.
Also in this dimension, the Netherlands and Finland scored almost the same points. Both
countries were positioned approximately in the middle of the uncertainty avoidance
continuum, but the Netherlands was counted as belonging to weak uncertainty avoidance
countries, while Finland to strong uncertainty avoidance countries. (Hofstede 1991) The
dimensions of power distance and uncertainty avoidance are the most important dimensions
in the organisational environment (Ibid.).
According to Hofstede (1991), setting up a foreign subsidiary is much less risky than
acquiring a foreign firm where the cultural risk is enormous. Then, differences in both
organisational and national cultures establish together a big cultural distance between the two
organisations. Olie (1990) argues that national cultures are found to have big effect on
organisations and organisational behaviour. The closer the integration required between the
organisations, the bigger the potential cultural clashes will be.
Acculturation
“Acculturation is a function of the interaction of inter-group dynamics that encourage groups to
maintain separate and unique cultural identities, with organisational requirements for interaction and
organisational integration.” (Elsass and Veiga 1994,)
Acquisition is followed by interaction of people of two separate organisations, which have
different cultural frameworks. This leads to a fusion of cultures, which in the context of
acquisitions and mergers has been called acculturation (e.g. Nahavandi and Malekzadeh 1988,
1994, and Elsass and Veiga 1994). The concept of acculturation is derived from anthropology
and cross-cultural psychology, where Berry (1980,; ref. Nahavandi and Malekzadeh 1994)
defined acculturation as “changes induced in [two cultural] systems as a result of the
diffusion of cultural elements in both directions.” Acculturation is not considered to be a
process that is forced, although the mode of acculturation depends on the desires and
attitudes of the people of the culture that has been “invaded.” Therefore, the focus is on
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how the people of the invaded culture adapt to the culture of “invader.” (Nahavandi and
Malekzadeh 1994)
Even though the concept of acculturation was introduced to describe societal groups, it can
be applied to organisations as well, as they have many same characteristics, such as shared
symbols and cognition to deal with the outside world. On the other hand, they differ in the
way that members in the societal groups cannot choose not to acculturate as the members
of the organisations can by resigning. (Nahavandi and Malekzadeh 1988)
Elsass and Veiga (1994) also approach organisational acculturation from an anthropological
perspective following Berry (1980) and Nahavandi and Malekzadeh (1988). Adopting the
behavioural approach, they suggest that “acculturation is a function of the interaction of
inter-group dynamics that encourage groups to maintain separate and unique cultural
identities, with organisational requirements for interaction and organisational integration.”
They apply the conceptual framework of social psychologist Kurt Lewin’s (1951) theory of
quasi-stationary equilibrium to the acculturative processes of cultural differentiation and
organisational integration. Lewin (1951; ref. Elsass and Veiga 1994) suggest that dynamic
interaction of opposing behavioural forces causes behaviour. Forces may have a driving or
restraining effect, and they influence behaviour at a different degree of strength.
Elsass and Veiga (1994) see the acculturation process as an interaction of two opposing
forces of cultural differentiation; that is, the group’s desire to keep their separate cultural
identity, and organisational integration, which refers to the organisational need for cultural
groups to work together. Applied to Lewin’s theory, these opposing forces affect the
behaviour of the organisation’s members, so that cultural “differentiation forces” are
restraining the cultural blending of two groups, and “driving forces” of organisational
integration are aiming to blend two cultures. Interaction between the forces will lead to
quasi-stationary equilibrium, defined here as initial form of adaptation.
According to Berry (1983, 1984, ref. Nahavandi and Malekzadeh 1988), acculturation can
occur in four modes, which define the ways in which two groups adapt to each other and
resolve emergent conflicts. Following Berry, Nahavandi and Malekzadeh (1988, 1994) and
Elsass and Veiga (1994) have defined the different modes of acculturation, which are
deculturation, assimilation, separation and integration/acculturative tension.
According to Elsass and Veiga (1994), deculturation takes place when both the driving forces
of organisational integration and the restraining forces of cultural differentiation are weak,
resulting in a low-tension system. The acquiring organisation is not interested in imposing its
culture on the acquired organisation, and the people in the acquired organisation are not
interested in maintaining their separate cultural identity. Nahavandi and Malekzadeh (1988)
argue that in deculturation either of the cultures of the acquired or acquiring organisations
are seen attractive by the members of the acquired organisation, and the acquiring
organisation is multicultural tolerating and encouraging cultural diversity. Deculturation
involves a lot of confusion, feelings of alienation, loss of identity and acculturative stress
experienced at the individual and organisational levels (Berry 1983). Deculturation is the
most potent of the different modes to result in the highest level of conflict and is the most
difficult to manage. It is often the result of disagreement between the two organisations.
(Nahavandi and Malekzadeh 1994)
Assimilation results from the interaction of strong driving forces of integration and weak
restraining forces of cultural differentiation. It means that the organisations integrate with a
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low level of conflict. Consequently, the people of the acquired organisation give up their
own cultural identity and assimilate into the other culture. (Elsass and Veiga 1994)
Nahavandi and Malekzadeh (1994) point out that assimilation can take place at structural,
cultural and behavioural levels. The acquired organisation has often been thought to
disappear as a cultural entity as well, and the people are expected to become part of the
parent company. However, assimilation can not take place if the members of the acquired
organisation resist it. In case of weak driving forces of integration and strong restraining
forces of cultural differentiation, the result is separation of the two cultures; both retain their
own cultural identities. (Elsass and Veiga 1994) Separation can happen, e.g. as the members
of the acquired organisation refuse to become assimilated and want to preserve their own
culture. (Nahavandi and Malekzadeh 1988)
Nahavandi and Malekzadeh (1988) follow Berry’s model by calling the last mode of
acculturation integration. They argue that integration takes place when the members of the
acquired organisation wish to keep their own culture and remain autonomous, but are
willing to be integrated into the acquirer’s structure. In integration, the structures of the two
cultures are assimilated, but little cultural or behavioural assimilation will take place (Berry 1983;
ref. Nahavandi and Malekzadeh 1988). However, some degree of change in the cultures of
both organisations will take place as the flow of cultural elements is balanced. Nevertheless,
the acquiring organisation has to allow the integration to happen. Nahavandi and Malekzadeh
(1994) argue that integration is likely to lead to some conflict, and it is less easy to
implement than assimilation.
Elsass and Veiga (1994) also agree that this phase leads to conflict but they do not include
the integration mode in their model at all. They argue that it would prevent the attempt to
change. Instead, they call the fourth form of adaptation acculturative tension. It occurs when
both the restraining and driving forces are strong. They do not consider it as an acculturation
mode or final outcome, but a process leading to the final acculturation mode. During
acculturative tension, people are likely to experience high levels of stress, tension and/or
anger. Applying Lewin’s theory (1951), this is a state of high-tension system; strong
resistance is likely to occur if cultural change is introduced. Neither of the modes of
acculturation is considered static, but as dynamic balances between the opposing forces of
cultural differentiation and organisational integration. (Elsass and Veiga 1994) The different
modes of acculturation with the forces of cultural differentiation and organisational
integration can be seen in figure 2.
Strong
Separation
Acculturative
Tension
High
Forces of Cultural
Differentiation affected by
• perception of differences
• structure of inter-group relations
Weak
Deculturation
System
tension
Assimilation
Low
Weak
Strong
Forces of Organisation Integration affected by
• acquisition motive
• transition management
• managerial communication
Figure 2 The four archetypal modes of acculturation
(A revised figure of the model of Elsass and Veiga 1994)
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Acquisitions bring two groups of people together at some level. These groups may have
quite distinct cultural backgrounds. Applying social identification theory to the context of
acquisitions, only the existence of different subcultures may lead to feelings of in-group out-group
bias, discrimination and conflict. Social identification theory suggests that salience on social
categories directly influences the perceptions of differentiation. Differences between the two
groups and the structure of inter-group relations are likely to affect cultural differentiation.
Moscovici (1985; ref. Elsass and Veiga 1994) suggests that the more dissimilar the out-group
is perceived, the stronger negative feelings are likely to arise among the in-group members.
The differentiation is enhanced when perception of low status in relation to the reference
group is increasing. The loss of status may be experienced, e.g. when managers in an
acquired organisation work with employees at lower hierarchical level with less authority or
status. The structure of inter-group relations reflects differing perceptions of status and
inter-group conflict or competition. (Elsass and Veiga 1994) If the inter-group hostility
prevails, win-lose competition becomes the shared expectation and each group strives only
for its own interests. These continuing win-lose situations may hinder the future coordination and co-operation between the groups and create more distrust, tension and
hostility. (Blake and Mouton 1985)
A strong driving force of organisational integration is the acquisition motive, which influences the
required level of integration. Management actions in acquisition and integration processes may
also have important influence on reducing the potential for negative consequences of cultural
differentiation. Furthermore, uncertainty has been shown to influence inter-group feelings of
cultural differentiation. Managerial actions, e.g. effective managerial communication and wellmanaged transition process, would be useful in reducing culture-based distinctions and,
consequently, in reducing the amount of cultural differentiation. (Elsass and Veiga 1994)
According to Nahavandi and Malekzadeh (1988), one decisive factor affecting which mode of
acculturation takes place is the degree of multiculturalism, which is “the degree to which an
organisation values cultural diversity and is willing to tolerate and encourage it.” Unicultural
organisations are more likely to impose their own culture on the acquired organisation than
multicultural organisations. Likewise, the type of leadership and organisational structure are
likely to affect the desired mode of acculturation. (Nahavandi and Malekzadeh 1994)
Nahavandi and Malekzadeh (1988) suggest that when the organisations share the opinion about
the mode of acculturation, there is likely to be less acculturative stress, organisational resistance and
problems for individual and group functioning, and also other problems associated with merger.
Even though the cultures and practices of two organisations differ considerably, congruence
can happen. Incongruity will take place as a result of disagreement on the mode of
acculturation between the organisations.
Dealing with cultural differences
In addition to strategic and organisational fit or compatibility of the acquiring and acquired
organisation, cultural compatibility has frequently been considered to be critical to the
success of acquisition in practice. (David and Singh 1994) Schein (1992) suggests that a
cultural analysis is as important for the acquisition decision as financial, market or product
analysis. Many researchers (e.g. Nahavandi & Malekzadeh 1994; Ivanchevich et. Al, 1987;
Håkansson 1993) have argued that differences in organisational cultures create obstacles to
integration. A survey of 500 American senior managers who have gone through a merger or
acquisition clearly shows culture’s being the primary reason for failure to achieve the
financial goals. Another survey conducted by Watson Wyatt Worldwide of 125 major U.S.
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employers and 45 Asian companies found out that 73% of the respondents shared the
opinion that most important limitation to merger integration or the biggest reason for
failure was cultural incompatibility. (Grossman 1999)
Also Olie (1990) argues that “cultural differences often seem to lie at the root of merger
failures.” Integration, in particular, when the need for cultural assimilation is great, may be
troublesome to achieve, because culture is central to a group’s identity and view of reality
and is not easily given up. The resistance to cultural change is likely to be the bigger the
more radical the changes. Buono and Bowditch (1989) argue that in mergers and
acquisitions, the culture change is even more demanding when there are additional
uncertainties, ambiguities and stress involved in the process as well. “The greater the degree of
operational integration desired, the greater the likelihood of cultural tensions as a result of the
increase in day-to day interactions between the different employee groups”.
Although many researchers, as noticed above, have pointed out the importance of cultural
compatibility for the success of integration, Larsson (1991), based on his studies, suggests
that culture is a questionable rationale for selecting targets for the acquisition. Cultures of
the combined organisations need not to be similar. It is reasonable that only directly
conflictive cultures be avoided. More important than cultural similarity is how the integration
process is managed for the achievement of acculturation. In the supportive approach, the ground
for co-operation is established by showing the benefits from working together. The
supportive approach was found to be superior to the hard approach, where the acquirer’s
culture is imposed on the acquired organisation or the soft approach, where the acquiring
organisation interferes as little as possible. Elsass and Veiga (1994) argue that acculturation is
a process where the members of both organisations make many adjustments. Furthermore,
they suggest that using effective integrative mechanisms to minimise the forces of cultural
differentiation is the best way to approach cultural issues.
Buono and Bowditch (1989) argue that “the task of co-ordinating and integrating different
organisational cultures is one of the most demanding, complex and problematic aspects of
mergers and acquisitions.” Most organisations do not consider the cultural matters
thoroughly enough. It would be useful to first identify their own culture and then the culture
of the company, which it has planned to acquire. This makes it easier to plan the appropriate
cultural integration strategy. “Cultural change is among the most difficult types of changes of
human beings, since culture provides the foundations of one’s life.”
Summing up
When two organisations come together people with different cultural backgrounds will have
to co-operate. The cultural differences can manifest themselves in organisational culture,
professional culture, or even in national culture. Differences in cultures can become a problem
or even an obstacle to the integration of two organisations.
The culture of organisations consists of different issues. In this study, the organisational culture
is defined as consisting of values, leadership style, organisational environment and codes of
conduct. National culture has a strong impact on an individual’s perception and understanding.
Hofstede’s theory provides a useful framework for considering how to approach people of
different nationalities after acquisition. Awareness of the differences can be assumed to be a
prerequisite for understanding their reactions and expectations. He distinguishes between
four main dimensions of culture: power distance, individualism-collectivism, uncertainty
avoidance, and masculinity-feminity. Measured in Hofstede’s dimensions, the cultures of the
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Netherlands and Finland are quite similar and, therefore, big cultural clashes in national
cultures are not very likely to occur.
The fusion of the cultures of two organisations begins when the people of the two
organisations start to interact. In merger and acquisition literature this is called acculturation.
This study focuses on a theory introduced by Elsass and Veiga (1994), who apply Lewin’s
(1951) quasi-stationary equilibrium to the theory of acculturation. They suggest it to be a
function of the interaction restraining forces for cultural differentiation that encourage
groups to maintain separate and unique cultural identities with driving forces of
organisational integration.
The perception of cultural differences and inter-group dynamics build the restraining forces of
cultural differentiation. The more different the other group is perceived to be the more
restraining forces of cultural differentiation there is likely to occur. According to the social
identity theory, people want to join groups whose membership can contribute a positive
image of themselves. In this study, the cultural differences are examined at both national and
organisational level, and inter-group dynamics are assessed by the perceived relationship and
feeling of togetherness between the people of the two offices. In addition, the attractiveness
of the acquiring organisation is assessed at some level.
Acquisition motive is a strong driving force of integration as it influences on the level of
integration. Also, management actions in acquisition and during integration processes have
important influence on reducing the potential for negative consequences of cultural
differentiation. In order to prevent cultural differentiation, effective managerial
communication and well-managed transition processes are useful. In this study, the
management actions are assessed quite extensively, focusing on communication, fairness, and
human resource issues but also on how cultural differences were managed.
Depending on the forces of cultural differentiation and organisational integration, the mode
of acculturation is determined. There are four different modes of acculturation:
deculturation, assimilation, separation, and acculturative tension. Deculturation takes place
when both driving forces of organisational integration and restricting forces of cultural
differentiation are weak, leading the people of the acquired organisation to alienate
themselves from both cultures. In assimilation, the driving forces of integration are strong and
restraining forces of cultural differentiation are weak. This results in the integration of the
organisations with a low level of conflict. When the driving forces of integration are weak
and restricting forces of cultural integration strong, separation occurs. This means that both
organisations retain their own cultural identities. Finally, acculturative tension occurs when
both the driving forces of integration and restricting forces of cultural differentiation are
strong. This will probably result in high levels of stress, tension or anger experienced by the
people.
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Co-ordinating and integrating organisational cultures is very important but also very
demanding. Many researchers support the idea that cultures should be compatible in order
for the acquisition to succeed, whereas others point out the importance of managing the
integration process to achieve acculturation and avoid cultural clashes. When the people of
the integrating organisations share the opinion about the mode of acculturation, there is
likely to be less acculturative stress, organisational resistance and problems for individual and
group functioning, as well as other problems associated with merger.
The theory on culture helps to shed some light on processes occurring during a merger or
acquisition. Deutsche Bank demonstrated cultural understanding during the merger with
Bankers Trust where they acknowledged the need for explicit programmes to manage
cultural integration.
Deutsche Bank/Bankers Trust Cultural Integration Programme
Objectives
• To measure the existing cultures in both DB and BT by line of business and
geography – a cultural assessment
• To develop a programme for integration activity in the businesses
• To use the feedback of the cultural assessment to engage staff and help focus them
on the new Deutsche Bank
• To identify any other key issues that emerge.
The Cultural Assessment survey
• Based on 68 one-on-one executive interviews and 172 separate BT and DB
employee focus groups conducted between April-May 1999
• Standard interview and focus group guides were used. In addition, all focus group
participants completed an organisational cultural inventory tool
• Specific questions asked about alignment to DB values
• Consultants appointed to carry out the cultural assessment and assist in developing
integration plans
Key messages
• Clear message that staff who stay post closure needed to become excited about the
new Deutsche Bank
• Employees in both companies had a poor and inaccurate perception of employees in
the other company
• Employees in both companies perceived big gaps between what was said and what
was being done – strongest in Bankers Trust
• Many employees were confused about the logic of the deal and did not see a
compelling platform or offering in the market for the newly integrated company
• Significantly different cultures existed both between and within Bankers Trust and
Deutsche Bank – also significant similarities
• Employee communication needs were not being met. There was a lack of
engagement with employees, and messages were reported as bland
• Employees everywhere felt that clear, united and visible leadership from the top of
DB was lacking
• Most DB clients did not feel strongly impacted by the acquisition, BT clients had
mixed feelings
• BT showed a higher alignment to emerging DB values.
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Chapter 4 - Case Study: The PDI – WBB Acquisition
Report contributions from PDI
Joy F. Hazucha and Klaus Schuler
Background
The players:
•
Personnel Decisions International (PDI), founded in 1967, headquartered in Minneapolis,
Minnesota, USA. First European office opened in Brussels in 1993. Also had offices in
London, Royal Leamington Spa (UK), Paris, Geneva, total about 65 people. “Define,
measure and develop individuals, teams and organisations”, with simulation-based
assessment and 360-degree feedback as the largest global practice areas.
•
WBB, GmbH, founded in 1984, headquartered in Tübingen, Germany, with subsidiaries
in Czech, Slovakia, Hungary, and Romania, total about 25 people. Personnel and
organisational development, with moderation, moderation training, TTT, teambuilding
and a unique 1 year program for HR-Specialists as the largest specialities.
•
Timeline:
•
PDI “scout” met one of the principals of WBB (KS) at a conference in Hungary –
Summer 1997
•
1st meeting in Paris between KS and the MD of Europe (JFH) – Dec 1997
•
meeting in London between the two principals, the MD of Europe, plus the COO and
the CEO of PDI - Feb 1998
•
first work and negotiations began – June 1998
•
alliance agreement begun – Jan 1999
•
strategic alliance agreement signed – May 1999
•
acquisition – 15 July 1999
Strategic drivers
For PDI, the initial strategic driver of this acquisition was to serve our global clients in
Germany. A key ingredient in this was to find an organisation with high-quality, customerfocused consultants. Their motivation for selling was key: PDI wanted an organisation
which was successful, and whose owners wanted to stay involved in the new organisation,
rather than people who wanted to “sell out and get out.” This combination is not easy to
find, as most successful, engaged people have no reason to want to sell.
For WBB, the strategic driver was complementary: continuing to become more international
and global. They saw their choices as (a) doing it alone, or (b) joining forces with us.
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Run up
Due diligence
The focus of the due diligence was to test “personal and professional compatibility.” People
issues are key in most mergers. But in a consulting firm, people and ideas are the only assets,
so this is critical.
Because both companies are privately held, we had the luxury of being able to take a
progressive approach, without worrying about news “leaking” and affecting the share prices.
First, looking for projects on which we could work together, and taking them on a case by
case basis. Next, formalising a strategic alliance agreement, which involved being more
proactive about (a) conducting training for WBB people in PDI’s core areas, and (b) looking
for more opportunities to connect more people across the two organisations. How we
worked together and how people reacted to each other at all levels, and how we resolved
problems would be key to whether this seemed like a good match. The CEO took
advantage of the opportunity to stop in Tübingen on one of his trips and had a very pleasant
and fun dinner with the team.
There were tense moments about several client projects. We had worked through several
of these issues with constructive resolution before the acquisition, which helped to build
confidence for the future.
Setting up integration plan/ process
As we got to know our partner more, a second driver became to expand PDI’s range of
capabilities; in addition to having an organisation who could learn to deliver “PDI stuff,”
there are things from WBB that would be great additions to our offerings to clients beyond
Germany. In addition, WBB has a number of interesting internal practices that lead to high
team spirit and high retention of people.
Our CFO suggested an integration plan and an integration manager. This was developed the
day of the acquisition by the two principals of WBB and the MD of Europe, with input from
the finance and legal people who were present. We built the integration plan around PDI’s
goals (which were shared by WBB, although not formalised in the same way)
•
Clients
•
Team members (people)
•
Professionalism
•
Business
We identified point people on each side for each key area, e.g. finance, marketing, practice
areas.
We framed this as a “coming together” rather than the technical term, “acquisition”, since
the objective was to have two-way communication and exchange, vs. one-way imposition.
Unlike the typical merger for “synergies”, since there was no overlap in geographies, the
objective was to keep everyone. The focus of the integration was (1) in our client offerings,
and (2) in our systems and processes, to (3) achieve 30% growth and 15% profitability.
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A key value of creating the integration plan was to help us to be more realistic about our
goals. For example, we decided (a) to start with Germany and worry about Eastern Europe
later, and (b) to postpone creating a new practice area together until after the first year.
Transition
(First 100 days: don't change what doesn't need to be changed)
A condition of the acquisition was that everyone in WBB be informed before closing. This
was done within a day or two of closing. Many of them had worked with PDI on projects,
and the strategic alliance agreement had been announced before, but an acquisition is a step
further. Some were surprised that the owners would ever sell; others expected that this
might have been the objective. The annual week-long team meeting was already scheduled
for soon after the closing. We prepared a communication about what would change and
what would stay the same. This was an opportunity for people to work through their
reactions and feelings and questions, in an environment that was familiar to them: their
managers were the same, their communication processes had not changed.
Does not change
Does change
Contracts and compensation structure
stay the same for 3 years (revisit in 2
years to see if want to change after 3
years)
WBB continues to offer current services
WBB also offers PDI stuff, and PDI learns
WBB stuff
WBB/ PDI Germany team still reports
to Klaus and Martin, who make German
staffing decisions
Added complexity due to need to follow
practice area leaders, project managers,
client managers
Still have own team meetings
Will also join annual PDI Team Europe
meeting
Keep WBB name and logo on business
cards, letterhead; timing TBD
Will add “a PDI company” and the PDI logo
where feasible
German still an important business
language
More English for internal communication and
client work
Continue to report invoiceable time
Will start to use project numbers and
timesheets in October
Retain German clients, including small
ones
More larger and international clients
This is a high risk time: WBB had had very little turnover in employees, but being “bought,”
especially by a ‘big American company’, raises fears and concerns. People do need to
understand what will change and what will not. Throughout the first year, they kept a team
meeting structure similar to what they had had before, but the leaders took advantage of the
opportunities to continue to bring the organisations together.
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At the 3-month mark, we held the European Leadership Team meeting in Tübingen. This
provided opportunities for the WBB team to showcase “their stuff” to the rest of the ELT.
This was very impressive, highlighting their knowledge and professionalism, and a change
from the previous interactions, where WBB was learning ‘PDI stuff’. It also provided an
opportunity for informal interaction over drinks and dinner. The MD of Europe and the
COO joined the team meeting in the morning the next day to discuss what had changed and
what had stayed the same.
Around the 6 month mark, WBB joined the annual PDI Team Europe event for the first
time. The meeting was organised with some of their tools and methods, and the
atmosphere was very positive.
At the one year mark, we organized our first larger-scale two-way exchange event: WBB
led a session on Moderation Training, primarily for PDI people to attend; PDI led a session
on TeamWise, primarily for WBB people to attend. It was a great cross-section of people,
from a dozen or more offices around the world, in a wonderful setting on Lake Balaton in
Hungary.
We began by tackling financial and communication systems. We decided to not change the
compensation system or logo for the first three years. This helps to keep an external focus,
using joint client projects to help build commonality and momentum, vs. diverting too much
attention to the inside.
New organisation
Success criteria
According to the integration plan, we defined success as:
•
retaining all WBB team members and clients, and having them grow and prosper
•
delivering consistently high quality solutions
•
sustained profitable growth of WBB – A PDI Company/PDI Germany, and PDI Europe
Through 2000, the first full year:
Positives:
•
only one WBB consultant left the organisation – to go to a client
•
more clients were added, none were lost
•
consistency and quality have become better and easier
•
growth was 38% vs a target of 30%
•
profitability was over the target of 15%
•
20% of the revenue was ‘PDI stuff’, half of it to PDI clients
Disappointments:
•
IT integration and financial integration behind schedule
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Other positives:
•
PDI and WBB people don’t hesitate to call each other; PDIers don’t check with the PDI
integration manager about whether they are “OK”.
•
We are capturing lessons to apply to future partnerships so they can go more smoothly.
KS is a great contributor to discussions with other potential partners, because of his
view from first the ”acquiree” side and now “PDI
Other disappointments:
•
People (within PDI and clients) are still a bit confused about the double branding: are
they part of us or not? If so, don’t they want our name? Etc.
•
There has not been much exchange in the other direction – from WBB to PDI - yet
Over the next several years:
•
Can we successfully deploy some WBB stuff within PDI?
•
Can we create some things together?
•
Will the principals stay in the organisation and keep finding interesting things to do?
•
Will WBB people have and take advantage of opportunities in other parts of the
organisation?
•
Will Germany and Eastern Europe continue to grow and thrive?
Lessons learned
1. It takes a lot of TIME to work each of these issues. Each issue needs point people
on each side.
2. Key success factors: high quality relationships and communication at multiple levels
3. Start integration right away (especially the hard stuff) but pace it to ensure there is
no loss of external focus on external.
4. Do more proactive work on quality assurance issues up front.
5. When you learn something new, you feel incompetent again. Two-way exchange is
key, but takes time.
6. Key processes PDI can learn from WBB:
• Variable compensation models (and flexible working time)
• Team spirit, team meeting process
• Consultant retention
• Consultant time planning and management of “holding” time with clients
7. The difference in size (800 vs. 25) tends to:
• tip the scale toward the smaller one adopting the larger one’s processes, vs.
identifying best practices and having them go both ways
• Create more demands from the larger one than the smaller one has capacity to
absorb; this also makes it difficult to make time to transfer learning back the
other way
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•
also create the illusion that the larger one has “deeper pockets” and more
resources, even though the larger one is a collection of units that are similar in
size to WBB
What we would do differently:
1. The integration managers were one of the two WBB partners and the MD of PDI
Europe. This worked well because of the high quality communication, but both the rest
of the ongoing business and the integration could have benefited from more time and
attention. Therefore:
a. assign another 0.5-1 person on each side to help integration to avoid having each the
rest of the business or the integration suffer.
b. hold monthly calls and quarterly progress reviews for the three years planned for
the integration to finish
c. revise the integration plan for years 2 and 3
2. Put safeguards in place to avoid prematurely selling something we are not yet prepared
to deliver because we now have the language but are not yet ready on the capability
side:
a. learn from past lessons and find a way to communicate this to everyone so they
have less to learn from direct experience
b. clearly identify and communicate the steps to qualification to deliver something
c. require going through a quality assurance point person before promising something
new to a client
3. Align the IT infrastructure (LAN and WAN and Enterprise systems) as one of the first
steps
4. Ask more people (e.g. PDI execs, PDIers at large, clients?) about success criteria at the
beginning and over time; identify metrics for these. Have a communication plan for
multiple audiences (e.g. including PDI at large) and over time
The acquiree’s view:
Run up
1. Owners:
Can I give my “baby” to someone else? Will they look after it as well as I would?
2. Transition
3. From the employees:
“We have been bought” by Americans and “We have been sold” by our leaders. (The
stereotype of Americans in Europe is that they are “hire and fire” and profit-hungry)
4. New organisation
5. Not finding processes where we expected them; running into them without knowing
they were there
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6. July 00:
We don’t like “integration” anymore, because it sounds like integrating two different
things together and (a) we are already together, and (b) PDI is changing too. We
thought we were “integrating” into a large, stable, structured organisation; we found
that this is about PDI developing together – all of its offices and headquarters, not just
WBB into PDI. We can only be global together, and we all need to be open to change.
7. Perception of the relative importance of profits vs. excellence: contributing high quality
and benefit together with a client, and contributing to a better life for the individuals
they work with vs. making profits. It seems to WBB people that profits receive more
emphasis that quality at PDI. (Note that PDI’s values put Clients first and Business last, so
PDI would not agree that profits come first, but this is what WBB tends to hear – this is
important to explore)
8. Even after 16 months, there is still a lot of hard work ahead
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Chapter 5 - The New Organisation
At a certain point the organisation must close the merger process and look to the future as
a new organisation. Integration activity may continue for many years but the budget will
close and, in some cases, further merger may involve a new cycle of change. Many
organisations find they need to undertake another period of re-structuring to achieve a
better organisation design which meets the market needs.
Evaluation and learning
Few organisations are able to evaluate their merger beyond simple share price measures. In
most cases, this is because no criteria have been set beyond short-term budgetary savings.
Similarly, in many cases, the learning gained about what did or did not work in the merger
process is lost. This is due, for the most part, to time pressure. Once the announcement
has been made, time is of the essence to achieve difficult deadlines and learning tends to be a
case of deciding in retrospect what could have been done better. If the teams responsible
for managing the merger quickly revert to their normal roles, or leave the organisation
before the process has been assessed, there is little chance of gaining many of the
organisational benefits of their experience.
The EFMD Group, however, consider that there are several potential benefits of consciously
learning from the experience of handling a merger. A key benefit is getting better at
acquiring by building skills in merger activity. UBS, for instance, are able to track the
development of their organisation over two decades of merger activity by the addition of
new capability, market penetration and acquisition of scale and new business. This has helped
them achieve their position of strength in the US and becoming a leading player in the
banking sector.
Another key benefit of evaluating the process of merger or acquisition management is that
the learning gained can be relevant to managing other forms of change which the
organisation is undertaking. Learning from merger experience can prevent unnecessary
‘firefighting’ and failure to plan for what might seem predictable issues with the benefit of
hindsight. At least one major financial services organisation based in the UK is deliberately
documenting its process with the help of Roffey Park so that learning from past and current
events can inform future change management.
Similarly, knowing what to anticipate can prompt decisions and actions which in turn lead
to measurable benefits for the organisation. Where HR departments have good pre-merger
data on their workforce some evaluation may be possible on staff retention levels,
absenteeism, health and job satisfaction.
Learning and evaluation is commonly carried out by post-acquisition research and attitude
surveys. Nevertheless there are no examples within the Learning Group of sound measures
of ‘soft’ issues being put in place pre-acquisition which can be used to ‘measure’ success in
this area. Some of this learning is reproduced in documents that the authors have been able
to pull together in this report. The various checklists and guidelines are a tribute to
individuals who have seen the need to capture the knowledge before the same mistakes are
Effective Mergers and Acquisitions
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repeated. The following checklist, devised by Sari Jokisalmi, is based on M&A literature and a
study conducted on one of Sonera’s acquisitions in the Netherlands. It can be used for
planning, monitoring and evaluation purposes. We include it here as a Best Practice guide for
reviewing the way people processes are handled during an acquisition, from an acquirer’s
perspective. Her Personnel Decisions Checklist is included in the Appendix.
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Chapter 5 – Toolkit
Checklist for people management during an acquisition
Before the acquisition
Testing organisational fit
Did we assess the organisational fit to find out how compatible the organisations were in
terms of:
•
Organisation structure (current management structure, responsibility and authority
within organisation, organisational chart (e.g. flat vs. hierarchical organisation)?
•
Job structure (roles and responsibilities, competencies, accountabilities)?
•
Human resource management - HR due diligence ?
•
Cultural due diligence (i.e. company history, values, decision-making processes,
communication patterns/barriers, beliefs, norms, leadership (vision, commitment, style
and behaviours, teamwork, mentoring/coaching)?
•
Knowing our own culture fully?
•
Paying attention to the negotiation style which reflects the company’s managerial style
and culture, i.e. the degree of formality, the relationship between co-negotiators etc.?
Preplanning
Did we:
•
Outline the terms of possible acquisition/merger?
•
Establish the likelihood of its acceptance and so ascertain a realistic time scale for
integration?
•
When the acquisition decision was made, did we plan ahead as much as possible, e.g.
level of HR integration, estimated changes for the personnel according to the human
resource transition plan, how to address cultural differences, how to combine the
cultures?
•
Carry out intensive information gathering?
Acquisition announcement
Did we:
•
Inform the whole personnel at the same time and, concurrently or in advance of public
announcement?
•
Make the announcement preferably at on site facilities because people typically feel more
comfortable in familiar surroundings?
•
Approach the announcement as an invitation to the ‘acquired’ employees to join the
new organisation? Did we prepare people for change and demonstrate sensitivity and
awareness of their concerns?
•
Provide people with as much realistic information as possible about the buyer’s
organisation, its strategic aims and expected changes at organisational and personal
levels?
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•
Did the people delivering the messages possess strong, charismatic leadership qualities
and were they already fully socialised to the culture of the acquiring organisation?
•
Did we effectively present our own culture, so that people could form a clear,
consistent and realistic understanding of the culture of the acquiring organisation?
•
Provide people the opportunity to ask questions verbally or on paper?
•
Did we avoid using ambiguous language or jargon specific to our organisation?
•
Did we tell the employees if issues raised concerning aspects of combination had not yet
been considered?
•
Use the opportunity to get to know the personnel.
•
Send each employee a personal letter (addressed by his/her name- not Dear Employee!)
so that the most important information is on paper?
•
Provide all managers and supervisors with some form of briefing document, so that they
could pass on consistent information to their subordinates?
•
Assign a contact person representing the acquiring organisation to act as an intermediary
for the personnel of the acquired and the acquiring organisation?
•
Assign a Human Resources representative from the acquired/acquiring organisation, to
address emerging employee issues and remain involved through integration process?
•
Provide employees with “who’s who”- list of key contacts, including HR-representative?
•
Did we remember that giving good first impressions is important!
•
Did we make the people feel that they are warmly welcomed to the new organisation?
After the acquisition
Integration
Different merger and acquisition types with their strategic focus, degree of friendliness and
desired synergies demand different resources, levels of expertise, and pre- and postcombination efforts to be successful. Different strategies affect how different pre- and postmerger and acquisition techniques are used.
In managing the integration, did we judge appropriately:
•
the level and amount of member participation in combination decisions
•
the speed with which the integration process was handled
•
the extent to which the process was unilaterally, as opposed to mutually, directed
•
how communication was to be handled
•
the level of turnover planned and expected
•
the amount of change that would be fostered on the acquired firm
•
the level of integration preplanning
•
the level of overall concern for the people involved in the merger or acquisition?
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Effective Mergers and Acquisitions
Communication
“Talk to your employees. Let them express themselves. I think that it’s important to let
them feel that we take them seriously. If you don’t have good communication you will not
come anywhere.” (An employee from an acquired company)
Communications are vital to preparing people for the changes they will experience. Frank
face-to-face discussions help employees to contend with the natural and expected concerns
that arise early on and increase once integration starts.
Did we:
•
Gain an understanding of employee attitudes and expectations, as well as recognise and
address concerns, fears and hopes of employees of both organisations through, for
example, attitude surveys or individual discussions?
•
Increase people’s knowledge about typical reactions and concerns and help them to deal
with them, or train their supervisors to support people?
•
Sponsor programmes for employees to address resistance to change, grief processes,
team building and consensus, stress management training programmes, seminars about
merger syndrome?
•
Prepare people to meet and work with their counterparts?
•
Establish an effective and clear communication structure?
•
Reinforce all verbal communications by written statements to avoid confusion?
•
Communicate effectively between integrating facilities so that the information required
for the integration was obtained in a timely manner?
•
Inform people on a regular basis of how the integration is proceeding? Did we
communicate regularly even if the content of the message was only to affirm that, at the
current time there was little or no information to communicate?
•
Communicate a clear vision and strategies, so that everyone has a clear picture of where
to head to and how?
•
Communicate changes in HR and other issues? Did we let people know what‘s the plan
to proceed?
•
Communicate directly to all the employees, e.g. newsletters, e-mails, presentations?
•
Facilitate team building and develop an ongoing-timely and continual process of two-way
communication?
•
Provide people with a possibility to ask questions e.g. personally, through the intranet or
help-line?
•
Have a contact person from the acquired organisation in place all the time to act as an
intermediary for staff of the acquired organisation and managers in charge of the
integration?
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Handling people
“Just keep the people informed and involved, give them the idea that you do care.” (An
employee of acquired company).
Did we:
•
Provide clear leadership, clear lines of responsibilities.
•
Maintain high visibility and momentum for change.
•
Ensure that decision-making procedures were fair and known by all.
•
Identify and reward valuable personnel both from the acquiring and acquired
organisations.
•
Treat people of the acquired and acquiring organisations equally and give them equal
opportunities for participation and advancement according to their skills. - “Equal
opportunities for all”.
•
Treat people with dignity, honesty and respect.
•
Provide on-going support at each facility to address emerging issues related to the
integration. Did we manage to pay attention to people at all levels of the organisation? If
it was not possible to deal with all of them, did we guide the supervisors in how to deal
with people, e.g. by providing them training (“All the people are important”).
•
Make sure that those that who should participate in the decision-making and planning
had the time to actually do that.
•
Let people maintain a sense of control and increase their motivation by giving them
opportunities to participate in work-groups and various co-operative occasions.
•
Remain in touch with employees, and reassess and monitor the success of the
integration process, adjusting our plans as a consequence?
Cultural issues
According to one study, creating a brand new culture from scratch is easier than changing or
integrating two established cultures. Culture change should consist of the following
elements:
An understanding of both cultures
Unfreezing the existing culture(s)
The presentation of a positive and realistic view of the future.
The wide-scale co-operation of organisational members.
A realistic time scale for change or integration
A process for monitoring the progress of any culture change or integration,
To identify problems before they escalate.
In dealing with changing cultures, did we:
•
Carry out a study of our own (the acquirer’s) culture? Did we find out what are the
main values and drivers to do business. Did we then consider which aspects of our
culture it was desirable and necessary to ‘export’ to foreign subsidiaries?
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Effective Mergers and Acquisitions
•
Carry out a cultural audit/due diligence of the acquired organisation: get to know the
acquired organisation and the way it operates?
•
Identify the cultural differences and define potential synergies and incompatibilities. Did
we decide how the cultural distance was to be resolved?
•
Decide the level of cultural integration required?
•
Plan how to achieve the desired level of cultural integration, acculturation?
•
Provide orientation for managers and employees of both organisations about the history,
mission and culture of the other organisation?
•
Focus on describing a positive but realistic culture? Did we outline, rather than criticise,
the cultural differences?
•
Encourage the sharing of best practice?
•
Support the formation of informal contact networks based on mutual trust?
•
Design joint seminars and conferences in a way that promoted informal socialisation and
the creation of personal links?
•
Were management actions, especially communication and transition management,
aligned to the direction of the new organisation?
•
Show people that working together is advantageous?
•
Provide opportunities for participation at all levels of the organisation?
•
Did we take into account different national cultures in judging appropriate approaches to
people of different national cultures (See e.g. Hofstede: power distance/level of
uncertainty avoidance/ individualism-collectivism /masculinity-femininity)?
Future plans
For most people who go through a merger, the experience is not ‘business as usual’. Yet
surprisingly few organisations appear to have developed real skill in handling the people
aspects of mergers effectively. Of course, even with the best preparation and the most
thorough plans, success cannot be guaranteed. However, the Roffey Park research and
EFMD Learning Group’s experience suggests that there is a greater chance that a successful
and high performing organisation will emerge from the integration process if the people
issues are well handled. We hope that this report will provide some practical insights into
how to achieve this, though we recognise that more work can be done to take the learning
further.
The shared practice of the EFMD Learning Group echoes many of the findings of the
ongoing Roffey Park research project, Mergers and Acquisitions : Getting the People Bit Right.
The various case studies developed as part of that research and described in the report of
that title1 provide a broad framework for understanding the people aspects of mergers and
further insight into a wide range of issues, some of which have been addressed in the EFMD
Learning Group discussions. Research into the link between effective management of people
issues and the success of mergers, acquisitions and strategic alliances continues at Roffey
Mergers and Acquisitions : Getting the People Bit Right (report) and Mergers and Acquisition
Checklist for Managers obtainable from Roffey Park Institute
1
Effective Mergers and Acquisitions
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Park. Organisations wishing to take part in this project will be able to tap into the expertise
of the researchers as well as gain insights into the way other organisations approach the
people aspects of mergers.
We also plan to extend the usefulness of the EFMD Learning Group/Roffey Park findings by
developing a computer model of the merger process and related people processes during
2001. If you would like to get involved in the Roffey Park research or the modelling project,
please contact Linda Holbeche or Valerie Garrow at Roffey Park or Tim Phillips at EFMD.
Contact details
Linda Holbeche, Director of Research
Roffey Park Institute
Forest Road
Horsham
West Sussex
RH12 4TD
T:
+44 (0)1293 851644
F:
+44 (0) 1293 851565
Email: linda.holbeche@roffeypark.com
Valerie Garrow, Senior Researcher
Roffey Park Institute
Forest Road
Horsham
West Sussex
RH12 4TD
T:
+44 (0)1293 851644
F:
+44 (0) 1293 851565
Email: valerie.garrow@roffeypark.com
Tim Phillips
EFMD
88 rue Gachard
1050 Brussels
Belgium
T:
32 2 6480385
F:
32 2 6460768
Email: phillips@efmd.be
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Appendix
Personnel Decisions Checklist
Employment relationship issues
– transferring the employment relationship, salary payment etc
– employment contracts
– employment conditions
– insurances
– corporate security
– employee information
– regulatory/legal issues?
Personnel policies
It is essential that there is access to personnel handbooks and intranet sites as soon as
possible. First decisions with regard to personnel policies require early clarification on
the following:
– Acquirer’s HR-policy- how applicable it is in foreign subsidiaries and alliances?
– To what extent should HR processes be in common with foreign subsidiaries?
Other policies include:
– Car policy
– Mobile phone policy
– ISDN policy
– Insurance policy
– Travelling policy
– Occupational health services policy
– Occupational safety
– International assignment policy
– Country policies
– Trainee policy?
Tasks and responsibilities
– What are the skill requirements for the jobs existing in the new entity?
– Assessing the skills of all the people, and possibly reselect people to the jobs. This
way the future training needs can also be assessed.
– Job evaluation - provide realistic job reviews
– Discussion (performance and appraisal discussion) between supervisor and
employee to clarify the task and responsibilities and set targets for the future aligned
with the goals of the organisation.
– Job titles aligned.
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Appendix
–
–
Clear job descriptions defining the objectives of their roles as well as the skills and
competencies required for success in the new environment.
Twofold communication about HR issues. Give the people the possibility to discuss
about the issues that are bothering them. Possibly provide separate orientation
sessions for employees.
Compensation and benefits
– Examine the compensation and benefits systems of both organisations
– Salary frames/grades and levels/competency profiles
– Working hours, practice of the overtime work.
– Vacation/holidays, other leaves (parenthood leave, rotation leave)
– What benefits (e.g. car, mobile phone, stable phone, ISDN, rented flat, health care
etc.) and for whom?
– Financial support for sports and leisure
– Examine the performance management systems
– Pension system and conditions
– Performance management system
– Bonuses
– Recruitment reward
– Long-term remuneration, stock options
– Plan how to align the compensation and benefits of two organisations or design a
new system
– Financial bonuses/rewards for the integration work
Development issues
Current practices:
– Performance and appraisal process
– Training policy
– Career path
– Succession planning
– Induction practices
Integration:
– Induction programme as soon as possible in order to socialise employees of the
acquired organisation to the acquiring organisation. Company presentation right
after the announcement of the acquisition would help in creating positive, but
realistic image of the acquiring company.
– Training for managers on what people are experiencing in acquisitions and
suggestions on how to handle and support people.
– Separate orientation sessions for managers and supervisors at the acquired
organisation to explain Human Resource policies and practices.
– Find out the training requirements
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Effective Mergers and Acquisitions
Appendix
–
–
–
–
–
Training and development design
Executive team building
Provide information about career possibilities.
Provide training possibilities at least to key employees.
Provide ambassador training for members of transition team and their designees
who will be spending time at the new facility.
Recruitment
– Recruitment and selection policies
– Employee assessment
– Employee selection (offer the new jobs first to the existing personnel)
– Are relocation or reduction of personnel necessary?
– Improving incentives and compensation schemes (Plan the appropriate form and
timing of the financial rewards for the former management team members and other
key employees)
Retention: How to re-recruit personnel of the acquired organisation?
– Give employees of the acquired organisation an opportunity to participate in the
integration work according to their skills and desires.
– Provide interesting and challenging work tasks and interesting career paths
– Provide possibilities for personal and professional development
– Promote image as a desirable employer. “Sell” the company to the employees, but
give them a realistic picture- do not “oversell”.
– See the other issues in this list.
Management of key employees
– Identify key employees
– Determine of ways to keep them, e.g. building dialogue and exchange between the
key executives or by holding individual meetings with the key personnel.
– Offer integration roles and new responsibilities to key employees
– Design flexible compensation plans.
– Define integration compensation agreements
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