Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances, Revised and Updated Second Edition

Joining Forces

Joining Forces Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances Revised and Updated Second Edition

Mitchell Lee Marks Philip H. Mirvis

Copyright © 2010 by Mitchell Lee Marks and Philip H. Mirvis. All rights reserved. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741—www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at www.wiley.com/go/permissions. Readers should be aware that Internet Web sites offered as citations and/or sources for further information may have changed or disappeared between the time this was written and when it is read. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Marks, Mitchell Lee. Joining forces : making one plus one equal three in mergers, acquisitions, and alliances/Mitchell Lee Marks, Philip H. Mirvis. — 2nd ed., rev. and updated. p. cm. Includes bibliographical references and index. ISBN 978-0-470-53737-4 (hardback) 1. Consolidation and merger of corporations. 2. Consolidation and merger of corporations— United States. 3. Strategic alliances (Business) 4. Strategic alliances (Business)—United States. I. Mirvis, Philip H., 1951– II. Title. HD2746.5.M288 2010 658.1′62—dc22 2010019249 Printed in the United States of America first edition HB Printing

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Contents Preface The Authors

I

Creating Value in Mergers, Acquisitions, and Alliances 1 2

II

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1

The Elusive Equation What Goes Wrong and How to Make It Right

3 29

The Precombination Phase

53

Strategic and Operational Preparation Psychological Preparation Precombination Checklist

57 83 104

The Combination Phase

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Leading the Combination Putting Companies Together: The Transition Structure Managing People Through the Transition Easing the Clash of Cultures Combination Checklist

109 137 164 189 215

IV

The Postcombination Phase

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9 10 11

Building the New Organization and Culture Joining People and Teams Together Damage Control and Recovery Postcombination Checklist

223 242 265 281

3 4

III 5 6 7 8

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Contents

V

Building M&A Competence

285

12 13

Tracking and Learning from the Combination Joining Forces—Building M&A Competency

287 312

Endnotes Index

329 341

Preface Joining Forces When we began studying the human, organizational, and cultural aspects of mergers and acquisitions (M&A) over thirty years ago, roughly 70 to 75 percent of corporate combinations failed to achieve their desired financial or strategic objectives. Since then, scholars have generated many insights and practitioners have honed many tactics to improve M&A success. To this day, however, the failure rate still hovers in the same range. Although some organizations, such as Cisco and General Electric, have developed competencies in finding a good partner and managing the integration effectively, most executives remain ill-prepared for the rigors of steering a combination through its three phases—too often they rush through the precombination work of strategy setting and due diligence, mishandle the melding of two organizations and their cultures, and neglect to reenlist employees in the postcombination phase and create lasting value from promised synergies. “I am really sorry about the pain and suffering and loss caused,” lamented Jerry Levin on a CNBC program entitled “Marriage from Hell: The Breakup of AOL Time Warner.”1 In this ten-year retrospective about the failed deal, he added, “The destruction of value was so painful to many people. … I invite business schools to continue to study it. Not because it was the worst deal of the century, but (for) the lessons to be drawn from it.” What did the former CEO from the Time Warner side learn? He told viewers, “There were a lot of psychological things going on,” and confided that he “didn’t have enough compassion for people,” and hadn’t paid enough attention to the “human side” of the merger.

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Steve Case, the AOL head who became chairman of the combined company, added another perspective: that managers were focused too much on “internal politics and on Wall Street, rather than innovating.” Levin reflected on the strategy, “I believed strongly in the power of the idea … that AOL Time Warner would in fact change the landscape not only of our own company, but across an industry. … You get beguiled by the majesty of that language, and the aspiration that’s underneath it.” Case rejoined, “The vision is one thing but execution is another.” Where did the execution fall down? “Execution is about people,” Case said, “Strategy is inside people.” Levin concurred, “I had the missionary zeal,” he said, but lamented that “not everyone did.” A clash of cultures? One of us worked on the Time Inc. plus Warner Brothers plus Turner Broadcasting combination (recounted in our 1998 edition of this book). Those firms, with very different cultures, found a way to work together. Hence Levin discounted cultural differences as a factor in the failure with AOL. Case had a more nuanced view of the differences between “old” versus “new” media companies. He compared the two to venture capitalists that had very different views of a “safe” versus “risky” investment. To illustrate, he used the music business where there are thousands of rock bands, a few that create a hit, and even fewer that turn out to be a franchise like U2 or the Rolling Stones. He noted that Warner Brothers was comfortable investing a billion dollars in movie deals, because from their side that seemed like a safe bet. By contrast, the Time Warner board was “out of its comfort zone” spending $100 million to buy Internet technology. That, of course, is how Case built the AOL franchise. There were, to be sure, “exogenous” factors that sent this January 10, 2000 $350 billion deal to ruin. The dot.com bubble led investors to overvalue AOL and made recouping the purchase price implausible. That’s why many M&A analysts and many executives within Time Warner argued against the deal at the time. Competitors like Yahoo and Google, and the rapid development of the Internet also overtook the combined company with innovations and market appeal. In a January 10, 2010 postmortem, one of the former executives involved summed up the failure in this

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way: “The enduring debate is whether the deal collapsed because the concept was flawed at the start or because the cultures were too different and the execution of the merger was a failure.”2 These are the kinds of questions we address in this second edition of Joining Forces. Here our aim is not only to highlight what goes wrong in combinations and the reasons why, but also— and especially—to show how they can be managed toward more successful ends. In so doing, we draw on our studies of and hands-on experience in over a hundred mergers, acquisitions, and alliances, as well as on the insights of academic colleagues and the best-practice examples of managers from whom we have learned.

What This Book Is About The preface to our prior volume reads, This book is concerned with a specific breed of merger, acquisition, or alliance: the type that attempts to build some strength or capacity greater than that present in the partners as independent organizations. Getting one plus one to equal three calls for sound strategy and a careful management process to guide identification and attainment of true and productive synergy. Opportunistic deals, combinations made purely for cost-cutting reasons, or acquisitions meant more to satisfy a CEO’s ego than to enact a cogent business strategy are not likely to enhance the partners’ abilities to achieve their desired business and financial results. Slamming two organizations together and eliminating redundancies may achieve one-time-only cost savings, but does the organization reap sustainable gains in ability to compete over the long haul?

That same emphasis on creating value through M&A permeates this new edition. Who is this book for? First, our emphasis can help business leaders to understand and work more effectively with the human, organizational, and cultural factors that matter most in eventual M&A success. We are confident that it can also aid line managers and corporate staff in HR, communications, and marketing to better understand and handle what they are called upon to do in M&A. Finally, we hope that our emphasis

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shows fellow scholars and students how theory and practice intersect in managing combinations.

What’s New in This Edition? With our first book, Managing the Merger, we were dubbed “merger mavens” by Fortune magazine. The second, Joining Forces, was called the M&A “bible.”3 So why a third crack at it? Several reasons: • In the early 1980s we identified the “Merger Syndrome,” the human reactions to the uncertainty and threat posed by combining businesses. We showed how this syndrome afflicted not just everyday workers and managers, but also the deal makers and leaders on both sides of combining firms. Nowadays, the majority of the corporate workforce has been through a combination or some other organization-wide restructuring or traumatic change. Many more senior executives are M&A battle tested and integration managers have better training and more tools available to put companies together. This new book helps these seasoned managers to accelerate the process of putting companies together and shows how to build longer-term resilience in a merged workforce. • Much of the case material in our two earlier books dealt with big deals in industry consolidations, large companies absorbing small firms, and either U.S., European, or cross-Atlantic combinations. Today the M&A landscape has changed. Firms like Cisco and Google use alliances as an R&D strategy and take a phased approach to M&A. Companies are buying into growth markets with acquisitions that require a delicate balance between integration and preservation of an acquiree. Global companies are acquiring businesses in China and India. And Chinese and Indian firms, such as Chinalco and Tata, are globalizing by acquiring U.S. and European assets. These deals pose new kinds of strategic challenges and present new forms of the culture clash that destroys so many mergers. This book identifies the organizational and cultural issues posed by these new forms of M&A and how to best manage them.

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• Finally, our guidance in earlier volumes concerned managing a single combination—how to select a partner, set integration goals, put the companies together, bring people along, and so on. Here we also talk about developing an M&A competence within companies—drawing lessons not only from GE and Cisco, but also from Asian companies that have benefited from the M&A lessons learned by Western counterparts. Here we describe how to create a merger mind-set in firms, merger competencies among senior managers, and merger readiness and execution skills among professionals and workers at every level. We believe that the capacity to conceive, organize, and implement combinations can become a core competence of companies and a source of competitive advantage. This new volume shows what it takes—for firms and for their managers—to do M&A well. As with our previous books on M&A, our aim is to blend theory, research, and especially practice in a useful and insightful volume. To accomplish this: • We not only report the who, what, how, and why involved in implementing proven practices in each of the phases of a combination, we also highlight their relevance in different kinds of deals and focus on which ones matter most in eventual M&A success. • We share our personal experiences (good and bad) as researchers and advisers in many deals and the best of the academic and practitioner literatures on making mergers and acquisitions work. Throughout this new edition, we address combination management from five distinct but overlapping perspectives: Strategy M&A is not a strategy. It is a means for a company to achieve its strategy. This book is not a primer on strategy; rather, we examine how companies can best translate their growth strategies into the search for and selection of a combination target or partner. We also show, based on some hard-earned experience, how different strategies dictate different degrees and types of integration.

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What’s new is that scholars, such as Joseph Bower, have studied how combinations differ depending on industry dynamics and the synergies sought.4 In turn, Anthony Buono has distinguished methods for capturing “hard” versus “soft” synergies in a deal.5 These yield new lessons and tools on the “search for synergies” in a combination. Growth into new markets via M&A also poses special challenges for buyers and acquirees alike. Here we see how Pfizer put together a new animal health group with its skillful integration with a partner. We also see how Hindalco, the metals flagship company of India’s Aditya Birla Group, used a series of market-extending acquisitions to transform itself into a global powerhouse in aluminum. Organization Are you buying a product brand or a business? A hands-on case study shows how Unilever had problems trying to preserve the power of the Ben & Jerry’s brand following its heavy-handed integration of the acquired ice cream maker’s factories—a situation since improved as the two sides learned to work together. By comparison, P&G expanded its male customer base with its welldesigned integration of Gillette. In this volume, we build on our prior writings to show how to integrate businesses function by function to capitalize on synergies without destroying the vital “organizational ability” of a partner. People To paraphrase Gerry Levin, there are a lot of psychological things going on in M&A. As organizational psychologists, we’ve written about them crystallizing in the Merger Syndrome. We’re updating that material here with the latest research on which emotional reactions are more prominent at different stages of a combination and what interventions are best suited to address them. On the practice end, some interesting methods are being used to help people to surface and talk about the psychological aspects of M&A. One of us worked with a client that made innovative use of “toys” to surface feelings about culture in the merger of two large Midwestern firms.6 In one exercise, employees from each of two merging companies were asked to choose from a variety of toys and objects the ones that represented their feelings about the

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combination. One employee chose the Etch a Sketch to represent the future because “everything is a blank screen.” Other items selected—a menacing pirate, a prowling lion, and a scrambled egg—evoked more harrowing images. Culture In prior writings, we have identified the sources and symptoms of culture clash in M&A. Here we pay special attention to the clash of multiple cultures—both corporate and national—that arise in a combination. The scale of cross-border M&A continues to grow and the contours are changing: Chinese companies, for instance, now spend far more on cross-border acquisitions than foreign investors spend acquiring companies in China. How about doing a deal in Eastern Europe? “Slovenes do not appreciate the ‘American’ style,” reports our colleague Lidija Drobež, an M&A consultant based in Ljubljana. When asked whether it was Americanism that bothered her countrymen, she said not at all, “We love Americans. It is your aggressiveness in running our businesses that is the problem.” Her studies indicate that the real aggravation for Slovenian acquirees is that the parent company executives rush in, change things, then move on, and their replacements repeat the process. Transition Management In this volume, we focus on best practices to accelerate and improve transition management. Studies find that the interval between the announcement and closing of deals has fallen dramatically, from roughly 130 days a decade ago to 60 days in the past year.7 Why? The Internet and new software technology has led to the formation of “clean teams” that can consolidate information from two companies and prepare combined balance sheets and unit-by-unit comparisons for use in precombination planning. FedEx’s acquisition of Kinko’s highlights how you can speed up the combination period in a friendly deal with the right structure and processes. All twelve hundred Kinko’s stores were rebranded within four months of the close. Employees involved in the combination, over eighteen thousand, went through roughly forty hours of training on combined products, processes, systems, and corporate culture—some 700,000 hours in toto.

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At the same time, some innovative methods to “slow down” the acculturation process were pioneered by Tex Gunning, who led the combination of Unilever and Best Foods in Asia. Executives from thirteen Asian countries were molded into a leadership community and embarked on journeys across the region to get firsthand knowledge of their markets and their own cultural diversity. The result was a transformation of their business that helped to reshape the parent company’s operating philosophy and product lines. Finally, we look closely at the successful operational combination of Hewlett-Packard and Compaq—rich with best practices— and their unsuccessful efforts to reach strategic targets. This takes us into a fresh look at “damage control” in combinations and what executives can do to recover from missteps in putting firms together. Although no one knows when the impact of the global economic crisis will subside, one thing is clear: once business and credit markets rebound, there will be a huge wave of M&A. Some executives will make smart moves to fill product or service gaps, enter new markets, or participate in industry transformations. Others will be less strategic and more opportunistic as they go on a shopping spree for targets at bargain basement prices. This book aims to help those who want to create lasting value with M&A. With experience in scores of combinations over the last thirty years, we have had the opportunity to work with many gifted and insightful colleagues in studying and facilitating the combination process. Thoughtful scholars like Tony Buono, Dave Schweiger, Ken DeMeuse, Barbara Blumenthal, Phillippe Haspeslagh, David Jemison, Sim Sitkin, and many others have shaped our thinking. Leaders and practitioners, including Mike Blumenthal, Will Clarkson, Tex Gunning, Susan Bowick, Walt Freese, Glen Tines, Ronny Vansteenkiste, Dan Baitch, and many more too numerous to cite here, have sharpened our practice. The support of administrators, faculty, and staff at the San Francisco State University College of Business is also appreciated by Marks. Additionally, we very much appreciate the support of Kathe Sweeney, Rob Brandt, Byron Schneider, Cedric Crocker, Mark Karmendy, Donna Cohn, Jeanenne Ray and their colleagues at Jossey-Bass Publishers.

The Authors Mitchell Lee Marks is an organizational psychologist, a member of the faculty in the College of Business at San Francisco State University, and president of the consulting firm JoiningForces .org. He is an internationally recognized expert on managing corporate transitions (including mergers, acquisitions, alliances, downsizings, and restructurings), corporate culture, and executive teambuilding. He is a frequent speaker to professional groups, corporate meetings, international conferences and others, including the Harvard Business School and Smithsonian Institution. Marks consults with a wide variety of firms globally on issues of organizational change, team building, strategic direction, organizational effectiveness, corporate culture, human resources management, employee motivation, and the planning and implementation of mergers, acquisitions, alliances, reorganizations, and other transitions. His clients range from small start-ups to large corporations, and include government and not-for-profit organizations. Marks has advised in over one hundred cases of major organizational transitions. Clients include Pfizer, Intel, AT&T, Lockheed Martin Corporation, Unisys, Hewlett-Packard, Abbott Laboratories, Johnson & Johnson, BP, Molson Breweries, Bank of America, American Airlines, Kaiser Permanente Medical Care Program, U.S. Department of Energy, Los Angeles County, the March of Dimes, and others in the financial services, manufacturing, health care, entertainment, transportation, high technology, publishing, consumer products, and communications industries. Reports of his work have been featured in publications such as the Wall Street Journal, Fortune, The Economist, U.S. News and World Report, Time, Newsweek, New York Times, and Sports Illustrated, as well as on the PBS News Hour, NBC Nightly News, CNBC, CNN, and other television and cable programs.

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Marks is the author of six books—including Charging Back Up the Hill: Workforce Recovery After Mergers, Acquisitions and Downsizings, and Resizing the Organization—Managing Layoffs, Divestitures, and Closings: Maximizing Gain While Minimizing Pain—and scores of articles in practitioner and scholarly journals, including MIT Sloan Management Review, Academy of Management Executive, Human Resource Management, Journal of Organizational Change Management, Journal of Applied Psychology, and Organizational Dynamics. Marks received his Ph.D. in organizational psychology from the University of Michigan, and his B.A. in psychology and communication from the University of California, Santa Cruz. His research on organizational change and transition, as well as on employee motivation and productivity, has received recognition, including the Outstanding Contribution to Organizational Behavior Award from the Academy of Management. Philip H. Mirvis is an organizational psychologist whose research and private practice concern large-scale organizational change, the character of the workforce and workplace, CSR and sustainability, and M&A. He is currently a senior research fellow at the Centers for Corporate Citizenship and Work & Aging, Boston College. A regular contributor to academic and professional journals, he has authored or edited ten books, including the highly acclaimed study of national attitudes, The Cynical Americans, a U.S. national survey of corporate human resource investments; Building the Competitive Workforce; and a ten-year study of organizational transformation, To the Desert and Back. His latest is about business in society, Beyond Good Company: Next Generation Corporate Citizenship. In mergers and acquisitions, corporate clients have included the CEOs of Unisys (Burroughs and Sperry), Prime Computer, Hexcel, Time Warner, CSX, Ben & Jerry’s, and Boeing; plus business group presidents in IBM, General Electric, Chase Manhattan, Hewlett Packard, Unilever (Asia), SK Group (Korea), and Wipro (India). His writings on M&A include two books, Managing the Merger and Joining Forces, First Edition (with Mitchell Lee Marks). Mirvis has led public and corporate seminars and lectured throughout the United States and in over fifty nations in Asia, Europe, and the Americas, plus Brazil, South Africa, and Australia.

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He is a board member of the CDC Development Solutions and formerly a trustee of the Foundation for Community Encouragement and Society for Organization Learning. Mirvis has a B.A. from Yale University and a Ph.D. in organizational psychology from the University of Michigan. He has taught at Boston University; Jiao Tong University, Shanghai, China; and the London Business School. He lives in Ipswich, Massachusetts and is married to Mary Jo Hatch, a professor at the Copenhagen Business School and Gothenburg University, and has three daughters.

To Jason Akaka and Michael Kretchmar, for continually showing how valuable joining forces can be (M.L.M.) To Edward Lawler and Lyman Randall, for teaching me theory, research, and practice (P.H.M.)

Part One

Creating Value in Mergers, Acquisitions, and Alliances

Chapter One

The Elusive Equation One plus one equals three. Billions of dollars and millions of jobs hinge on fulfilling this equation and the hope that a combination of two organizations can produce something more than the sum of the parts. Whether it’s called synergy or leverage, the prospect of creating value through a combination is touted vigorously in boardrooms and executive suites where top managers and their financial, legal, and strategic advisers conjure up and put together deals. The concept is alluring: combine the strengths of two organizations to achieve strategic and financial objectives that neither side could accomplish as easily or affordably on its own. The reality, however, is often woeful: up to three-quarters of corporate combinations fail to attain projected business results.1 In fact, most produce higher-than-expected costs and lower-than-acceptable returns. Meanwhile, executive time and operating capital are diverted from internal growth; morale, productivity, and quality often plummet; talented crew members jump ship; and customers go elsewhere. In the great majority of combinations, one plus one yields less than two. Why do they fare so badly? Price is a factor. If you pay too much to buy a company or join a partner, the resulting debt load requires massive cost cutting that prevents companies from investing in innovation and growth. Naturally, a flawed business strategy and poor choice of partner can also destroy value. Several studies find that an ill-conceived strategy and inadequate due diligence undermine even sensibly priced combinations.2 Our own research program spanning more

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than thirty years documents how mismanaged human, organizational, and cultural dynamics on one or both sides can also spell doom. As executives compete for top appointments and clout, as functions do battle over procedures and turf, and as employees angle for better opportunities (or simply to keep their jobs), even well-intentioned pledges of camaraderie and fair play give way to self-promotion and flank protection. Of course, planning makes a difference. Bankers, lawyers, and industry consultants can variously help executives gauge whom to partner with or buy, how much to spend, how to structure the transaction, and where to position a new mix of products or services in the marketplace. But when it comes to sorting out who gets which jobs, deciding whose methods and systems to use, and actually shaping a combined company culture that will create value, plans don’t make or break the combination. It is fundamentally up to the two managements to make their deal work. From the outset, let us face squarely the reality that most mergers, acquisitions, and alliances have human costs. Stress levels can be acute, and workloads exhausting; former colleagues may be fired and careers derailed; corporate cultures often clash; new structures may not align; and selected systems might fail to mesh. These are the typical, predictable, and troubling trials that people face when they join in a combination. Managers have to work their way through myriad traumas and tribulations to achieve a combined organization that is more competitive, efficient, and effective than its prior components. As one senior executive we worked with put it, “Buying is fun; merging is hell.” But the upside is enormous. Certainly megamergers grab all of the headlines and for good reason: these give companies the scale and scope needed to compete on a global playing field. But the real growth story in the past decade is how top companies like GE, Johnson & Johnson, IBM, Cisco, Tata, and others have adopted what Booz & Company call a “merganic” strategy—a combination of organic and M&A-based growth.3 This translates into building businesses through smaller, focused, and rapid-fire deals in current or adjacent markets, or by acquiring complementary technologies and product lines.

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This book shows how to make one plus one equal three. Our focus here is not on financing deals, the legal ins and outs, or corporate strategy per se, but rather on the flesh-and-blood factors that make combinations succeed. Using principles and practices derived from successful cases, we describe why and how executives have joined forces successfully. We also select some unsuccessful cases, as these can be instructive and humbling. The companies we profile achieved their strategic and financial objectives by building productive capacities and by searching for and capitalizing on better ways of growing their businesses. They were led by executives who took care to understand what it takes to put companies together; united two groups of managers to plan for and build their new organization; and were sensitive to the human, organizational, and cultural issues that had to be addressed along the way. Most important, many of these executives used M&A to grow their businesses and create added value for their shareholders, customers, employees, and themselves.

M&A Scale and Scope The global value of merger and acquisition (M&A) deals rose from US$462 billion in 1990 to over US$4.6 trillion in 2007, slowing the next two years with the financial meltdown. Who makes out financially on the deals? Acquired company shareholders typically do very well, especially in cases where the buyer pays a premium to forestall competitive bidding. By contrast, investors in buying firms frequently experience share price underperformance in the months following acquisition, with negligible long-term gains. Indeed, nearly two-thirds of companies lose market share in the first quarter after a merger; and by the third quarter, the figure jumps to 90 percent.4 Analyses reveal that there have been only modest improvements in the failure rates over the thirty years that serious research has been conducted on M&A performance.5 We’ve noted how erring on price, purpose, and partner factors into failure. Our particular expertise is process—how companies set their M&A objectives, study and select a partner, prepare to combine, manage integration, handle people, and build the “postcombination”

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organization. Let’s start then with the process of creating value through M&A.

Creating Value Many motives prompt executives to acquire, merge, or forge alliances with another organization. Perhaps a combination can help a company to extend its product lines or gain a toehold in a new market where it is too costly, risky, or technologically advanced to do so on its own. Other times, deals are opportune, as when a competitor can be purchased to gain scale or scope, or opportunistic, as when an unwelcome bid puts an attractive company into play. Still other times, M&A can be a defensive move to protect market share in a declining or consolidating industry—or to avoid being swallowed up by someone else. The overarching reason for combining with another organization is that the union promotes attainment of strategic goals more quickly and with less risk than if a company were to act independently. In this era of intense and turbulent change, when market niches open up quickly and whole industries transform on a global scale, combinations also enable two organizations to gain flexibility, leverage competencies, share resources, or create global reach. Value is created when organizations join forces in a way that genuinely enhances the capacity of the combined organization to grow and prosper. To get one plus one to equal three, a combination must yield more than synergies based on cost savings and the elimination of redundancies. One study found that in 90 percent of all combinations, initiatives associated with generating revenue drove more value than any other action.6 Increasing revenue by 1 percent has five times greater impact on the bottom line than decreasing operating expenses by 1 percent. Yet managers in most combinations spend the bulk of their time searching for ways to reduce operating expenses.

Strategy and Synergies We have noted that M&A is not a strategy. It is a means for a company to achieve its strategy, whether that strategy is to firm up a competitive position in a consolidating market, add products to

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grow in the same or an adjacent market, move into new territories around the globe, or participate in an industry transformation. What are the synergies sought in M&A? Economies and Cost Savings Called “cost synergies,” some of the biggest savings in M&A come from reducing payroll and personnel costs. One study finds that on average between 12 and 25 percent of their workforces can be expected to become redundant when two companies merge. Another study of large acquisitions finds that 88 percent of those in acquiring companies remain in their jobs while 64 percent in the target company stay.7 This is one reason that Wall Street cheers when two companies combine: the short-term savings can be substantial. The problems with doing a deal to cut payroll costs are multifold beginning with the fact that it doesn’t take much business acumen to eliminate jobs and lay people off. The risks, of course, are that the most talented and thus most marketable people leave on their own accord and that the aftermath of downsizing leaves a workforce bitter, demotivated, and fearful—waiting for the next shoe to drop. Moreover, there is nothing distinctive or enduring about downsizing as a strategic move. Competitors, too, can cut staff if required, matching within months any cost advantages gained through downsizing. There are, in addition, some one-shot savings in M&A that come from the disposal of idle assets, such as a redundant headquarters building, unused plant capacity, or excess inventories. More enduring are the financial gains associated with economies of scale, such as greater purchasing power vis-à-vis suppliers, and slimming down and eliminating intermediaries in a supply chain. In addition, there are financial synergies associated with a reduction in taxes, improvements in working capital, increased borrowing capacity, and the like. In some instances, such as industry consolidations, these synergies alone may justify M&A activity. But in realizing these cost savings, merging companies risk both staff and customer defections. Moreover, the combined company itself may be in no better position to compete and grow. As our colleagues Philippe Haspeslagh and David Jemison point out, these “value capture”

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motives are not a sufficient motive for companies that seek “value creation” through M&A.8 Resource Combinations A second set of synergies comes not from simply paring down the size of staff and functions but from configuring them in new ways through a combination. We will see, for example, how the alliance between Renault and Nissan created new value as the two sides shared auto platforms and parts and together built a new engine; contrast this with the merger of Daimler-Chrysler that foundered, in part, because the high-status lead company resisted combining resources with its lower-status partner. Or take the case of HewlettPackard and Compaq, which were in comparable markets, had many common products, and operated in a consolidating industry. Naturally, there was extensive cost cutting in this deal and some facilities were closed. But after thoroughly studying their respective strengths and weaknesses, cross-company integration teams worked to reconfigure product lines, preserve key Compaq technologies and brands, redesign sales and distribution channels, and integrate and improve the IT architecture for customers and employees. An “early win” for HP was securing a ten-year, $3 billion contract to provide IT services for Procter & Gamble. It took time, and recovery from some missteps, to mine other resource synergies in this case but the process was set in motion by a well-managed integration process. A key resource synergy comes from the combination of people. The all-too-familiar scenario in M&A is that people experience “mushroom management”—they are kept in the dark, covered in manure, and ultimately canned. Throughout this volume we will describe an alternative approach of preparing people for a combination, engaging them in transition planning, and empowering them to build a new and better organization in their scope of responsibilities. The combination of Pfizer and Warner-Lambert, in which one of us participated, is a good example of how people can make a difference in the success of M&A. Pfizer intended initially to impose its practices on the target. But during the transition process, it experienced the benefits of some of its acquiree’s ways of doing things. Ultimately, aided by interaction with its partner, Pfizer “loosened up” its comparatively rigid culture, sped

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up its formerly hierarchical and labored decision-making processes, and developed, with its partner, a new system of talent management. It also achieved cost savings of $1.4 billion within eighteen months while its stock outperformed the DJIA, S&P 500, and an index of peer companies. Revenue Enhancement Product and market extension deals, by their very nature, create new revenue sources—but this is often just a classic 1 + 1 = 2 proposition with perhaps some cost synergies adding fractional value. Creative integration, however, allows partners to gain more: • Increase pricing power based on larger size • Leverage a larger customer base or target countries for export • Cross-sell products and services • Streamline marketing and reduce agency costs • Realize faster and better product development through combined R&D departments All of these revenue enhancements hinge on holding on to talent and customers and sensibly integrating functions and staff. P&G’s acquisition of Gillette, as an example, joined companies selling noncompeting products in related market channels. Warren Buffet, chairman and CEO of Berkshire Hathaway, described it as a “dream deal”: “This merger is going to create the greatest consumer products company in the world.” To do so, however, would require technology transfer across the two companies. A P&G manager described one aspect of this exchange: For those who have been at P&G, there are a number of significant events that have shaped the way they think (such as Deming, Covey, Monitor, Consumer is Boss, etc.). We need to figure out a way to quickly share these frameworks with those joining P&G. This should also include business processes. At P&G people understand them and they are second nature. We need to make them very transparent to those joining P&G from Gillette. We also need to be patient, realizing the time it takes to learn all these systems. Hopefully, Gillette employees will see them as a way to leverage their horsepower versus as a hindrance.

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New Knowledge and Capabilities Perhaps nowhere is it more important to transfer knowledge and capabilities than in fast-moving fields of info-, nano-, and biotechnology. Companies like Cisco and IBM use acquisitions as a form of R&D. They then create value by linking small firms together to build a business line. Google’s acquisition of AdMob gave consumers enhanced capability to browse the Internet with handheld devices; Electronic Art’s acquisition of Playfish enabled it to distribute computer games electronically and thrive in the growth market of social gaming. But the success of both of these deals hinged on the two sides working together to improve and scale new technologies. In synergies of this type, it is not enough for an acquirer to “buy” a technology; rather, it has to nurture the people behind it and integrate their knowledge into the combined business. Plans, programs, blueprints, and the like can be bought and transferred from one company to another. But what’s involved here is the exchange of tacit knowledge—the experience and judgment that resides within individuals and, often, within a set of relationships among people. The research is clear that the exchange of tacit knowledge between partners in a combination takes a long time and depends on the development of mutual trust and rapport.9 Interestingly, retention of senior managers may be less important as compared to holding on to top technologists.

Searching for Synergies The search for synergies is a crucial part of every phase of M&A— from translating business strategy into M&A objectives, to searching for a partner, to planning and implementing integration, to nurturing the combination over the longer term. A few years ago, one of us received a call from the CEO of a computer products company. His firm had a solid niche in the highmargin, high-end range of the market but growth was in the lowmargin, low-end segment. The CEO had listened to advisers who warned that internal growth would take too long and made an acquisition of a firm operating in the lower end. Shortly after the deal’s announcement, and on their own initiative, several senior executives from the acquiring company spent a weekend holed

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up in a conference room where they hammered out what they called the “Integration Plan.” When the CEO read the plan he found that, among other things, it called for the elimination of the to-be-acquired firm’s R&D function. That’s when he gave a call. “Think about it,” the CEO said, “eliminating their R&D function would defeat the very purpose for doing the deal—it would eliminate all the engineers with expertise in the low end of the product line.” The next step, accordingly, was to bring managers together to review the acquisition strategy and to make sure everyone was on the same page about the key synergies in this deal. Figure 1.1 shows four classes of synergies in a combination matched up against key functions in a firm’s value chain. Smart companies search for these synergies at every step of the chain. R&D, as noted, can be a rich source for knowledge transfer synergies. Boston Scientific’s purchase of Guidant was described as a

Figure 1.1. Searching for Synergies in M&A. (Corporate functions) R&D

Procurement

Manufacturing

Marketing

Sales

Financial/Cost Savings How much can we save from consolidation, common sourcing and marketing, eliminating redundancies? Can we capitalize on economies of scale in contracts, borrowing, etc.?

New Resource Combinations How much can we benefit by grouping factories, sharing manufacturing and distribution, combining IT? Can we get access to better people, suppliers, technology with the power of 2?

Revenue Enhancements How much can we gain by cross-selling, leveraging larger customer base, streamlining supply chain? Can we speed up or improve R&D, sales support, the customer experience?

New Knowledge/Capabilities What knowledge and capabilities can we transfer? Can we learn from each other’s people, cultures, and distinct competencies?

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“deal from hell” when first announced but the parent has nurtured its subsidiary R&D to the point that it is now a global leader in medical stents. Procurement and manufacturing are areas for cost savings. One study of multiple combinations estimates the range in savings from M&A to be increasingly significant as you progress from raw material procurement (4–12 percent), to components (4–17 percent), to production costs (5–20 percent).10 More significant can be the benefits of knowledge-transfer in manufacturing, as we will show in the Renault-Nissan case. In the marketing end, the full range of synergies is present. We’ll see P&G, Pfizer, and Unilever mining these possibilities throughout this volume. How you brand the combination can also be a source of value creation. When SBC Global acquired AT&T, for instance, it adopted the acquiree’s name. Why? CoreBrand, a communication firm that studies brand equity, estimated that the AT&T name alone was worth $2.4 billion at the time. Finally, cost and resource synergies can be found throughout the corporate functions in a combined company. The template of synergies by functions helps companies to think about value capture and value creation in every phase of their dealings.

Combination Forms Organizations can link together in many forms of legal combinations, ranging from a relatively informal network to outright absorption of one entity by another. The kinds of combination vary by the depth of commitment and level of investment between the organizations joining forces (Figure 1.2). At the lower end of the continuum is the relatively simple relationship of organization A licensing a product, service, or trademark to organization B. Next, a strategic alliance is a cooperative effort by two or more entities in pursuit of their own strategic objectives. A joint venture ( JV) goes further, by establishing a complete and separate formal organization with its own structure, governance, workforce, procedures, policies, and culture—while the predecessor companies still exist. At the far end of the continuum are mergers and acquisitions. A merger usually involves the full combination of two previously separate organizations into a third (new) entity. An acquisition typically is the purchase of one organization for incorporation into the parent firm.

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Figure 1.2. Types of Strategic Combinations. Licensing

Alliance/Partnership

Low

JV

Investment Control Impact Integration Pain of separation

Merger

Acquisition

High

Important differences distinguish these forms. Financial investment and risk increase along the continuum, as shown in Figure 1.2, but so does the control held by the lead company. Along this same line, the impact on the target company or lesser partner grows, as do the requirements for integration. If, for whatever reason, a combination does not live up to expectations (or if the needs of either party change), then the formal bonds of a merger or acquisition are much more difficult to undo than are the relatively time-bound and looser ties of an alliance or JV. These forms of combination differ in psychological as well as legal and financial terms. In an alliance, for instance, you do not own the other company, nor do you unilaterally control decision making. So key questions need answers: Where is the authority? Who has more power? The alliance between Disney and Pixar was fraught with conflict over these answers. Merger implies some level of cooperation between companies, but what may be announced as a merger is rarely perceived as being a combination of equals by the members of at least one of the partnering organizations. People from one side are likely to feel a sense of superiority and greater entitlement, while those from the other side may see themselves in a relatively weak position and perceive threat to themselves and their way of doing things. Psychologists Sue Cartwright and Cary Cooper use the metaphor of marriage in describing varying types of combinations.11 They liken an alliance to two people living together; the partnering organizations accept each other as they are and maintain their independence. In a traditional corporate marriage, by contrast, one partner assumes a more dominant role—although there may be considerable debate as to which partner perceives that

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role as rightfully its own. In these cases, differences in style and culture identified early in the courtship are apt to be regarded as novel and may even enhance the attractiveness of the partner. However, once the contract is legalized, the dominant partner “conforms” the acquired firm to its structure and culture. And, as happens in many marriages, this is likely to be resisted, passively or aggressively. What Cartwright and Cooper call a “modern marriage” is still the rarest but most desirable way to join forces. Each side brings distinct strengths and characteristics that, when combined, produce synergies. The essence of this modern organizational marriage is shared learning: the partners are stronger and more successful together than if they continue to operate separately. Differences in organizational procedures or cultures are seen as potentially adding value to the partnership and are respected and built upon as their partnership unfolds.

Combining Organizations and Cultures At the broadest level, senior executives need to decide how much to integrate two firms in a combination. When it comes to putting together, say, manufacturing or marketing, the synergies therein may dictate different levels of integration. For instance, in many high-tech acquisitions, marketing and sales in a subsidiary are absorbed into the parent company—which often has more competence and better distribution channels. But the acquiree’s engineering and manufacturing may be given high levels of autonomy to “do their thing.” In health care combinations, back office functions may be consolidated, and systems and procedures standardized, but the delivery of care is left to each of the providers. In oil industry mergers, in turn, refining and distribution are often consolidated yet each company’s dealerships and brand kept separate. In all of these cases, decisions about integration ought to hinge on the impact on value creation. In the same way, there needs to be a “business case” for combining cultures. It is very likely that senior executives will see a need for a common and unified culture in some areas of the combination and for more pluralism in others, as in the hightech, health care, and oil industry examples above. Occasionally,

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executives will be ready to articulate their case for combining cultures; more frequently, however, they will need prodding to make explicit what has been implicit in their thinking about the combined organization. Four “end states” need consideration: 1. 2. 3. 4.

Where the lead or parent company’s culture will prevail Where the partner’s cultural autonomy will be honored Where the two sides’ cultures will be blended Where new cultural themes need to be developed through a transformational process

In our opinion, companies joining forces need a high-level vision of this end state before agreeing to a deal. That way decisions about how to put manufacturing, marketing, and other functions together can be weighed against the desired end state. However, executives do not need to have an intricate or fully worked out cultural end state from the get-go. To the contrary, combination partners learn a lot about each other and their cultures only after they work together and the two sides become better acquainted. Figure 1.3 shows a grid of different

Degree of Change in Acquired Company

Figure 1.3. Define the End State. High

Absorption Acquired company conforms to acquirer Cultural assimilation

Transformation Both companies find new ways to operate Cultural transformation

Best of Both Additive from both sides Cultural integration

Low

Preservation Acquired company retains independence Cultural autonomy

Reverse Merger Unusual case of acquired firm leading Cultural assimilation

Low

High Degree of Change in Acquiring Company

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organizational and cultural end states that can help executives to think through their options and clarify their intentions for the combined organization. • Preservation. This is the case where the acquired company faces only a modest degree of integration and retains its ways of doing business. This end state is desirable in diversified companies that promote cultural pluralism among business units and in acquisitions where the intent is to secure and build on human and social capital. To succeed, parent company management has to protect the boundary of the subsidiary, limit intrusions by its corporate staff, and minimize conformance to its rules and systems. Strategic synergies generated in a preservative combination come from the eventual cross-pollination of people and their work on joint programs. • Absorption. Here the acquired company is absorbed by a parent and assimilated into its culture. This is the classic model used by GE Capital and, until recently, by Cisco— companies that regularly buy and culturally assimilate small companies. Lead companies often have to bring in new management in these cases and conform the target to corporate reporting relationships and regimens. This end state is often workable in horizontal mergers that join companies in the same industry. Acquisitions in the U.S. airline industry, such as Delta’s absorption of Northwest, are classic examples. • Reverse takeover. This is the mirror image of the absorption combination. Here the buyer wants to adopt the ways of the seller. The acquired company dictates the terms of the combination and effects cultural change in the lead company. When this unusual type of combination occurs, it typically involves an acquired business unit or division absorbing the operations of a parallel unit in an acquirer. For example, REO Motor Company acquired Nuclear Consultants and, ultimately, folded its operations into the acquiree that became the modern-day Nucor. • The Best of both. This is the case of achieving synergy between companies through their partial to full integration.

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Geographical expansions or roll-ups in fragmented industries often seek this end state. Historically, these additive kinds of combination tend to be more successful than others—but also bloodier. Financial and operational synergies are achieved by consolidation. This means crunching functions together and often leads to reductions in force. The optimal result is full cultural integration—the blending of both companies’ policies and practices. The “merger of equals” between SmithKline and Beecham (and of these with Glaxo Wellcome to form GlaxoSmithKline) and the combination of Canada’s Molson Breweries with Australia’s Carling O’Keefe are examples. • Transformation. Here both companies undergo fundamental change following their combination. This end state is desired when an industry is radically evolving or emerging. Synergies come not simply from reorganizing the businesses, but from reinventing the company. This is the trickiest of all the combination types and requires a significant investment and inventive management. Transformation poses a sharp break from the past. Existing practices and routines must be abandoned and new ones discovered and developed. In the integration of Pfizer Incorporated’s Animal Health Group and SmithKline Beecham’s animal pharmaceutical business in Europe, two orthodox country-centric operations were transformed into a new organization aligned with the realities of the European Community. Traditional country-specific structures and cultures were broken down and forged into a pan-European strategy, structure, team, and identity as the pre-combination parties merged.

Cultural Fit Culture is a lot like breathing: you don’t think about breathing, you just do it. You may be aware of your breathing now, because it’s been raised to your attention. But if someone came up from behind, cupped their hands firmly around your mouth and nostrils, and threatened your ability to breathe, then you would certainly pay attention to breathing. The same holds true for a culture clash in a corporate combination. People don’t regularly

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notice their corporate culture, but when thrust into a merger, employees become aware of how their ways of doing things differ from those of the other side. When they feel threatened by a combination—often because they see themselves on the weaker side—employees not only see differences but also feel a sense of vulnerability and fear over losing their accustomed way of doing business. Just as an organization cannot effectively run with multiple incompatible information systems, it cannot succeed with multiple incompatible cultures. The key is to get people in the lead company to act not like missionaries landing in the new world with the intent to convert the heathens to religion, but like diplomats who are charged with bringing disparate factions together. Companies like Scheering, BP, and AT&T now proactively alert managers to the fact that culture clash is inevitable and prepare them with steps that can be taken to minimize its impact. Keep in mind that successful combinations do not require the partners to be “cultural clones.” In fact, a moderate degree of distinction between the partners’ cultures usually results in the most successful integrations—the parties have enough similarities to take advantage of the differences, but they are not so disparate as to be like “oil and water.” As depicted in Figure 1.4, a moderate

Figure 1.4. Cultural Differences and Combination Outcomes.

Combination Outcomes

Positive

Negative Low

Medium Degree of Cultural Differences

High

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degree of cultural distinctiveness can be a source of creativity and synergy in combinations. If it were possible to find two organizations with completely identical cultures and values guiding their behavior, the combined organization would at best be no better than the sum of the parts. Although too much distinction in underlying values and ways of approaching work is unhealthy, the best alliances and acquisitions occur when a fair amount of culture clash prompts positive debate about what is best for the combined organization. Ideally, this debate includes consideration of cultural norms that may not be present in either organization separately but that may be desirable for the combined organization.

The Human Side of M&A Employees in combining organizations often find themselves working harder but not smarter. One likened his situation to that of a chicken with its head cut off, frantically moving about with no sense of direction or hope for survival. Another talked of struggling to keep her head above water; she knew what to do but was weighed down by a heavy workload. Compounding the sheer volume of work confronting people in a combination is a lack of prioritization of what to tackle first. Role ambiguity can paralyze people in combinations, too. They wonder who is responsible for what and whom to go to for which decisions. What most strains survivors of combinations is the perceived loss of control over their working lives. No matter how well you have performed on the job, your track record can be meaningless, and your employment taken away—if not in the combination, then in a subsequent downsizing. Interviewed a year after his telecommunications company was acquired, a midlevel marketing manager articulated this control issue: “I used to think that if I did my job well, completed my projects on time and in budget, I would be able to control my fate. That’s no longer true. This merger is bigger than I am. I’ve seen other managers from our side—people who clearly were good, if not excellent, performers—get the shaft. I didn’t ask to be acquired, but now my track record doesn’t count for anything. I’m at the mercy of some bureaucrat at headquarters. I’m no longer the master of my own fate.” In a combination, one of the few areas that employees feel they have control over is whether to stay or leave the company. The best

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and the brightest among the workforce—those with the skills and experience in greatest demand—are the most marketable and most likely to walk away. Recruiters swarm over companies engaged in combinations; talented employees are vulnerable to poaching competitors. Therefore, mismanaged combinations have the potential to destroy a firm’s human capital. As an experienced merger manager notes, “An organization can burn down and be rebuilt. If you run out of money, you may be able to borrow more. But, if you lose people, you’re dead.” Loss of expertise and the departure of key role models further demotivates remaining employees. The impact of a poorly managed combination lingers for years. It is measured in the drain on both human resources and operational results. “Survivor guilt,” a well-documented reaction to reductions in the workforce, leaves employees feeling culpable for having been spared and depressed at their inability to avert future layoffs.12 If faithful employees feel that layoffs are unfair, their loyalty drops more sharply than that of less-committed survivors.13 Insensitive dismissals also hurt a firm’s reputation, making future recruitment more difficult. Since the publication of our previous books on this topic, employees’ perceptions of loss of control have been intensified by the multiple transitions experienced in many workplaces—an acquisition followed by a downsizing, then a restructuring, changes in leadership, a new strategy, and perhaps another restructuring and reduction in force. All of this leads to “change fatigue” that translates into cynicism about management and robotic responses to the next change initiative. According to one combination veteran, these psychological and behavioral reactions to a combination prompt many employees to “withdraw their personal and professional power from their jobs, while making it look like they’re still working.” People’s bodies show up at work, but not their hearts and souls. As executives exhort their employees to boost productivity, enhance quality, and be more globally competitive, many simply respond with a shrug.

Transition Management There is no one best way to manage a merger, acquisition, or alliance. Personalities, product profiles, and procedures vary from

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one combination to another, making a one-size-fits-all prescription for achieving success ill-advised. The objectives in one deal may call for expedient implementation, those in another a more cautious approach. Nevertheless, there are some practical theories regarding transition management that apply in almost every case. Stages of Change To begin, successful combinations build on one of the simplest yet most helpful models of organizational change: the three steps of unfreezing, changing, and refreezing introduced by social psychologist Kurt Lewin.14 Suppose that your target for change is not an organization or individual, but an ice cube. If you want to convert the cube to another shape, you can proceed in one of two ways. The first is to use a hammer and chisel; with the right skill, you can transform the ice cube into the shape of a cylinder. But there’s a cost to this approach: you lose a lot of ice as the cube is chiseled. The alternative is to unfreeze the ice cube, change its mold to that of a cylinder, and refreeze it. Unless you’re clumsy in pouring unfrozen water from one mold to the other, you gain the desired cylinder with no loss of volume. With organizations involved in M&A, then, the first step in the process of change is to unfreeze present behaviors or attitudes. The deal itself shakes things up, but it takes a compelling rationale for joining forces along with information and education on the disadvantages of the status quo to unfreeze mind-sets. Still, companies, like people, are reluctant to abandon habits and accustomed ways. This is why we recommend that people be engaged, early on, in fact-finding about current realities, collectively search for synergies, and prepare themselves emotionally for the combination. We term this strategic and psychological preparation. The second step is moving the two organizations from their original state to a new one. This means, for example, delineating the principles that govern the combination, defining the values that will be embodied in the end state, and stating what behaviors will and will not be tolerated as the two firms combine—and then walking the talk! The companies move toward combination as the two sides plan and take steps to, for example, leverage each other’s technology, strengthen the customer service culture,

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devise a leaner organizational structure, deploy new work processes, or select people with the skills and capabilities required to achieve new objectives. Recognize, however, that although senior executives design the new mold, it is business and functional managers, and everyday employees, who have to do the pouring and manage the inevitable spillage. The third step, refreezing, reinforces and locks desired behaviors or mind-sets into the combined organization. This means aligning structures and systems, performance targets and incentives, and action with intentions to support the desired end state and strategic goals. This refreezing creates what Lewin characterized as a new “quasi-stationary equilibrium.” Alas, few companies can savor such a steady state for long, as new opportunities and problems, and new deals and combination prospects, beckon. Perhaps a better analogy is to a muscle. Muscles that are well exercised and fit are ready when you need them. In this regard, Larry Bossidy, CEO of Allied-Signal, argues that no one is better prepared to handle complex change than a company that has managed it successfully in the past. Although the unfreezing-changing-refreezing model is simple to imagine, it is difficult to implement. We will see here how General Electric, as one example, developed a robust model of change applied to M&A that starts in the preacquisition period and extends through to the assimilation of acquired companies. GE’s managers are trained in this process and work with counterparts at the fabled Jack Welch Learning Center in Crotonville, New York, to plan and implement their deals. But this is the exception; too often companies simply call on external consultants to lead their transition and use off-the-shelf change management tools. As a result, transition management in M&A is typically no better, and often worse, than the garden variety change programs that operate in companies. A production supervisor, expressing a common sentiment, labeled it BOHICA when it was announced her company was to be acquired—Bend Over Here It Comes Again! Psychology of Adaptation Theories of personal change follow the Lewinian logic but focus on the psychological mechanisms of adapting to endings,

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transition, and new beginnings.15 People have to loosen their grips on the old before they can accept the new, yet there is a dynamic tension posed by endings—between “hanging on” versus “letting go” of the past. As psychologist Harry Levinson points out, “all change is loss.”16 People often lose identification with their former organization in an acquisition or merger, and lose their ties to colleagues who retire early, leave voluntarily, or are laid off. Even the seeming winners have to cope with uncertainty and loss of familiar methods and routines. In almost every successful combination we have worked with or observed, management has taken steps to help people let go of the past through activities as varied as grieving meetings, rap sessions, and ritual burials of memorabilia. When it comes to change itself, leaders of combining organizations have to contend with people who may be carrying “baggage” from previously mismanaged deals and downsizings, reengineerings, and other types of change initiatives. Straight talk and active involvement in the combination process are the best means to counter cynics and rekindle people’s desires to be on a winning team. We will see, in later chapters, how to set a proper pace for the combination that generates some “quick wins” while giving people more time to study and develop options for longerterm value creation. Finally, when it comes to new beginnings what is most crucial is “reculturation.” New jobs, roles, team members, organizational structures, systems, and such, and new leaders will all change in a matter of months or years. A new culture, by comparison, takes longer to build but provides a more enduring basis of purpose and value to which people can attach themselves. The work of building this new culture starts with defining the end state and nurturing it into being. Woe to companies that don’t fully attend to acculturation and the psychology of adaptation—as the cautionary tale that closes this chapter warns.

A Cautionary Tale The strategy behind Unilever’s acquisition of Ben & Jerry’s was sound. But the process of integration was not well conceived and the combination foundered for a few years. The story of the

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founding and growth of B&J’s has been well chronicled.17 The key points are that the founders are ex-hippies who introduced such flavors as Cherry Garcia (named after the Grateful Dead’s founder), along with Coffee Heath Bar, Chunky Monkey, and other add-in flavors to the super-premium category of ice cream. They are also “social entrepreneurs,” fabled for their support for community interests and creative cause-related marketing. After thirty-plus years of growth, the company hit a wall, and received unsolicited takeover bids from several large, multinational corporations. Unilever entered the fray and bought the company with a tender offer that was a 25 percent premium over the current stock price. Buying Values This is only one of many examples from the past few years of large companies acquiring smaller businesses because of their strong brand presence among consumers who favor them not only for their products, but also because of their commitments to corporate social responsibility (CSR). Other CSR-driven acquisitions include the Body Shop by L’Oréal, Tom’s of Maine by ColgatePalmolive, Stonyfield Farm by Groupe Danone, and confectioner Green & Black’s by Cadbury Schweppes. There is, not surprisingly, considerable debate about the gap between people’s expressed interest and actual buying behavior in these regards, and certainly as to whether consumers will pay a premium for such goods and services.18 Still, it is well documented that a firm’s social credentials can help differentiate its brands, that consumers will switch brands based on CSR issues, and that when they know about a firm’s bona fides in this area, it is a factor in purchasing decisions. Indeed, evidence is that when a product’s social content aligns with their consumers’ personal interests, it can be decisive in building brand loyalty.19 A key question: Are these acquisitions about buying brands to gain in a growing market segment? Or about buying companies whose DNA will continue to infuse their own offerings and, perhaps, inform how its new owners do business? Evidence suggests that the Body Shop, Tom’s, and Green & Black deals have been configured as “preservative” acquisitions. They operate as more or less stand-alone business units with new owners exercising

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financial oversight and exerting some strategic control. By contrast, teams from Stonyfield and Danone worked together to combine the “best of both” in areas of sourcing and product development.20 Ben & Jerry’s integration into Unilever was, by comparison, a mixed model. It kept its marketing autonomy, but in several areas (for example, finance, IT, communications, sales, and, crucially, manufacturing), Unilever effected an “absorptive” integration. After a brief period when, under agreement, no changes could be implemented, Unilever undertook layoffs at the B&J headquarters, converted B&J’s fun-and-funky Web site to corporate control, and installed one of its own marketers as general manager. The impact was negative: long-service employees who were not laid off left anyway; Ben and Jerry refused to put their personal likenesses and messages on the corporatized Web site; and the new GM, though greeted with a festive B&J parade, was viewed by some as an interloper. To make matters worse, the main manufacturing plant—and site of the brand building and the #1 Vermont tourist attraction factory tour—was severed from B&J control and reported into Unilever’s North American Ice Cream division in Green Bay, Wisconsin. This began months of political power plays where the ice cream division modified ingredients, challenged longstanding commitments to pay dairy farmers a premium to sustain them through tough times, fought against further use of organic and fair trade ingredients, and pushed constantly to increase margins. Their justification: B&J’s product costs, particularly compared to Good Humor and Breyers, the other brands in Unilever’s North America ice cream portfolio, were simply too high. This integration model yielded financial synergies, but over the next two years produced other costs including lower morale, quality problems, a loss of innovativeness, and more. It also created friction that manifested in a culture clash. Cultural Clash Unilever’s pedigree in CSR dates from its founding in the 1880s by social entrepreneur William Hesketh Leaver.21 But cultural compatibility wasn’t evident to B&Jer’s. One commented, “When I started here it seemed like the product and social missions were

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upfront and the economic mission took care of itself. Now it’s all about money . …” Another added, “The cultures of Green Bay and here [Burlington, Vermont] are night and day.” A more nuanced look at the cultural fit in this case suggests that Unilever was a compatible parent for growing the B&J brand, but that the ice cream division was not a good place to situate the people that make it! As one B&Jer described it, “They didn’t figure out that they spend millions on advertising to sell products and that while we spend a little more on ingredients we get a ton of free press out of our social mission . …” The hitch? None of those savings on advertising went into the North American Ice Cream division’s P&L. Learning Together Then, as sometimes happens in a combination when the two sides learn from each other, things began to change. For one, Unilever’s GM on the scene came to see the value of and become socialized in B&J’s ways; subsequently he used his influence to gain the acquiree more sway in recipes and sourcing decisions. Second, the parent company learned the hard way about the vagaries of social capitalism in the United States. The Green Bay team had “pooh-poohed” B&J’s warnings about growing activism over “battery cage” chickens. When NGOs began to protest the use of eggs from tortured hens, however, higher-ups in Unilever took notice, heeded B&J’s advice on ingredients, and began to pay closer attention to what its subsidiary had to say about other aspects of socially responsible business. Finally, B&J got a new CEO, or self-styled Chief Euphoria Officer, Walt Freese, who had been GM at CSR pioneer Celestial Seasonings and was savvy to corporate mores. Freese put together a “managers of managers” team, or MOM, that spent the next years effecting a reculturation of their company. This included reengaging Ben and Jerry in company campaigns and rehiring select flavor specialists and cause marketers. Soon thereafter B&J, in partnership with the Dave Matthews Band and SaveOurEnvironment.org, launched a “moo-vement to lick global warming.” Today there is good two-way learning between B&J and Unilever. B&J has learned a lot from its parent on global sourcing

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and the localized marketing of “fair trade” products. Unilever, in turn, has imported some “fun and funk” into its marketing of other brands. Most significantly, B&J now reports into a new North American marketing group and its factory is reconnected to its headquarters. Reflecting on recent developments, one B&Jer remarked, “It’s almost like we’re using the social mission to drive the business again.” These developments would reclassify Ben & Jerry into a more “transformative” acquisition—where both parties are being transformed by their partnership.22

Making One Plus One Equal Three Our work as researchers and advisers to executives leading the M&A process over the past thirty years has identified insights relevant to all combinations—be they large or small, friendly or hostile, absorptive or transformational. In this volume, we summarize these findings from over a hundred combinations along with the lessons learned from other scholars and consultants who have studied and documented the M&A process. In the next chapter, we examine why so many deals fall short of their financial objectives with the conclusion that actions taken at each of the three phases of a deal—precombination, combination, and postcombination—have a profound impact on M&A results. We then review each phase’s strategic, organizational, human, cultural, and transition management actions that matter most in eventual combination success. Part Two addresses strategic and operational preparation (Chapter Three) in the precombination phase along with the psychological and cultural dimensions of doing a deal (Chapter Four). Part Three describes leadership (Chapter Five) and transition management (Chapter Six) of the M&A process in the combination phase, with detail on managing people through the transition (Chapter Seven) and minimizing the inevitable clash of cultures (Chapter Eight). Part Four shows what it takes to translate a deal’s potential synergies into real enhancements in building the postcombination organization and culture (Chapter Nine) and joining together people and teams (Chapter Ten), and, when things don’t work out as desired, how to recover from missteps and reroute a combination toward success (Chapter

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Eleven). Finally, Part Five tells how companies track the progress of M&A and its impact on organizations and people (Chapter Twelve) and learn from past or current deals to build a core competency to better manage future ones (Chapter Thirteen). As we will see, these are the companies that truly succeed in using M&A to achieve their financial and strategic objectives. Although we believe that combination management can benefit from the insights generated by ourselves and others, our ultimate objective is to help people be more aware of and skilled in managing the M&A process to create value.

Chapter Two

What Goes Wrong and How to Make It Right Minneapolis, October 2009. Two Northwest Airlines pilots overflew the Minneapolis airport by 110 miles as more than a dozen air traffic controllers in three locations tried desperately to reach them. Meanwhile, the North American Aerospace Defense command had four fighter jets on runway alert to intercept the plane. What went wrong? Drinking in the cockpit? On the contrary, the pilots missed their destination because they were busy on their personal computers trying to learn the scheduling system of their company’s new owner, Delta Airlines. A random event? Surely, but combinations immerse employees in untold numbers of unfamiliar tasks involving new policies, systems, and procedures. In this case, getting in an early bid for a flight assignment was important, because many Northwest pilots now have to operate from cities far away from their home base. Moreover, special training is required because the Delta scheduling system is not as “intuitive” as their prior one. This raises a key M&A question: Who decides which of the two companies’ systems to use? On what basis? The usual answer: Who bought whom! Interestingly, this is not the only time that airline mergers have distracted employees from their routine job performance. When Northwest bought Republic airlines, the baggage handlers, unconsulted and anticipating massive layoffs, purposely mistagged thousands of pieces of luggage so that they ended up at different locations from their owners. Shortly thereafter,

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Northwest executives met with the baggage handlers’ union to talk over the implications of the deal. Those who lead, participate in, or study combinations use many metaphors and genres to characterize the goings-on: the old west (shoot-outs); the high seas (piracy); chivalry (knights and damsels); warfare (raids and rescues); medicine (surgery); family (parent and child, sibling rivalry); and of course courtship, love, and marriage.1 One way or another, these all speak of the human dimension that lies behind the financial and strategic logic of M&A. A CEO with whom we worked describes the integration process this way: “Managing a merger is a lot like killing a moose. The hunt is fun. But then, you have the dirty, smelly work of gutting, cleaning, and preparing the carcass.” This chapter provides an overview of M&A in its historic and contemporary context and then examines, in brief, the human dimensions at every stage. Make no mistake: people matter in combinations and can make or break the results of a combination of firms. Certainly success depends on sensible strategies and financial acumen. But it also depends on people-minded management of the transition process and on winning over employees’ hearts and minds to a new way of doing business.

Combinations Historically and Today Combinations have long been a factor in sculpting the business landscape. Six distinct waves of merger activity have influenced the shape of organizations and industries in the United States. 1. Beginning in the 1890s, the first wave witnessed thousands of horizontal mergers, which brought together companies in the same industry. Small and medium-sized companies combined to form such giants as United States Steel, Standard Oil of New Jersey, DuPont, and General Electric. 2. Federal legislation in 1914 halted these industrial consolidations. Over time, however, court decisions gutted this legislation and a second wave of buying and selling surged from 1925 through 1931. Vertical combinations, in which a buyer acquired a major supplier or customer, predominated in this period, producing American Cyanamid, Radio Corporation of

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America, General Foods, and others. The Great Depression and World War II slowed the frenzy, and stiff government action on the anti-trust front brought it to an end. 3. The strong postwar economy of the mid-1950s led large corporations to seek new avenues of growth. With regulation and enforcement inhibiting deals within industries, motivation and money were redirected toward diversification. Conglomerate mergers (linking firms with different customers and technologies, often in different industries) defined the third merger wave. This wave swelled in the 1960s with the rise of inflation and the preeminence of portfolio models of corporate finance. Between 1961 and 1968, Litton Industries made 79 acquisitions, Gulf & Western made 67, and Teledyne, which had no assets in 1960, took over 125 firms. 4. In 1974, Mobil acquired Montgomery Ward (then part of Marcor) for $1.6 billion; a year later GE acquired Utah International for $1.9 billion. These events ushered in the fourth wave of combination activity—characterized by financially driven opportunistic deals—and fundamentally changed the scope of deal making in a variety of ways. First, this wave brought forth megamergers. Blockbuster deals, such as Beecham Group’s purchase of SmithKline Beckman and the Kohlberg Kravis Roberts takeover of RJR Nabisco, were routine headline grabbers in the business press in the 1980s. Meanwhile, justice department officials in the Reagan and George H. W. Bush administrations virtually eliminated the practice of contesting large combinations, responding instead to the call to establish organizations with the scope and size to compete globally (a practice retained during the Clinton administration). The fourth wave featured new players using new tactics in the contest for corporate control. Corporate raiders decried the self-indulgence of senior managers who enjoyed bloated salaries and handsome perks while allowing share prices to fall well below their potential value. The most opportunistic raiders then purchased those undervalued shares, pumped up prices through bidding wars, and got paid off in greenmail or by selling their shares at a premium to white knights. Others restructured firms, downsized staff, and sold off prime

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assets (breakup raiders) or simply took over control from incumbent management and whipped firms into shape (discipline raiders). As the economy soured in the late 1980s—and public disdain for the greed of Wall Streeters and yuppie stockbrokers rose—unfriendly takeover attempts, corporate breakups, and other financially driven moves slowed. Junk bonds lost currency, and banks and other lenders did not have the risk capital available to finance deals. Before it ended, however, the fourth wave of combination activity radically transformed the corporate terrain. Some 250 of the firms on the 1980 Fortune 500 did not survive intact to the 1990 list. 5. The mid-1990s to 2000 saw a merger wave of tsunami proportions crash ashore. The U.S. economy was strong and financing on a global scale was available. The scale of deals continued to climb as corporate giants combined in industry transformations. Time Warner purchased Turner Broadcasting, Disney joined Capital Cities/ABC, and Rupert Murdoch’s News Corp grew through multiple deals; the entire telecommunications industry was put into play with the breakup and then recombination of the Baby Bells; and the banking sector went through a flurry of combinations and roll-ups of regional into national banks. Meanwhile, outfits like GE Capital and Cisco undertook hundreds of small deals to build out new business lines. More often than not, companies doing deals in the 1990s sought real synergies with their partners rather than to merely cut costs or create a portfolio of assets to reduce risk. The fifth wave also saw globalization driving more deals. Typically such deals involved U.S. and European companies buying or forming alliances in Asia-Pacific, Latin America, or across the Atlantic. But Rupert Murdoch’s acquisition and alliance spree in the media and entertainment industry took off in Australia and Europe before he set his sights on the U.S. market. This wave subsided with a thud with the dot-com bust and stock market collapse in 2000. We are now in a sixth wave of M&A activity with new players, new market leaders, and new types of deals. Several features are notable:

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• Big gets bigger. The world’s largest companies continue to get bigger through M&A. In the most active industry sectors in 2009, Pfizer acquired Wyeth and Merck bought ScheringPlough (pharmaceuticals) and Oracle purchased Sun, HP bought 3Com, and Cisco did two big deals for over $6 billion (computer technology). • Private equity and sovereign states. Certainly one new feature in M&A has been the growth of private equity which accounted for 20 percent of M&A activity in 2007, before the market collapse. Many of these deals involved turnarounds. Neiman-Marcus, Metro-Goldwyn-Mayer, and Toys “R” Us were all acquired via private equity. Sovereign investors, such as the Government of Singapore Investment Corps, the Mideast Emirates (Dubai, Kuwait, Abu Dhabi, and so on), and China, Korea, and even Japan poured monies into M&A. • Global cross-currents. Meanwhile large companies in China and India began undertaking buys around the globe. Chinese companies, for instance, now spend far more on cross-border acquisitions than foreign investors spend acquiring companies in China. State-owned companies, such as Petro China, China Petroleum & Chemical Corps, and China Merchant bank, as well as appliance maker Haier, are all part of the nation’s “Go Global” strategy. In the past few years, the India-based Tata Group, Hidalgo Industries, Wipro, and Dr. Reddy’s Laboratories have made significant deals in the United States and Europe. Note, too, that in the past few years South African breweries bought Miller beer and Brazil’s co-owned InBev bought Anheuser-Busch; Taiwan’s Acer purchased Gateway and China’s Lenovo acquired IBM’s PC division; in turn, industry roll-ups and consolidations are under way throughout Latin America, Eastern Europe, Russia and neighboring states, within China and India, and throughout the Middle East that will create the next generation of regional, even global, powerhouses. • Seeking synergies. Amid all of this global investing, there is a strong trend toward well-defined capability building M&A activity. Disney buys Marvel Comics, Comcast acquires a big share of NBC-Universal, Cadbury is taken over by Kraft

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Foods—all of these are sensible product- or market-extension deals. More than ever before, successful acquirers and merger partners today are looking to create value and not simply capture short-term savings with their deals. They are doing so in a more “holistic,” planned, and proactive manner—making, say, a series of market-related growth-oriented deals rather than speculative deals—and with the intention of elevating M&A management to a core competency in their organization. And, without doubt, cross-border deals will continue to grow. With this big picture of M&A as backdrop, let us turn next to what this means for executives and companies involved in M&A activity.

Understand Your Deal Several experts from academe and consulting firms have classified M&A activity based on different market scenarios.2 The main scenarios include: Industry Overcapacity. Many combinations occur in industries that have substantial overcapacity—such as automotives, steel, petrochemicals, department stores, utilities, and radio/ television stations. As these industries mature, the norm is for three to five global players to dominate over two-thirds of the market. Integration has firms combine product lines, prune marketing and sales, close facilities, downsize staff, and rationalize corporate functions. The combined company gains market share, has economies of scale, and survives in a consolidated market. But these combinations can put merging companies at odds over whose methods are best, can exact a substantial human toll, and may or may not create any lasting value. Mergers among two industry players work best when the two sides have complementary capabilities and leverage each other’s strengths. Industry Roll-Up. Deals in telecommunications, pharmaceuticals, beer and beverage distribution, and airlines show industries rolling up local or regional companies to become global powerhouses. Here, too, there is considerable integration, at least of the acquired company, but the pace can be more gradual and it is vital to hold on to local management with their long-standing

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customer relationships. However, changing an acquiree’s brand name, challenging local customs, and imposing corporate standards all risk losing distinct competencies and what differentiates an acquiree in their customer and labor market. Product or Market Consolidation or Extension. Here M&A activity extends a company’s product line or market reach. In a consolidating market, this involves some rationalization of corporate functions but offers possibilities for cross-selling and leveraging customer connections. The longer-term game is to create value through future innovation in products or services and marketing. When multibrand companies buy smaller brands, they often want to develop a platform in a growing market. Many M&A specialists recommend rapid absorption—taking over an acquiree’s supply chain and injecting marketing know-how. We generally favor first protecting the acquiree’s assets and culture and only gradually “blending” it into a related business group. Industry Transformation. Here companies use deals to transform the way an industry works—say in the entertainment and media industry. Value creation hinges on cross-fertilizing and sharing expertise, competencies, and best practices. Beware the high risks and high rewards of deals like TimeWarner and AOL. The seeds of industry transformation are being planted today in deals between pharma and agro-business to create functional foods or “nutraceuticals” and between pharma and cosmetics companies to produce “cosmeceuticals.” Growth Bets. Finally, there are acquisitions or a series of acquisitions where companies buy to grow in new or emerging product or consumer markets. Many high-tech and biotech companies use acquisitions instead of R&D to build market position quickly in response to shortening product life cycles. Here, too, we challenge recommendations to rapidly assimilate entrepreneurial companies into the corporate model. Risks of talent departures and innovation hothouses cooling off need careful consideration.

Phases of a Combination Even when executives base their M&A decisions on a sensible strategy, and have a sense of the operational implications and what has to be managed, it is the human factor that determines

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Figure 2.1. Combination Phases. Phase

Typical Emphasis

Successful Emphasis

Precombination Combination Postcombination

Financial Political Damage Control

Strategic Transition Planning Value Creation

whether or not this translates into success. A study of combinations in banking and finance conducted by the Management Analysis Center, and in which we were involved, identified important differences between the “typical” and “successful” cases over the three phases of a combination (see Figure 2.1): 1. The precombination phase when the deal is conceived and negotiated by executives and then legally approved by shareholders and regulators 2. The combination phase when integration planning ensues and decisions are made 3. The postcombination phase when implementation occurs and people settle into the new organization

The Precombination Phase As the deal is conceived and negotiated by executives and then legally approved by shareholders and regulators in the precombination phase, much of the emphasis in the typical case is on financial implications. Buyers concentrate on the numbers: what the target is worth; what price premium to pay, if any; what the tax implications may be; and how to structure the transaction. Executives entering an alliance who scope out the size of returns but neglect how they will be achieved also fit the typical scheme. The decision to do a deal is thus framed in terms of the combined balance sheet of the companies, projected cash flows, and return on investment. Two interrelated human factors add to this financial bias. First, in most instances members of the “buy team” come from financial positions or backgrounds. They bring a financial

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mind-set to the study of a partner, and their judgments about synergies are informed by financial models and ratios. They often do not know very much about, say, engineering, manufacturing, or marketing; nor do they bring an experienced eye to assessing a partner’s capabilities in these regards. Second, there is a tendency for “hard” criteria to drive out “soft” matters in these cases: if the numbers look good, then any doubts about, say, organizational or cultural fit tend to be scoffed at and dismissed. In successful cases, by contrast, buyers bring a strategic mindset to the deal. But there is more to this than overarching aim and intent. Successful buyers also have a clear definition of the specific synergies they seek in a combination and concentrate on testing them well before momentum builds. Here, too, human factors play a part. For instance, in successful cases members of the buy team come from technical and operational, as well as financial, positions. During the scouting phase, they dig deep into the operations and markets of a candidate when gauging its fit. “Acquisitions are too important to be left to our corporate development department,” one experienced executive opined to us. “I get my management team involved early on to kick the tires and look under the hood before we consider buying another firm.” Another put the distinction plainly, “Our M&A department gets paid to buy a company. I get paid to run one.” Sensible buyers consider carefully the risks and problems that might sour a strategically sound deal. This does not mean that financial analyses are neglected or that they are any less important to success. To the contrary, what puts combinations on the road to success is both an in-depth financial understanding of a proposed combination as well as a serious examination of what it will take to produce desired financial results. The result of this exercise is a road map to guide the combination and show how it will work. This serves important purposes. First, it guides more detailed combination planning and subsequent decision making and action in putting the firms together. Second, it provides the basis for conveying the merits of the deal to diverse stakeholders. Finally, it gives otherwise skeptical managers and employees something substantive to consider in weighing their doubts and, in the best of cases, something tangible to hope for in the way of career opportunities and challenges.

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The Combination Phase As the two sides come together, politics typically predominates. Oftentimes, it’s power politics: the buyer decides how to put the two organizations together. But even when a buyer seeks to combine on the basis of operational synergies, politics can intrude. Corporate staffers bring in their chart of accounts, reporting cycles, planning methods, and the like, and impose them on subsidiaries. No matter that these systems seldom enhance growth and often prove unworkable for the needs and business cycles of the acquired firm. Why do companies insist that subsidiaries conform to their bureaucracy? We term this corporate staff hegemony. Meanwhile, individuals jockey for power and position; and management teams fend off overtures for control from the other side by hiding information or playing dumb. In the typical situation, transition teams are convened to recommend integration options, but personal empire building and conflictual group dynamics block efforts to seek out and capture true synergy. Meanwhile, culture clash rears up as people focus on differences between the partners and fixate on which side wins what battles rather than join together to build a united team going forward. Consider these matters in the merger that brought German and American automobile manufacturers together to form DaimlerChrysler. In this case, the merger-of-equals joke went: “How do you pronounce the new company’s name? Daimler … the Chrysler is silent.” Daimler was unresponsive to suggestions that it adopt some of Chrysler’s innovation. Certainly synergies could have been achieved had Daimler shared car platforms with Chrysler. Instead, the high-status company rejected this and other integration ideas. On the culture side, Mercedes’ disciplined engineering and superior quality culture clashed with Chrysler’s cowboy-like bravura and high-volume, low-cost manufacturing and distribution business model. It didn’t ease frictions either when German auto dealers refused to carry Chrysler’s products in their home market or that U.S. autoworkers earned up to four times more than their German counterparts. Interestingly, Daimler’s “not-invented-here” attitude slowed integration to the point that that the combination was described as “one company, two cultures.” In the end, Chrysler was sold off via private equity,

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went bankrupt, and was purchased by Fiat in the auto industry bailout. In successful combinations, there are still politicking and gambits for self-preservation, but much of the energy typically directed into gamesmanship is now more positively channeled into combination planning. Leadership clarifies the critical success factors to guide decision making and oversees the planning process to ensure that sources of synergy are realized. Managers and employees come together to discuss and debate combination options; if the process is well managed, high-quality combination decisions result. A compelling counterpoint to Daimler-Chrysler is the valuecreating combination of Renault-Nissan. CEO Carlos Ghosn reflected on cross-border deals in this way, “Some people consider cultural differences a source of friction and conflict. It is true. But cultural differences can also be a source of enrichment and progress. [In Renault-Nissan] cultural differences are seen more as an object of cross-fertilization and innovation …”3 When the alliance with Renault was formed in 2002, a Global Alliance Committee was formed, and a steering committee and cross-company teams were created to guide the hunt for synergies and manage common programs; among their achievements were codeveloping common engines and gearboxes and sharing auto platforms and parts. Nissan’s manufacturing know-how, the Nissan Production Way, was adopted by Renault and their plants produce one another’s vehicles.

The Postcombination Phase We have received calls eighteen months after a combination from executives bemoaning that their best talent has bailed out, productivity has gone to hell in a handbag, and culture clash remains thick. Often this is because the executives grew impatient with planning and hurried implementation, to the extent that their two companies failed to integrate and serious declines resulted in everything from employee morale to customer satisfaction. Much can be done in this damage-control situation, but it is obviously better to preclude the need for damage control by following the successful path from the onset.

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In successful combinations, managers and staff from both sides embrace the strategic logic and understand their roles and responsibilities in making the combination work. To facilitate this transition, we’ve seen combining companies engage thousands of their employees in integration planning and, later, in the implementation efforts that they have helped to shape. This phase sees successful companies intentionally go through the work of organization and team building in combined units and functions and forge a common culture. We have also seen a few, like HP and Compaq, undergo a successful midcourse correction and turn a potential disaster into a winning combination.

The Merger Syndrome Several years ago, we identified the symptoms of the “Merger Syndrome” as a primary cause of the disappointing outcomes of otherwise well-conceived mergers and acquisitions.4 The syndrome is triggered by the unavoidably unsettled conditions in the earliest days and months following the announcement of a deal; it encompasses stress reactions and development of crisis management in the companies involved. One of our most striking discoveries is that the Merger Syndrome arises even when the partners have taken some care to devise a thoughtful integration designed to minimize upheaval and provide due consideration for its effects on people. What creates the Merger Syndrome? For employees, it is a fusion of uncertainty and the likelihood of change, both favorable and unfavorable, that produces stress and ultimately affects perceptions and judgments, interpersonal relationships, and the dynamics of the combination itself. At the organizational level, the syndrome is manifested by increased centralization and lessened communication, leaving people in the dark about the combination and fueling rumors and insecurities. This often produces worst-case-scenario thinking that distracts employees from regular duties and causes them to obsess about the impact of the combination upon themselves and their work areas. All of this hampers integration, reduces productivity, and contributes to turnover of key people.

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Personal Signs of the Merger Syndrome 1. 2. 3. 4. 5.

Personal preoccupation Worst-case scenarios Rumormongering Distractions from job performance Psychosomatic reactions

Signs of human stress are present in all combinations, even the friendliest and best-managed ones. The first symptom of the Merger Syndrome is heightened self-interest: people become preoccupied with what the combination means for themselves, their incomes, and their careers. They develop a storyline about the implications, but it is a mix of fact and fantasy. No one has real answers—or if they do, the answers are apt to change. Not only do people become fixated on the combination, but they tend to focus on the costs and ignore the gains. Soon after the combination is announced, the rumor mill starts and people trade on dire scenarios. At the headquarters of an acquired Fortune 500 company, rumors spread that three thousand people were to be laid off. Interestingly, only seventeen hundred were employed at the site! All of this adds up to distraction from job performance. Combination stress takes its toll in people’s psychological and physiological well-being. Reports of tension and conflict increase at the workplace and at home, because spouses and children grow anxious, too. Rates of illness and absenteeism rise in workforces going through combinations. In the merger of two Fortune 100 firms we worked with, incidents of high blood pressure among employees doubled from 11 percent in the year preceding announcement of the combination to 22 percent afterward. Interviews with executives in the early stages of a combination are colored with reports of headaches, cold and flu symptoms, sleeplessness, and increased alcohol and drug usage. “I stopped smoking seventeen years ago,” one manager told us, “and started again when the acquisition was announced.” Needless to say, these stress symptoms are present at all levels of the combining organizations. Many companies target their stress-management programs toward hourly and clerical employees in hopes of reducing stress for the troops. What about the

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officers? They suffer from high levels of stress, and the consequences of their stress-impaired judgment reverberate through the organizations.

Organizational Signs of the Merger Syndrome 1. 2. 3. 4. 5. 6.

Crisis management Increased centralization (upward) Decreased communication (downward) War-room and combat mentality Interpersonal and intergroup tension Less insight, more groupthink

To cope with the many tasks of combining, teams of executives in both the lead and target companies typically lurch into a crisis-management mode. The experience is stressful yet exhilarating; many liken themselves to generals in a war room. Decision making in these top groups can be crisp and decisive. However, because top managers are generally insulated during this period they often prepare self-defeating gambits. Top teams misestimate or ignore the other side’s priorities and counterstrategies; they cut themselves off from relevant information and isolate themselves from dissent. All of this is symptomatic of what psychologist Irving Janis terms groupthink, the result of accepting untested assumptions and striving for consensus without reality testing the possible consequences.5 It feels good to executives to act as if they are controlling their destinies. However, crisis management only gives them the illusion that they’re in control. In truth, they often set themselves up for trouble. While the executive teams are in their respective war rooms, people in one or both organizations are adrift. Decision-making powers become centralized and reporting relationships clog with tension and doubt. Priorities are unsettled; no one wants to make a false move. Meanwhile, downward communications tend to be formal and perfunctory. Official assurances that any changes will be handled smoothly and fairly ring hollow to a worried workforce. Everything seems to be up for grabs. Down the line, managers isolate themselves from employees. Sometimes this is because they don’t know what to tell employees.

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Many managers fantasize that talk about the combination only adds to people’s stress—as if they think employees are in blissful ignorance, whistling while they work the day away. Go out and speak with the employees, however, and you quickly find that they regard no news as bad news: “What’s management trying to hide from us? Something really bad must be going on if they’re not talking to us.” Then, as they charge up to work together and integrate the businesses, executives from both sides jockey for position and fight for their budgets, projects, and power bases. Rather than cooperate, they attack and defend. Studies of how to integrate operations become mired in controversy. Clout and connections determine who runs what and what the combined functions will look like. Meanwhile employees update their scorecards, chart wins and losses, and begin to sort themselves out. This can send a corporate marriage off on a hellish honeymoon.

Cultural Signs of the Merger Syndrome 1. 2. 3. 4. 5. 6.

Clash of cultures We versus they Superior versus inferior Attack and defend Win versus lose Decisions by coercion, horse trading, and default

All of this is exacerbated by the clash of cultures. By their very nature, combinations produce an us-versus-them relationship, with a natural tendency for people to exaggerate the differences rather than the similarities between the two companies. What is noted first are differences in the ways the companies do business—maybe their relative emphasis on manufacturing versus marketing or their predominantly financial rather than technical orientation. Then differences are discerned in how the companies are organized, say, their centralization versus decentralization, or their differing styles of management and control. People ascribe these differences to competing values and philosophies, with their own company seen as superior and the other as backward, bureaucratic, or simply bad. Eventually, one side “wins”

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as their way is adopted in the combined organization, leaving the other side feeling like losers.

Joining Forces—Best Practices What does it take to manage a combination effectively? Our experience and advice coalesce in five key areas in which to concentrate executive attention and resources over the course of a combination (Figure 2.2): 1. Strategy. Manage the combination with constant attention to value creation. 2. Organization. Integrate for synergies and a better organization. 3. People. Attend to the human element—before, during, and after. 4. Culture. Use the combination to build a desired culture. 5. Transition management. Develop an effective transition structure to plan and implement change.

Precombination Management Actions taken—and not taken—in the precombination phase set a direction whereby a merger, acquisition, or alliance heads down a successful path or veers off toward failure. In this phase, management translates its growth objectives and business strategy into M&A goals and determines what kind of firm it wants to partner with, how, and why. It conducts a search, selects a partner, and negotiates a deal. To enhance the likelihood of a successful combination, management uses this period to prepare to join forces, strategically and psychologically. Strategy Successful combinations begin with self-scrutiny and analyses that yield a conclusion that a company can realize strategic goals more realistically, rapidly, or cost-effectively through a combination rather than by acting on its own. This creates the basic rationale for scouting the marketplace with the intention of merging, acquiring, forming a joint venture, or making an alliance with

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Study opportunities to build a new and better organization Get the right people in place and onsite Manage culture clash and culture building Create and staff a transition structure to execute an integration program

Conduct thorough screening and due diligence Prepare people psychologically Respect the precombination cultures Know where you want to go . . . and what it takes to get there

People

Culture

Transition management

Organization

Strategy

Develop and follow vision and CSFs

Combination

Clarify strategy, rationale, and search criteria

Precombination

Postcombination

Learn from this combination so as to better manage future ones

Reinforce the desired culture

Regroup individuals and build teams

Align organizations, policies, practices, and groups

Maintain executive oversight

Figure 2.2. Best Practices in Managing a Combination.

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another company. Fleshed out further, it also informs search criteria and is applied in screening candidates. As a partner is identified, strategy comes to life in preparing a business case for how the two parties will create value and in thoroughly analyzing the potential costs and risks in putting the two together. Organization Companies have to organize themselves to buy and sell. On both sides, this means assembling a team that includes not only corporate staff and the CEO but also the executives who ultimately have to lead the combination. In addition to its obvious part in determining strategic and financial fit, thorough screening explores a partner’s motivation for doing a deal, its culture, and the makeup of its people. Diligent due diligence, in turn, digs deep to determine if the values of the potential partners are compatible, if the bench strength exists to manage the combination while running the core business, if all parties are on the same wavelength regarding synergies and what it takes to combine, and if there is enough trust and chemistry to propel the combined operation into becoming more than the sum of its parts. Such diligence counters momentum and the rush to close, giving the parties a chance to get better acquainted—and, when warranted, to back out gracefully. People Good strategies do not necessarily produce good combinations. People have to be prepared psychologically for joining forces. Psychological preparation educates people about the mind-sets of winners and losers and readies them to meet and work with their counterparts. Seminars on the Merger Syndrome, guidelines on effective communication, and frank people-to-people discussions help employees to contend with the natural and expected concerns that arise early on and increase once integration starts. Culture Combinations often upset traditional ways of doing things and can threaten prevailing beliefs and values on one or both sides of a deal. The precombination phase provides managers with time

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to learn more about their partners’ cultures, to begin to counter stereotypes and misperceptions, to raise and discuss genuine differences, and to look for and solidify similarities. Even when one side more or less dominates a combination, the lead partner can show respect for the other’s culture and explain why they choose to implement their own ways. We recommend, in any case, that the two sides carefully consider cultural differences when setting integration timetables. Transition Management Unfortunately, many organizations waste the period between the announcement of a sale and its legal close. During this time, executives can begin to identify the optimal points of integration between firms, define a desired cultural end state, and prepare for the grueling work of forming transition teams to identify synergies and implement change. They also need to think through how to allocate executive time and talent to the combination. Meanwhile, preparations have to be made to ramp up communications (internally and externally), conduct training and sensitization workshops, and develop retention and layoff policies.

Combination Management At the core of the combination is the integration program, designed to translate the opportunities of the combination into actual gains for the partner organizations. Management of the combination phase encompasses the same five dimensions. Strategy A clear and agreed-on definition of synergies guides planning and decision making in successful combinations. This end state for the combination confronts wishful thinking, denial, and tendencies toward empire building and flank protection that derail combinations in which integration decisions are based on political agendas. It directs some of the energy that typically goes into politicking toward collaborative planning instead. The desired direction is expressed in an elaborated vision of where the combined organization is headed and clearly defined critical success factors that must be achieved along the way.

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Organization An alignment of strategy and structure is integral to the success of a combination. This is what makes analysis of organizational fit so essential in defining how, where, and when to integrate the two companies. Managers from both sides assemble into factfinding and transition management teams. Their charge is to exchange knowledge, build rapport, and plan for integration. Carefully launching transition teams, determining and adhering to operating principles, and facilitating and monitoring their work all result in decisions that support the desired organizational end state and achieve desired synergies, as well as offset the tendencies toward personal empire building, domination, and ineffective group dynamics that plague typical transition teams. People Building the best possible organization rests on how well leadership identifies and retains talent from a partner in a merger or acquisition (or incorporates it into an alliance). This is accomplished through a staffing process that elucidates strategically sensitive selection criteria and provides opportunities for managers from one side to get to know people from the other. Doing so challenges executives to make staffing decisions based on meritocracy and with an eye toward building a new business. Meanwhile, as complex decisions are being made regarding structure and staffing, managers attend to the Merger Syndrome, in themselves and in their people. Outreach efforts, ranging from formal communications to informal chats, remind people of both the commercial and personal possibilities of the combination. Culture Making one plus one equal three generally implies that partners either draw from the best of both or use the combination to transform the work culture. As for cultural fit, the ideal is to have at least moderate distinctiveness between partners, provided the differences are a source of learning rather than rivalry. As the two sides prepare to integrate, it helps if the partners gain an appreciation of one another’s traditions and mores and, within the context of the desired end state, collaboratively decide which

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characteristics from their old cultures are worth retaining and which are incongruent with the new situation. Transition Management Integration teams are often based in a large transition structure that dedicates executive time and talent to overseeing integration and implementation of any changes. Pulling from both partners’ best and brightest contributors in order to staff transition management roles sends a symbolic message that it matters how the combination is put together. Substantively, a transition structure directs the abilities of top performers into creative decision making to mine the opportunities in a combination. Behaviors modeled by executives and the rules of the road followed in combination planning exert a substantial influence on the norms that are to prevail in the emerging postcombination organization.

Postcombination Management After months of gathering data, sifting and sorting it, and making integration decisions, people feel the pressure building to get on with implementation. Even though organization building begins, the foundations for a value-creating combination are not set in place unless conscientious and dedicated efforts are made to shore up desired changes. Strategy Once functions are combined, some companies treat strategy as a seasonal activity—something you do in spring and review in the fall. A wiser course is to revisit strategy monthly (at least for a year or two) in light of the strengths and weaknesses found as combined businesses operate together. Furthermore, market conditions, opportunities, and challenges may have changed since the deal was done, necessitating concurrent changes in the overall strategy and structure of the combined business. Thus as part of their business reviews or in sessions dedicated to this task, functional executives need to monitor results and identify areas that merit rethinking or rapid attention. Meanwhile, the senior management team should scrutinize progress toward the

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combination’s critical success factors and allocate resources as needed to move the combined business forward. Organization The complexities of combining previously separate organizations require careful knitting. Transition teams may suggest where to put the stitches, but it is up to executives and their teams to bind things together. This requires full upward, downward, and lateral communication and cross-unit coordination. Successful integrators build time and checkpoints into implementation plans to ensure that departments and work units, policies and practices, and supervisors and subordinates align, and that, taken as a whole, the new organization reinforces the strategic purposes of the combination. People In companies that achieve success in their combination, winners are crowned appreciatively, losers let go of graciously, and survivors handled gracefully. People receive the space, support, and time needed to adapt to the transition, and they get help in letting go of the old, dealing with change, and moving on to the new. In this process, managers understand postcombination mind-sets and help their direct reports sort out what’s happening around them. In turn, team leaders take proactive steps to build their teams through the stages of development and accelerate the melding of individual contributors through formal team-building interventions. Culture Once new teams and structures are in place, they need to be anchored in a new company philosophy and culture. Otherwise, the new organization will crumble and people will lose faith in and never identify with the combined business. Successful managers begin the work of culture building early on, knowing that their words and actions influence the attitudes, expectations, and behaviors emerging in the combined company. They build new cultures by design, rather than letting them emerge inadvertently or by default. Senior executives, functional leaders, corporate staff specialists, and middle managers coordinate

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actions across multiple leverage points to reinforce and refreeze desired ways of doing things. Reward and information systems are revised to ensure that they contribute to the desired cultural end state. Transition Management Increasingly, multiple mergers, acquisitions, and alliances overlap one another. Experienced leaders build an internal competence in combination management. They do this by embracing a learning orientation toward their efforts, engaging key executives and managers so as to learn what has and has not worked in the current combination and what lessons may be applicable to future ones.

Four Truths About Combination Management When we first talk about the Merger Syndrome in companies, many executives see it as something that afflicts their employees, rather than themselves. When we tell them about high blood pressure rates among executives involved in a merger and get them to talk about their own uncertainty and job pressures, most acknowledge that they, too, are unsettled and worry that, even as the situation calls for it, they will not be at their best. Beyond listening, coaching, and encouraging them to prepare themselves for rigorous road ahead, we highlight four truths about combination management: 1. You always travel a nonlinear route. Even the most successful combinations follow a course of two steps forward and one step backward. With so much to do and so much at stake, progress in a journey from precombination to postcombination inevitably produces some backtracking. Decisions have a way of coming undone, thoughtful actions can have unintended consequences, and changes in the business environment often necessitate midcourse corrections. This is one reason why we strongly favor bringing executives together en masse for periodic combination planning and review sessions, and why we think it prudent to develop methods for monitoring progress over time.

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2. You have to deal with difficult dilemmas and trade-offs. We can make a case for moving quickly in making integrations decisions and we can make a case for moving carefully. But we know that, either way you go, there will be some spillage to mop up afterward. Go fast in, say, appointing executives, and you risk making poor decisions based on limited information. Go slow, and you risk alienating or even losing some of your most talented people. There are thousands of such dilemmas in a deal; that’s why we say that a bias for action needs to be tempered by patience, study, and reflection. 3. You have to drive in two lanes at once. Amid efforts to plan and implement desired organizational change in a combination, there is still a business to be run. Operations managers tend to forgo the details of combination management and instead focus on day-to-day business matters. Obviously, someone has to mind the store. This is why it is so important to create a transition structure to plan and oversee the combination—and why effective executives insist that time and attention be focused on locating and realizing opportunities in the combination. 4. You pay now or you pay later. You pay now by taking the time to carefully consider combination options and making educated decisions that contribute to value creation. Or else you pay later by making quick-and-dirty decisions up front and dealing with value destruction down the road. You pay now by taking the time to do diligent due diligence or you pay later by contending with many financial or technological surprises. You pay now by preparing people for the rigors of transition planning or you pay later by getting low-quality decisions. You pay now by creating mechanisms for identifying and learning from integration missteps or you pay later by pushing them under the rug and later facing a damage control situation. In managing a combination, it is far better to do things right the first time than have to clean up after mistakes.

Part Two

The Precombination Phase The precombination phase encompasses strategizing, scouting, assessing and selecting a partner, deal making, and preparing for the eventual combination. Obviously, the quality of work conducted in this phase has a substantial influence on the eventual results of a combination. Our experience highlights several problems which afflict the typical M&A effort in the precombination phase: • Flawed connection between business strategy and M&A plan. To begin, some buyers are not sure what they want to or can do in their marketplace through organic growth and thus follow fashion in their industry when it comes to M&A. This happens all too often in industry consolidations where market leaders make aggressive moves and followers either have to do a deal or they’ll be acquired. These are also cases where a buyer has access to a mountain of cash and rolls the dice on undervalued acquisitions that don’t build out a business direction or offer much in the way of crossfertilization. Although the buying spree can be exciting, it seldom yields any sustained payoff. • Buying to fix a weak core business. Some deals are done to shore up flagging business lines. Buyers wishfully think that the target’s vigor will revitalize their current business but, of course, it’s the unhealthy entity that affects the healthy one.

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Better to fix or close failing businesses than try to revive them with fresh blood. Unclear search criteria. Many times, the strategic intent underlying the decision to look for an acquisition or alliance partner is not clear, the synergies sought are vague and conflicting, and the fundamental criteria for selecting a target are not broadly understood. Buyers in an acquisition or partners in a merger or alliance can’t get what they want if they don’t know what they are looking for! Pressure to do a deal. Why would staff planners and executives buy something when they don’t know what they’re shopping for? The market has heated up, they are under pressure to do something that appears strategic, and a candidate looks good—on paper, anyway. Additionally, psychological factors contribute to the pressure to do a deal. There is a macho element to buying a company and few events in corporate life are more exhilarating than hunting and bagging an acquisition. Hurried due diligence. The rush lasts into the deal-making stage. As excitement over doing a deal escalates, staffers hurry their due diligence. One corporate strategic planner likens her company’s due diligence process to her experience in conducting hiring interviews: “When I hear I’m getting a good candidate to interview, I make up my mind in the first two minutes whether I like the person and [then I] spend the rest of the hour confirming my first impression.” Overvalued targets and overestimated synergies. First impressions can prove costly in combinations. Insufficient due diligence leads to overvaluation, resulting in paying too high a price for a merger partner or acquisition. Without a close look at a partner’s capabilities, it is easy to overestimate synergies and underestimate the costs and headaches involved in integrating businesses. Wishful thinking replaces the scrutiny needed to determine whether the two parties can work well together.

This section looks at processes and practices to address these problems and increase a company’s chances for success at M&A. Chapter Three looks at the strategic and operational aspects of

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precombination doings; and Chapter Four at the emotional and cultural preparation to join forces. In this section, we emphasize that preparation involves continual self-reflection by an M&A team and management: Do I have a clear view on the market and business environment? How will customers, competitors, and employees on both sides react to a deal? What are the real, as opposed to theoretical, synergies and can they be realistically obtained? What’s the worst case? What will the combined companies look like? Feel like? Are we testing the downsides of the deal? Are we truly being honest with ourselves?

Chapter Three

Strategic and Operational Preparation Some observers liken organizational combinations to organ transplant surgery. In the latter, the process must be well thought out and planned, a well-qualified donor must be found, and the surgical team and patient need to be prepped prior to the operation to allow for rapid execution and to minimize the likelihood of rejection. So too, planning and preparation are integral to success when companies join forces. Preparation in a combination covers the five areas that we emphasize in M&A: strategic, organizational, cultural, psychological, and careful attention to transition management. The strategic challenges involve key analyses that clarify and bring into focus the sources of synergy in a combination—both in searching for a partner and in testing out opportunities for value creation. The organizational challenges involve prefiguring and testing potential synergies in different kinds of operational configurations. This means understanding the two sides’ current structures and cultures and defining the desired relationship between the two companies. The cultural and psychological challenges concern actions required to understand the mind-sets that people bring with them initially and develop over the course of a combination. This means raising people’s awareness of and capacities to respond to the normal and to-be-expected stresses and strains of living through a combination. The transition management challenges pertain to the countless tasks involved in moving from being two independent entities to one integrated organization and

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providing the inspiration that gets people to reach for something more than the sum of the parts. This means defining transition requirements and readying the resources—including people, time, and money—to manage them well.

The Four P’s of Preparation The journey toward a successful combination begins well before dealings commence. At each step—as the strategic intent for M&A activity and selection criteria are set; as a deal is conceived; and as potential partners are screened, assessed, and negotiated with—executives, staff specialists, and advisers need to continuously address what we have called the Four Ps of preparing for a combination: 1. Purpose. Define the strategic intent of the lead company or both parties, and detail the business cases supporting and arguing against the deal. 2. Partner. Develop clear and cogent criteria for use in the search for a partner, assess the two companies’ organizational and cultural fit, and conduct due diligence to build a deep and accurate understanding of what might be merged, aligned, or kept separate. 3. Parameters. Establish the relationship between the parties, and delineate the desired end state of the combined organization. 4. People. Understand and contend with the first phases of the Merger Syndrome and the distinct psychological patterns of perceived winners or losers in the combination. We discuss strategic and operational matters in this chapter and address cultural and psychological preparation in the next. But we don’t mean to imply a sequential set of analyses or actions. To the contrary, architects of successful combinations move continuously across the domains of purpose, partner, parameters, and people to deepen their awareness of who and what they are dealing with during the precombination phase and to build a workable relationship for what follows.

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A Disciplined Approach to M&A At a diversified financial services firm we studied, corporate staff was charged by the company’s executive committee to “formulate a growth strategy via acquisition” and “identify targets that fit our criteria.” The staffers figured that not bringing forward a recommended target would be seen as a failed response to the executive committee. After all, wasn’t it their job to locate candidates? The fact that this committee had never rejected an acquisition recommendation only reinforced the staffers’ sense that they were doing the right thing by bringing forward a candidate—any candidate— rather than say they couldn’t find one that fit the strategic criteria. Now, consider Cisco and its well-defined perspective on what it takes to be successful in M&A.1 Its leaders view acquisitions as a means to acquire top technologists and next-generation assets for entry into markets where it can reach a first or second leadership position. Key to its M&A strategy is to acquire technologies that build a new business platform that benefits the full range of the company’s customers, employees, contract manufacturers, and other supply chain partners.

Cisco’s Five Rules for Acquisitions John Chambers, CEO of Cisco, which has acquired over 125 companies since 1993, has five rules for making acquisitions:2 1. The purchased company needs to share a complementary vision of the industry and product. Cisco requires that the targeted company share a product and industry vision that is similar to its own. Chambers believes that unless acquirees view the future in the same way, the two parties will have problems working out the details of future product and service offerings. 2. The purchased company needs to share a compatible culture. “You have to avoid the temptation to say, ‘Well, our cultures are different, but I can still make it work.’ They normally don’t,” explains Chambers. Though there is compromise in any

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acquisition, the targeted company needs to share Cisco’s core values. 3. The acquisition must produce—preferably in twelve months—a shortterm win for shareholders. Cisco typically acquires targeted companies through the use of its stock; by doing so, Cisco is able to preserve valuable cash for later investment in R&D, marketing, and expansion. 4. The acquisition must produce long-term wins for major stakeholders: shareholders, employees, customers, and business partners. Shareholders aren’t the only ones that benefit from Cisco’s M&A strategy. As Cisco has made its growth strategy clear to Silicon Valley, engineers and entrepreneurs alike seek to develop a partnership with the company. Over one in four of its employees came on board via acquisition. And though industry-wide turnover in acquired companies is typically more than 20 percent, Cisco’s runs at 2.1 percent. 5. The purchased company location must geographically be near a Cisco office. Cisco has primarily acquired companies near its main headquarters in Silicon Valley. As Cisco has expanded, however, the company undertook acquisitions in areas like Research Triangle Park in North Carolina, near its East Coast headquarters, and of course globally in areas near to its overseas facilities. Chambers contends that full integration is best accomplished with a lot of human interaction and such interaction is simply more difficult when the buyer and seller are separated by a long distance. Adapting to Changing Circumstances As focused as these five rules are, they were amended in Cisco’s strategic acquisition of wireless router manufacturer Linksys. Tim Merrifield, director of IT Acquisition Integration at Cisco, described the situation as follows: “The challenge is that the division prizes its agility and the corporate parent prizes standardized processes. The trick is to accommodate both desires in a way that results in the best overall business growth.” Accordingly, Cisco devised a “selective” integration model that would keep the companies as “separate as possible” and only integrate for the sake of “revenue synergies” and “cost reductions.”3 This adaptation is a familiar story in M&A. Smart managers are willing and able to go

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back to the drawing board rather than follow a preconceived plan for combining.

Purpose: Putting Strategy to Work in M&A Remember, M&A is not a strategy. It is a means for realizing a strategy and creating value. Strategy setting begins with selfscrutiny of an organization’s own competitive and market status, its strengths and weaknesses, and top management’s aspirations and goals. The results define a direction for increased growth, profitability, or market penetration in existing businesses, for diversification into new areas, or simply for cash investment— which may or may not involve M&A activity. Take, for example, Unilever’s decision to buy Ben & Jerry’s: what was it all about? The strategic answer: finding opportunities in growing markets. Ben & Jerry’s and the other leading CSRdriven companies acquired in the past few years had foresight in establishing their business models. They capitalized, variously, on growing interest in all-natural ingredients, eco-friendly products, and cause-related consuming; this is reflected in preferences for organic foods and clothing (a market growing 20 percent annually), for fair trade coffee and chocolate (over 70 percent annually), and for sustainably sourced agricultural produce. Studies estimate that the size of the LOHAS (Lifestyles of Health and Sustainability) market will grow from $200 billion in sales today to $420 billion in three years to $845 billion by 2015.4 To reach this growth market, companies like L’Oréal, Colgate, Unilever, and others could develop new brand propositions but, as is so often the case, it seems less risky and cheaper in the long run to buy into the market through acquisitions. And, in the LOHAS market, a case can be made that the CSR pedigree and expertise of acquirees are key strategic assets and a prime source of continued value creation.

Strategic Intent for M&A The strategic intent of a combination spells out the rationale for the combination and the goals for the integrated company. In

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successful acquisition programs, the CEO, relevant corporate and division management, and various advisers translate M&A objectives such as growth, market penetration, technology acquisition, or diversification into specific strategic and investment criteria. Most buying companies have standard metrics for evaluating a candidate, which include its earnings, discounted cash flow, annual return on investment, and so on. They also have objectives concerning the impact of a combination on profitability, the combined organization’s earnings per share, and future funding requirements. Firms looking for joint ventures and alliances need clear boundaries regarding desired ratios of expense to return and the extent of risk and exposure that will be tolerated. In too many cases, financial fit receives a disproportionate amount of attention and priority in the search for a partner. In successful cases, financial criteria are respected, but they are balanced by careful consideration of each of the synergies sought in a combination and what it will take to realize them. Take, for instance, Dow’s joint venture with Eli Lilly in agricultural products. Dow’s review of the market opportunity and industry players revealed that a DowElanco alliance could immediately open more doors and was likely to yield more future products than any of several other acquisitions being considered. It would not be as financially attractive as full ownership but would reduce risks substantially and still allow Dow to pursue other ventures to further its reach in this marketplace. Knowledge gained from this careful look at synergies not only sharpens the parties’ assessment of their potential combination; it also enables leadership to put forward a clear and convincing rationale for the combination that goes beyond the numbers. Most combinations involve expense reduction. Executives who seek to create value have to be able to demonstrate to staff on both sides that there is more to the deal than cost cutting; this involves a crisp statement of how synergies will be realized and what it means for the people involved. Gut Check Once companies have defined their aspirations in a market or segment and take careful heed of customer requirements

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and competitive threats, the gut level consideration is “Can we do it on our own?” If the answer is that something more can be gained through a combination than through internal development, the path is open to M&A. Next come a thorough assessment of a company’s internal capabilities and delineation of what is needed from a partner. Without this mapping of desired capabilities, the benefits of any combination are limited and chancy. If the true motives underlying a combination have more to do with “nonstrategic” forces—say, desire to run the largest company in an industry or fear of being swallowed up by competitors—then value creation is unlikely because there are few benefits to be leveraged by joining forces. But don’t think that combinations based on such motives are infrequent. A blueribbon panel of financial experts several years ago concluded that CEO ego was the primary force driving mergers and acquisitions in the United States.5 In turn, a Columbia University business school study found that, in essence, the bigger the ego of the acquiring company’s CEO the higher the premium the company is likely to pay for a target.6

Clear Search Criteria When they have a voice in and can agree on the merits of a strategy, top executives, corporate planners, and line managers operate from a common interest and perspective in moving into M&A. The next step is to translate strategic intent into criteria for the search and selection of a partner; simply put, you need to know what you are looking for in an acquisition candidate or partner. Having a full and open review of these criteria allows for debate and consensus building between staff and line executives. If conflicts or confusion regarding these criteria are not aired and fully addressed up front, they will persist down the road. Applying these criteria religiously greatly increases the likelihood of selecting a partner that will bring true value to the combination. The more unified both sides are (within and between themselves) regarding what is being sought in a combination, the more focused they can be in realizing their objectives.

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Dick Kovacevich’s Dozen Don’ts for Doing a Deal Financial services giant Wells Fargo demonstrates how M&A can be a means for creating value by setting clear acquisition criteria. Wells’ vision to be the “premier financial services company” is supported by goals of double digit EPS and revenue growth as well as consistent year-to-year performance. To accomplish these, it has a two-pronged M&A strategy: (1) acquire community banks in new states that provide entry to growth markets; and (2) pursue new opportunities in the financial sector to complement existing business lines. How disciplined is Wells in sticking to its strategy and selection criteria? Although the company made over three hundred acquisitions between 1998 and 2009, it walked away from ten times as many deals! When asked to advise other chief executives on strategic and operational preparation in the precombination phase, Richard Kovacevich, who served as CEO and then chairman of Wells Fargo from November 1998 to December 2009, talks about what not to do: 1. Don’t deny the fact that most deals fail. “You have to start with the fact that 75 percent of deals are not beneficial to the buyer. Whatever buyers have been doing is a huge mistake and we have to do better.” 2. Don’t move forward with companies that are not culturally compatible. “Acquisitions are hard enough to manage under any condition, but mismatched cultures make them more difficult. If the cultures are not compatible, don’t even start.” 3. Don’t rush due diligence. “We do very thorough due diligence at even the lowest levels. We spend weeks on what some companies do in a few hours or on the weekend. People are overwhelmed by all the due diligence we do, but that is why we don’t make mistakes.” 4. Don’t do purely financial deals—aimed solely at cost cutting. “I am not much of a believer of doing a deal if the only benefit is one-time cost savings. You are paying a premium and dealing with integration risk. After one-time cost savings, the market is quick to ask, ‘What have you done for me lately?’” 5. Don’t do deals unless they generate growth at a rate greater than it otherwise would be as separate companies. “There really has to be added value.”

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6. Don’t do a deal to fix your broken business. “A lot of people do deals who are not satisfied with their existing business. The grass looks greener elsewhere but, in reality, they are ignorant about what they are buying. If you’ve done something to hurt your company, you are going to do the same thing to the target. You’ve got to address your internal problems and then get your own company healthy before making an acquisition.” 7. Don’t be a defensive buyer. “I don’t like the idea of buying something just for defensive reasons. You have to be running toward something and not away from something. When people do a deal just for growth’s sake, all they end up with is a bigger business which does not mean a better business.” 8. Don’t overlook the small deals. “A lot of people turn their nose up on small deals and only want to do big deals. I would argue that sweat equity is well worth it. They are usually cheaper, less risky, and easier to integrate. And, you can learn about how to do a deal.” 9. Don’t rely on investment bankers to know the business. “One of the reasons you have bad deals is that people listen to the external advisors too much. How can they be better at determining the business model or the potential synergies than someone who knows the business?” 10. Don’t kid yourself that bigger means better. “A lot of people think you get better by getting bigger. I don’t believe that. You get bigger by being better. What you want to do in an acquisition is to acquire some skills you don’t have. The only advantage of being big is you get to leverage the new skills on a larger platform. We look for deals where we can add skills to the sellers and the seller can add some skills to us.” 11. Don’t do a deal unless you are prepared for integration. “ You can screw up a good deal very easily by not being prepared for integration. A lot of acquisitions turn out to be bad not because of the price paid, but because people were not prepared for the integration.” 12. Don’t look for a one-size-fits-all approach to integration. “The advice I give would differ depending on the industry and the situation between the partners.”

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Criteria for Health Care Deals A study of sixty-six acute care hospitals concluded that mergers and alliances enable hospitals to gain a competitive advantage in markets with a high HMO penetration. Benefits include a widening geographic market to contract with HMOs, a larger population to serve, and a better financial picture in a competitive market.7 Operating in this kind of market, a Southern California hospital established several criteria for what it was looking for in searching for a partner: desirable partners would expand its geographic reach or market penetration, would offer high-quality care and be low-cost providers, would have excellent reputations and be aligned with the parent’s philosophies and goals, and so on. As this list shows, selection criteria can sometimes be at odds with one another and there is a seldom a perfect match between desired criteria and what you find in a potential partner. So the hospital’s executive team prioritized the relative importance of each criterion prior to the selection process. When it came time to evaluate choices, the team then assessed the multiple candidates and weighted the high-priority criteria accordingly.

Partner: Search and Selection Successful acquirers know what they are looking for and conduct a thorough due diligence to ensure that they get what they want. Their screening of candidates covers the obvious strategic and financial criteria, but it extends to include assessments of the human and cultural elements that can undermine an otherwise sound deal. How deep is the management talent in the target? What labor relations issues lurk around the corner? How does the company go about doing its business? Is their culture a good enough fit with ours?

Thorough Screening The value-creating acquisition of Benham by American Century began with a screening process that integrated human and cultural issues with strategic and operational criteria. Both firms meshed along operational lines in offering only no-load mutual

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funds and treating small shareholders well. But as one senior executive recalled, an exchange of corporate values statements during due diligence was among the data indicating that cultural compatibility existed as well: “Their ‘Guiding Principles’ and our ‘Statement of Beliefs’ were very similar. Both companies stated ‘honesty’ as a fundamental belief, and in the financial services industry you don’t too often see that both stated and acted out.” More than just identifying a candidate, the due diligence team must make a call on whether the targeted value of the deal can be realized by the management of the combined organization, whether the projected time frame is realistic, and whether all the associated risks—including customer, competitive, technological and financial issues—can be managed. In addition to an analysis of the “facts,” a thorough assessment of combination candidates covers less tangible matters. First, it reveals the motives of the sellers in an acquisition or partners in an alliance. Why does leadership of the target want to sell or join in an alliance? Are they responding to a business opportunity, or are they driven by more personal motives such as wanting to cash out their investment? Does senior leadership want to stay on board? Do you want them to stay? Second, thorough screening gets below top leadership and considers the mind-sets of the two management teams. How will their people feel about working with or for you? Are they looking for a savior—a buyer with deep pockets to fund them—or are they likely to fight hard to fend off any threats to their autonomy after the deal closes? Does your own management team buy into this deal, or do factions exist? Are the technical and professional staffs—which are outside of the inner circle but needed to make the combination work—involved in the process? Are they apt to depart after a combination is announced? Even if answers to these questions are not “deal killers,” they indicate what has to be done to win people over during the courtship phase. True due diligence also assesses and makes conclusions about the capacity and depth of managerial talent in the target. This provides savvy buyers with a jump on integration planning by identifying who from the partner to put on transition planning teams. Careful screening also raises early warnings regarding whether there is sufficient bench strength among the target’s

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management to keep the business running while contributing to a successful transition. One executive reports, “That is not as simple as looking at organizational charts; it requires speaking and listening to people both for the formal business issues as well as the less formal, how-does-it-really-work issues. You learn a lot by listening.”8 Diligent Due Diligence As excitement over doing a deal escalates, staffers hurry due diligence. Certainly they look for major liabilities in the target, but typically do an inadequate job of digging into the candidate to understand what is being purchased, how well it might fit with the lead company’s current businesses, and what potential pitfalls may lie ahead. Without a close look at the capabilities and characteristics of a partner, it is easy to overestimate revenue enhancements and cost savings and underestimate the resource requirements and headaches involved in integrating businesses. To offset these tendencies, we recommend that companies broaden the perspective of the deal-making team. HR professionals, operations managers, marketers, and other nonfinancial personnel are better equipped than M&A staff to compare the two companies’ business practices, organization structures, and corporate cultures and what these could mean for the combination. In addition, the inclusion of line management in the searchand-selection process builds understanding of and buy-in to the acquisition strategy among the people who will be running the acquired business. Importantly, the influence of nontraditional members on an M&A team is not limited to making a go/no go decision when selecting a partner. Their HR and operational inputs may influence the valuation and purchase price, the pace through which integration occurs, and the placement of personnel. A peer-based assessment of an acquired leadership team (and of their desire to stay on after the sale) can help a buyer understand the extent to which people from the lead company need to be more or less hands-on in running a new acquisition. On this point, a study of large combinations found that 65 percent of successful acquirers reported managerial talent to be the most important instrument for creating value in a deal.9

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Some organizations place up to twenty people in their due-diligence teams. This may be bulky up front in terms of scheduling logistics and organizing findings, but it is worth it if a “showstopper” is unearthed. One organization convenes duplicate diligence teams to assess candidates and overcome the “deal fever” that frequently afflicts due diligence. Knowing that choosing a poor partner can exact a huge financial toll and be a burden on management time and energy, this company only pursues combinations that pass muster with both teams. Diligent due diligence pays off: a McKinsey study found that successful acquirers were 40 percent more likely to conduct thorough human and cultural due diligence than unsuccessful buyers.10 The addition of business managers and staff to the precombination process who highlight human, cultural, and organizational dynamics signals to the to-be-acquired employees that the lead company is sensitive to these matters, which, in turn, breeds confidence that the buyer will manage the integration process well. Behavioral and Cultural Due Diligence Before moving ahead on any deal, GE Capital begins a behavioral and cultural assessment of acquisition candidates. This due diligence identifies a wide range of potential business and cultural barriers to integration success: • Level of resistance. Employee and leadership resistance to GE; trust in existing management; GE’s reputation in the market • Layoff potential. Probability of major downsizing year one • Availability of integration resources. Number, time availability, and quality on both sides • U.S. versus non-U.S. Language barriers and cultural differences • Other factors. Unionization, media coverage, winner-loser mentality, and so on All of these are then factored into buying decisions and, if the deal goes forward, into the integration manager’s agenda. On the culture end, GE combines the results of interviews with acquired leaders, focus-group discussions, a survey of acquired management, and sometimes staff into a “cultural workout” session with

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both sides during the integration phase. We’ll describe this methodology in Chapter Eight on easing the clash of cultures. Cross-Cultural Surveys There are several validated organizational culture surveys that can be used in M&A to (1) examine cultural fit between two firms prior to a combination, (2) inform cross-cultural dialogue during their combination, and (3) assess changes in culture in the postcombination period. One instrument, developed by our colleague Professor Dan Denison, has been used for all three purposes. The Denison culture model covers (1) the internal and external foci of a company and (2) its comparative stability and flexibility. Twelve areas of questions group under the themes of mission, consistency, involvement, and adaptability. Figure 3.1 shows the cultural profile of an integrated IT company and that of its acquisition candidate, a software house. In this example, the IT company was looking to extend its market reach and add to its product portfolio through an acquisition in Australia and New Zealand. The IT company had a strong internal focus and key cultural strengths to leverage in measured areas of teamwork, empowerment, core values, and goals and objectives. The software company, much smaller, leaner, and entrepreneurial had complementary strengths in teamwork and empowerment, and stronger ratings in areas concerned with vision, creating change, and coordination and integration. In this case, it was determined in the precombination period that there was compatibility between the two companies and that the software firm had sufficient strength to operate with cultural autonomy. Moreover, its emphasis on teamwork could aid crossfertilization between the two. It was recognized, too, that both firms lacked strategic direction and intent in their fast-moving markets. The cross-cultural assessment helped each to see that they had an important strategic gap to address once they combined forces. Culture matters in a combination. Don’t just take our word for it. A London Business School survey of CEOs who had attempted combinations found that “the major factor in failure was the underestimation of the difficulties of merging two cultures” and another study found that although 80 percent of senior executives felt underprepared to deal with culture, those that did give early attention to it were more likely to realize synergies.11 The real

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challenge, in our experience, is to get CEOs to pay attention to the differences and consider them before making a deal. That’s why we have begun to work with boards of directors to ensure that cultural fit is given due attention in a company’s M&A program. Frankly, we think it’s the board’s job for three key reasons: (1) The board’s primary role is to minimize risk and safeguard corporate values; (2) culture is a key contributor to M&A success and failures; and (3) board members may be better positioned than executives to take a more objective view of the deal. Our recommendation to boards is to first insist on an independent cultural audit of both organizations before approving the deal, and then review the cultural audit results in the context of how the acquiring company plans to operate after the acquisition.12

Parameters: Defining the Relationship In Chapter One we highlighted the importance of defining a desired “end state” for a combination. In successful combinations, partners share a commonality of purpose and recognize and accept the terms of their relationship. People are then able to focus their energy on a common goal and let go of any wishful thinking that may run counter to the strategic parameters of their combination. Yet in many cases, corporate marriage communications (like those between individuals) tend to be implicit rather than explicit, open to interpretation and misunderstanding. On the one hand, carefully defining the end state of a deal can bring the pleasantries and promise of courtship to a quick halt. On the other hand, failing to do so can lead to an even less pleasant divorce later on. Although the work of achieving the desired end state involves many people—and often the end state itself is not clear until the firms fully plan the integration and combine—the initial step in formulating it is the responsibility of senior executives involved in doing the deal. In successful cases, the leaders from the buying side have carefully thought through how much to integrate an acquisition or merge with a partner and come to precombination discussions with a clear sense of which aspects of this desired end state are open to discussion and which are nonnegotiable. What factors should inform the reporting relationship of firms?

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The Operating Relationship To some degree, the relationship between combining companies is established when their deal is structured (whether as a contract, joint venture, strategic alliance, acquisition, or full-scale merger, as described in Chapter One). In each case, however, there is a further need to define operating relationships, broad areas of integration, and the management implications. Several companies with which we have worked have gone through a detailed process to define their respective powers and combination parameters. The first, and often most painful, consideration centers on their potential degree of integration (Figure 3.2).

Figure 3.2. Degree of Integration Between Combining Companies. Degree of Integration

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Cross-company integration is not an all-or-nothing proposition. Options range from full consolidation to near separation of the companies, with other choices in between: • Separate holding company. This is common in conglomerate acquisitions, where the holding company invests in an asset chiefly as an investment. The conglomerate form has fallen out of favor in the United States and Britain. Witness GE’s decision to sell off NBC and its entertainment assets to Comcast. But it is alive and well in France, where Compagnie Financière de Suez is a holding company for many unrelated acquisitions. It is also found in some combinations between firms in unrelated industries. The Berkshire Hathaway Group is a prime example. • Strategic control. Here, the buyer shapes the strategy of an acquiree but exerts arm’s-length control over its organization. Many stand-alone acquisitions in pharmaceuticals and biotechnology fit into this category. On a greater scale, TimeWarner, Viacom, and other big media-news-andentertainment conglomerates handle their larger acquisitions in this fashion. • Managed subsidiary. In this model, a company grows in an adjacent market or offers a new service by acquiring a major player. This is the integration model in many cross-border deals and the one that Cisco chose when integrating Linksys. We will see how finding the right mix between structural integration and operating autonomy is tricky. • Operational control. This is the recommended degree of integration when two companies have overlapping capabilities and synergies depend on their combination. An illustration is the acquisition of Gillette by P&G where Gillette’s men’s shaving, grooming, and personal care business is treated as a subsidiary but its other business units have been fully integrated into P&G’s operations. • Merged and consolidated. This is the case of a full-scale merger or the full takeover of an acquiree by a division or business unit of the parent company. Seagate has used this strategy over the past several years, adding to its core disk-drive business and selectively building up its data-storage and

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software product lines. The merger of SmithKline and Beecham had this flavor, as did its subsequent combination with Glaxo Wellcome to form GSK. Although these integration parameters seem straightforward in the abstract, they generate considerable tension and disagreement in practice when considered by actual people facing what they perceive to be tangible losses or gains. In our view, however, it is better to hammer out the reporting relationships and determine the degree of integration in a combination in these areas before completing a deal, rather than see gaps or ambiguities sabotage results later on. Naturally, the finer implications of a combination depend on more detailed analyses by transition teams and negotiations between and among the executives who actually run the combined business. Integrating for Synergies Decisions about establishing the operating relationship between companies should not be premised on matters of power and control alone. On the contrary, decisions about integrating should have everything to do with synergies and value creation. About the same time as we developed our model of the cultural end-state between combining companies, Philippe Haspeslagh and David Jemison developed an insightful model on how to choose the right integration approach.13 Their two criteria can be pictured along two dimensions. One axis concerns strategy and the need for interdependence. Is value created by putting people together and sharing knowledge? By sharing resources? Is value created by consolidating functions? Does combining procurement, products, brands, and such create more market power? Affirmative answers to these questions call for more integration of the firms. A second axis concerns organization and the need for autonomy. Is autonomy essential to preserving the strategic value of a partner? Would integration create turnover, conflict, or a culture clash? Will there be problems and significant costs transferring resources, knowledge, and people? Affirmative answers to these questions call for less integration of firms. Mapping answers to these questions on our “degree of integration” scale is pretty straightforward. The classic conglomerate

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holding company model, integration point 1, has low strategic interdependence between parties and no sustained value to be created by combining them. In essence, the lead company here is simply making an investment in unrelated businesses and managing a portfolio of them. Cases where strategic interdependencies are low and the costs of deeper integration could be high settled on integration point 3 on our chart. Sony’s purchase of Columbia years ago exemplifies this on a large scale. Google’s purchase of YouTube is a modern-day version. Here the two companies are kept separate and the acquired firm’s capabilities are protected. Cases where interdependencies are high and the need for autonomy is low fit between integration points 7–9. Many of GE Capital’s deals are in this range as are full mergers by companies offering comparable products in comparable markets. The most complex cases are combinations where strategic interdependencies are high but so are the risks of integration. Many cross-border deals fit here as do acquisitions where a firm makes an acquisition outside of its current markets. Deals of this type involve integration somewhere between points 3 and 7 on our chart. This range is, in many respects, the hardest to navigate. Gerald Adolph and the M&A team at Booz & Company, for example, find that companies that acquire outside their current markets are often looking for a platform for growth. Here attention must be given to how future acquisitions will build out this platform. Also up for careful consideration are the “parenting abilities” of a company entering into an unfamiliar market.14 Quaker Oats’ purchase of the beverage maker Snapple is a cautionary example. The buyer never understood Snapple’s regional roots, independent distribution system, or quirky advertising, or the competitive prowess of Coca-Cola and PepsiCo, who launched me-too products. Big deals out of market, in turn, call for sober attention to how to develop synergies from the combination itself and argue for the involvement of outside experts to advise buyers of the risks-and-pitfalls of moving into a new competitive space. Witness TimeWarner’s unhappy purchase of AOL on this count. Our recommendation is that when there are high synergies and high risks in integration, companies should start toward the left end of the integration scale (3–4) and then gradually migrate toward right (6–7) as knowledge is transferred and relationships

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develop. Freek Vermeulen, a well-known merger scholar, points out that select acquisitions have the potential to revitalize parent companies through the cross-fertilization of knowledge and people and the transfer of entrepreneurial energy. He writes, “Revitalization cannot occur if acquisitions are isolated from the rest of the company; nor will it occur if the acquired company’s values and practices are suppressed through complete assimilation.”15

The End State: Cards Faceup on the Table Articulating a desired end state provides an early opportunity to clear the air regarding any misperceptions or fantasies about how the two sides will coexist in the combined organization. False expectations abound. Sometimes, people innocently misinterpret what they hear because the partners use language incautiously. How often, for example, does a promised “merger of equals” end up as a conquest? Other times, being in a state of denial interferes with the partners’ truly hearing what is being stated. At still other times, a partner knows quite well what is being said, but presumes that its own political skills will reign and change the situation as the organizations come together. Beyond checking misperceptions, a well-articulated desired end state contributes to successful combination in other important ways. First, it communicates to the workforce that their leadership has a solid sense of where the combination is going. Second, it gives people something tangible to talk about rather than trafficking in worst-case scenarios, rumors, and nay-saying. Third, a clear and understood desired end state guides combination planning and implementation. Putting cards faceup on the table means addressing: 1. Strategic end state. Strategic intentions delineate the synergies sought in a deal and what each side brings to the table. Management statements on these counts need meat and specificity to guide integration managers and transition teams and to win over those who are responsible for value creation. The business press and analysts will soon, if not already, have their stories to tell—pro and con—about what the combination is

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about and what’s likely to happen. Management should have a more complete and credible story. 2. Organizational end state. Senior executives on both sides have assumptions regarding organizational architecture and often different preferences for the design of the combination. Their inclinations should be debated, largely settled, and then conveyed to managers and participants in the transition planning process as soon as possible, and shortly thereafter to the workforce overall. The details can be worked out by transition teams as the companies combine, but the outline needs testing and clarification early on. 3. Cultural end state. What will the cultural end state be of the combined organization? Will one side’s culture predominate? Will cultural characteristics be sought from both organizations? In cases where the lead company intends to do things its way, it is better to say so from the outset than to pretend otherwise. Stating the hard truth may alienate acquired staff early on, but over the long haul some can be brought on board by having them experience the merits of another way of doing things.

People: Managing the Human Dealings Senior executives from the two sides often enter into a combination with different ideas about the desired end state. For instance, when the CEOs of two high-tech companies shook hands on what they jointly termed a merger of equals, little did they know that they held quite different interpretations of that phrase. The target company CEO assumed it meant both sides would have equal say in combination decisions. The lead company CEO intended it to mean that his side would have the final say but engage their counterparts in determining how to best implement those decisions. Both CEOs prepared their teams according to their personal interpretations; ultimately they destroyed the goodwill between them. Executive teams from the two sides showed up for their initial combination planning meeting, which was scheduled before the legal closing. As the meeting proceeded, lead company executives grew angry at the audacity of target management, who kept offering their opinions on how things should be put together. Target company representatives, in turn, became increasingly upset as

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their ideas were put down or ignored. The nadir came when the lead company’s head of operations took off his shoe, banged it on the table, and barked, “Don’t you people understand who is in control here?” Target management stormed out of the session and returned home to complain to their CEO. Upon learning of the disastrous meeting, and feeling led on by his counterpart, the target CEO convened his board and asked them to negate the deal. The target company was in a weak financial condition, however, and the board could not justify that course of action. The deal remained, but so did the bad blood between the two sides. It may be rare for an executive to emulate Nikita Khrushchev, but it is commonplace for partners to enter a combination with conflicting expectations. Conflicts in the precombination negotiations either have to be hashed out or taken as a sign that the partners are not ready to join forces peaceably. Problems can be expected when precombination promises do not match postcombination realities. A buyer might talk cooperation during the negotiations but not be in a position to deliver when dismal financial returns and target management turnover dictate a more aggressive response. Thus we counsel leaders on both sides to prepare best-case and worst-case scenarios for their combination and know what each means for eventual control of the business. In one case, this advice persuaded a group vice president to ease off on integration so long as acquired management met its numbers. In another case, it led a business head to prepare an attractive performance-related stock option package for acquired management to ensure their full commitment to the growth of the subsidiary. Many times a lead company CEO extols the virtues of a subsidiary and says that the parent company has much to learn from its acquiree. But group management, pressed to make the deal pay for itself, and group comptrollers, eager to consolidate control, often have different ends in mind. The problem here is that target management enters the deal with a set of expectations built upon what they hear from the CEO but at odds with what group management is expected to deliver. As the high-tech merger of equals that resulted in the shoe-banging incident shows, talking merger but acting acquisition spelled disaster. It is incumbent upon the CEO, then, to either tell it straight or work with his own team to clarify and enforce the desired end state.16

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Showstoppers When due diligence and early dealings reveal incompatible interests, uncover a dearth of real synergies, or portend a tumultuous culture clash, it’s often time to fold up the tent and move on to other combination candidates. What should executives think about at this point, beyond the familiar issues of “fit” between the parties? Marks, with consultants David Nadler and Marilyn Showers, distilled a list of showstoppers to consider prior to final consummation of an acquisition or alliance.17 If present, these might lead a company to withdraw from a deal, change the valuation, or allocate more resources to manage the aftermath. None of these is necessarily a showstopper in and of itself; but if enough are present and they are serious enough, then the combination should be reconsidered or reconceived: • Distrust and incompatibility between managements. Issues of trust and compatibility that arise as a result of the precombination planning and negotiation process may signal difficulty in working together after the deal. If the chemistry among key individuals is not good as they get to know each other, it will bring down the combination. Do you trust your potential partner? • Difficulties in working out governance arrangements. Problems in working out how the combined entity is to be governed and, in particular, what the roles of key individuals will be, flag divergent or mutually exclusive approaches to governance. Can you put up with the hassles? • Lack of talent to manage both ongoing operations and the transition. Not having enough managerial talent to deal with both core business tasks and the combination puts greater demands on management than there is capacity. Can significant weaknesses in the combination partner’s talents be handled? • Significant coordination costs required to obtain synergies. The reality of obtaining the hypothesized combination benefits is much more costly and time consuming than initially anticipated. Time, money, technology, and other investments required to obtain synergies may distract resources from other important areas. Can you afford it?

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• Disruptions associated with the combination. Going through the process of combination disrupts business operations and creates significant costs, problems with customers, or opportunities for competitors. Are you prepared for this? • Threats to customer relationships as a result of combination. Customers may feel differently about the combined entity because of its new ownership, its size and position, or other factors that lead them to view the new organization negatively. How loyal are your customers and theirs? • Incompatible values and culture. Core values and cultures that are significantly different are very difficult to combine. Are you prepared for the battles? • Postcombination talent drain. Key managerial, technical, or professional talent may not want to remain because of their feelings about the new owners or partners, the nature of the new company, or real or perceived threats to their careers. Can you replace them? • Negative impact on the workforce and communities. When combination gains require significant layoffs, there may be harm to the workforce and the communities in which the company operates. What is your stance? • Postdeal hangover. The process of deal making has been contentious enough to create significant bad blood that will be difficult to overcome during the combination phase. Are you ready to work together? Do you really want to?

Planning During the Precombination Phase Since the publication of our previous book on M&A, buyers have started to use the period from deal announcement to its legal close to get a head start on integration planning. British Petroleum and Amoco’s combination was sped up by using independent third parties—a “clean team” of experts from consulting firms— that had legal clearance to view data from both sides in advance of the merger’s close. The team used e-files from each company to prepare baseline data for transition teams on business and functional cost structures in the two companies. They also prepared pro forma pictures of synergies that might emerge in various integration and consolidation scenarios.

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This process enabled the merger partners to get just the kind of information needed to make decisions without having to modify existing software programs, or write new ones. The third parties worked with both sides to establish common rules on cost accounting, asset valuation, and so on and to reconcile differences in their treatment of payroll, taxation, and such. Ultimately the clean team provided data for unit-by-unit comparisons between the two sides. According to one report, on the day the transaction was approved, management learned that functional costs for accounting, finance, human resources, information technology, and facilities management stood at over $5 billion for the combined organization. This provided a data-based target for immediate consolidation and cost cutting. Furthermore, widespread differences in costs and margins were detected for comparable business units. This focused integration teams on locating best practices in one or the other company and on eliminating inefficiencies.18 As the third party steps away, executives and staffs from the partners must “play well” together. However, people may be more concerned with looking back at what they may be losing rather than looking ahead to what they may be gaining in the combination. Their interactions also may be colored by the mind-sets they bring to the deal. As we see in the next chapter, the human side of M&A matters considerably in whether strategic and operational preparation benefits the eventual combination.

Chapter Four

Psychological Preparation The CEOs of two merging industrial products companies invited one of us to discuss their upcoming combination process. In their early sixties, both men planned to remain on board for a couple more years, see the integration through, and then turn over the leadership to a younger executive. The courtship between their companies had been friendly and, as part of the deal making, the two CEOs agreed on their roles in the combined operation. One would serve as chairman and oversee the administrative, finance, and marketing functions; the other would get the CEO title and lead sales and manufacturing. During the discussion, one CEO stated, “I don’t understand why so many of these mergers fail. We seem to be making good progress and sorting things out.” The reply: “Of course, things look good from your vantage point. But you’re the only two people in both companies who know your titles and roles! Everyone else is wondering and worrying about what might happen to them.” Indeed they are—a longitudinal study of ten thousand U.S. employees representing four thousand organizations found that those from organizations that had been engaged in a merger or acquisition reported significantly less favorable results than those who had not experienced M&A.1 This held true for every industry group and every facet of working life measured. In this chapter, we look at the psychological challenges in joining forces. We describe the mind-sets of buyers and sellers in an acquisition and of partners in an alliance, as well as the sources of employee stress and uncertainty in a combination. We report how organizations and their people can use the precombination period to prepare psychologically for the work ahead.

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Combination Mind-Sets Combination partners typically enter a deal with distinct mindsets. In an acquisition, the buyer and seller usually have very different psychological perspectives on the deal. Often they bring a one-up/one-down outlook into their interactions, particularly when the acquiree has endured a downturn in business performance and is strapped for cash. The victor-versus-vanquished outlook is also found in many mergers where one of the parties is clearly seen as the lead company. Psychological mind-sets certainly influence early dealings and can dominate the critical months of transition planning and implementation. They often carry over into the combined organization. Awareness of these mind-sets, both one’s own and the partner’s, helps both sides prepare for a successful combination.

Mind-Set of the Buyer To the victor go the spoils. Certainly, bidding wars and hostile takeovers are exhilarating for the winners. But even in a friendly deal, there are few moments in an executive’s career that equal the intensity and satisfaction of buying another company. Acquiring another organization, or assuming the role of lead party in a merger or alliance, translates into a strong air of superiority. Company executives have just made a big deal; they are heady, confident, and very much on a roll. This attitude frequently carries over into assumptions that the buying company’s business acumen—and policies, procedures, people, and systems —are superior to those of the purchased firm. Being the dominant party contributes to condescending attitudes about the other side: “They’re still battling the problems we solved five years ago”; “Wait until we show them how to do things”; “Our systems will bring them into the modern age.” As the combination begins, the lead company seems impelled to move fast and consolidate gains. They have studied the situation longer and have more detailed plans and pressing priorities. Top management may have promised to go slowly and honor traditions during the negotiations, but business heads and corporate staffers have their own designs. Moreover, they are rewarded

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for cutting costs and producing results, not for how fairly or smoothly they manage the combination. As a result, lead managers often impose their own integration plans; prior promises mean nothing.

Mind-Set of the Acquired Why is being acquired often so debilitating to an organization? From the start, in the case of a hostile deal or one imposed by the board, there is a sense of violation: we have interviewed executives who liken it to rape and describe their buyer as an attacker or barbarian. Even in friendly deals, acquired managers often describe themselves as being “seduced” by promises that changes will be minimal, or as being “taken advantage of ” once they are forced to accommodate the new owner’s demands. A state of shock permeates a company following an acquisition announcement. Executives wander the halls, unprepared to assume new duties and responsibilities. Executive recruiter John Handy found that 90 percent of nearly one thousand senior and middle executives he studied were psychologically unprepared for the changes in status and organizational structure they would encounter following their company’s acquisition.2 Seeing and sensing the anxiety in their superiors, other employees grow anxious about the combination, how it would be managed, and their personal fate in it. One way executives cope with their shock is defensive retreat. This allows acquired executives to regroup and reformulate a “battle plan” for countering the “enemy.” At one acquired manufacturing firm, this led to a strategy of noncompliance and various tactics to resist the overtures of the lead company. Even in so-called mergers of equals, perceived fears of losing status or ways of doing things lead executives to dig in and protect their turf. Finally, acquirees often feel powerless to defend their interests or control their fate. Even when the deal is friendly or when a company is rescued from a hostile bidder by a sympathetic third party, the consequences are frequently out of acquirees’ control. Sellers sometimes respond with passive or aggressive hostility, or they may withdraw in defeatism.

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Many managers find that Elisabeth Kübler-Ross’s stages of reaction to death and loss mirror their personal reactions to being acquired.3 Initially, there is denial and disbelief. In shock, they deny the reality and their own vulnerability; there may be underreaction (“nothing will happen”) or overreaction (“everything will change”). People in the target company then experience anger. They are angry at their own leadership for selling out and cashing in. Later they will be angry with the buyer. Although expressing anger allows people to vent their emotions, many become stuck at this stage and are never able to move on to adapt to the new situation. For those who can move forward psychologically, next comes bargaining. People’s natural tendency is to look out for number one. Some leave what they consider to be a sinking ship; others try to make themselves indispensable. Some cozy up to new management and pitch their importance and value to the organization, whereas others guard data or customer relationships as leverage for survival. Only after some time, and in some cases after working through depression about their inability to control their own fate, do people accept the reality of the new situation and become ready to work with counterparts in a genuine and committed way. For some, this may be a matter of weeks or months. Others take years. Some individuals never reach the stage of acceptance.

A Partnering Mind-Set There are mergers that look, from the get-go, to be combinations of equals, acquisitions where a smaller business is delighted to be part of a larger company, and, of course, alliances and joint ventures in which both sides equally invest. In these deals, preconditions for a partnering mind-set prevail: • Trustworthy dealings. Trust cannot be negotiated as a condition for a deal, nor can a lack of it be compensated for in a combination design that keeps the parties at arm’s length. But openness, transparency, and partnership commitments during dealings provide at least a basis of trust that can be built on in precombination planning.

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• Common interests. Successful partners share with their counterparts a common interest and sense of purpose. Both sides are open about what they want from a combination and are ready to work together to achieve it. Each side may have distinct goals and priorities, but they rely on their interdependent interests to achieve them. • Complementary skills. Partnership implies that individuals from the combining organizations can see how working together will be of benefit. At a minimum, the combination needs to make strategic sense to people. More positively, they can see how they can learn, grow, and gain by working with counterparts in a new organizational arrangement. • Cooperative competitiveness. In a merger within the same industry, the competition that has pitted partners against one another needs to be displaced by cooperative spirit. Rather than battle one another, the key is to turn that competitive spirit toward external rivals. This is also important in joint ventures and alliances where the two companies have agreed to work together in a specific segment, but continue to compete with one another in other contexts. In these cases, partners need to believe in the value of working together and see that influence, risks, and rewards in their venture are fairly apportioned.4

Engaging Minds An executive with whom we worked several years ago suggested that preparing for a combination was like “preparing to be hit by a Mack truck.” Maybe so, but at least it helps to know that others have gotten up off the pavement and gone on with their lives. Psychological preparation for a combination means raising awareness of the normal and expected mind-sets of the buyer and the seller, and holds up the mind-set of partnership as the standard to achieve. The objective of preparation cannot be to eradicate the buyer and seller mind-sets; that would be artificial and futile. Rather, psychological preparation readies people to join forces by sensitizing them to the dynamics of the combination before the deal is closed. By being alert to these dynamics, buyers are more likely

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to sense when they are lurching into a dominating mode and temper their actions. They are also more likely to be patient with sellers who are in denial, working through their anger, or angling for an advantage for themselves. Concurrently, acquired managers who are aware of the stages of dealing with loss are more apt to be in control of their emotions when interacting with counterparts from the lead organization. When aware of the mind-set of the buyer, sellers are more likely to recognize what impels power plays and efforts at domination. One way to raise awareness of combination mind-sets is to educate people through readings, presentations, or discussions of human factors in a combination. Many companies offer seminars, distribute books and articles, and create sections of their intranet Web sites, which describe the mind-sets of buyer and seller. They also engage executives in discussing expectations or experiences in going through combinations. In organizations with experience in combinations, veterans of previous acquisitions and alliances can share their firsthand experiences with novices. A more dynamic way to raise awareness of these mind-sets is through an experiential workshop that helps people develop a true feeling of what it is like to acquire or be acquired.

Sensitization Workshops In several combinations in which we have been involved, employees from both sides participated in sensitization seminars to foster dialogue about their respective mind-sets. One of us led a workshop that involved a simulation of the buying and selling mind-sets. The morning of the first day began with a presentation on human, cultural, and organizational issues in combinations, including the mind-sets of buyers and sellers. The executives then participated in a discussion that vacillated between generic issues of buying, selling, and combining companies and specific issues in their combination. After a lunch break, the two teams went to work in an M&A simulation. Acquired executives played the Micro Widget Company and lead company executives the Macro Widget Company. These executives, being the competitive businesspeople they were, threw themselves into the simulation and established strategies and

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tactics for maximizing their returns. Just five minutes before the close of the first day’s session, however, it was announced that the Micro Widget Company intended to acquire Macro Widget (reversing the two sides’ roles in the actual deal)! Nothing further was said about the details of the acquisition, though more information was promised to be forthcoming the next morning. The meeting adjourned for day one, and the participants were invited to cocktails and dinner. Role Reversal How did the executives react to this role reversal? Entering the lounge, one would have thought the simulation was still on. Macro Widget executives huddled in one corner, wondering aloud about their fate at the hands of their new owners and plotting ways to resist any changes in control. Micro Widget executives, at the other end of the bar, began planning how they would establish authority in their new acquisition. Both sides continued to ask questions about the deal and its purpose and expected progress but, as is the case in real M&A, people learned that no further news was immediately available. The next morning, combination planning sessions commenced. Meeting separately, the two groups identified their negotiating teams and readied their strategies. The targeted Macro team was determined to protect its independence despite the change in ownership. The buying Micro team aimed toward consolidating operations quickly. Note that the two teams were not coached to develop these mind-sets; rather, they developed naturally based on their roles. Then it was announced that the two sides would participate in a series of negotiating sessions alternating with time allotted for the teams to report back to their colleagues. After three rounds of negotiations, no progress had been made; target executives were obstinate in their resistance and lead executives were growing increasingly frustrated with the lack of progress in negotiations and planning. The two sides were brought together to discuss what they had experienced. Micro Widget executives began by asserting how uncooperative and unrealistic their acquired counterparts had been. Macro Widget company executives, in turn, complained that the buyers never intended to listen to any input from their

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side, were disrespectful and not willing to negotiate alternative courses for approaching the combination. Both sides were asked to describe how their feelings might influence their subsequent behaviors back on the job. (Keep in mind that the Macros were the true lead company and the Micros the acquired.) Macro Widget executives acknowledged that what they saw the Micro Widget team doing in the simulation reflected their own tendencies back in the real acquisition: they were eager to move ahead with consolidation and assumed things would go their way. More than this, however, the Macros gained a deeper understanding of what it is like to have one’s organization suddenly taken away in a combination. They became more empathic toward the plight of their real-life acquired counterparts. The Micros, for their part, came to see how easy it was to slip into the mind-set of the buyer and dominate the action. The awareness raised by the simulation led to the creation of formal ground rules for combination planning. The two groups then disclosed their expectations and intentions, and the full group discussed how they could move from the mind-sets of buyers and sellers to one of partnership. Back in the real world, both sides saw more give-and-take in their relationship. Lead company executives still led the action, but they were careful to think through how actions on their part would affect the acquired team. They became more patient, did more explaining than dictating, and looked for opportunities for true collaboration. Acquired executives grew more tolerant of the style of the lead company but were also able to call a time-out and confront their counterparts when domination seemed extreme.

Human Reactions to a Combination Creating value through a combination requires a lot from people, whether they be executives who have to guide a transition while still running the business; transition team members who have to sort through mountains of data and make recommendations; or the overall workforce who have to maintain levels of productivity, service, and quality while fretting about what will happen to them. Ignoring or insufficiently attending to the first indications of the Merger Syndrome has negative, not just neutral, effects on what

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follows. Some of these results, such as lost productivity, have immediate implications; others, such as declining employee morale or customer service, burden organizations over the long haul. Foremost among the costs of not addressing the early mindsets of employees is losing the rare opportunity to use their “unfrozen” status to begin to build momentum toward a better organization.

What Makes a Combination So Stressful? Why are combinations so stressful for executives and employees? 1. There’s more work to do and less time to do it. The sheer amount of work involved in combining two organizations—digesting enormous amounts of information and making complex integration decisions—is overwhelming and absorbs senior executives’ time and energy. Compounding this is the pressure they encounter to maintain day-to-day results in the face of employees’ discontent. Tension filters down through an organization as staff and lower-level managers are often called upon to assemble information, without knowing the whys and wherefores. Employees are urged to keep their noses to the grindstone and not worry about the uproar around them. Meanwhile, leadership is mostly invisible; and when in sight, leaders seem harried and circumspect. 2. The future is highly uncertain. Questions abound for which no reliable answers are given. Will the deal be consummated? How will reporting relationships be structured in the new organization? Which side’s policies and procedures will be followed? Will pay and benefits be affected? Will decisionmaking practices change? Will expected promotions or job assignments be honored? How will redundancies be resolved? 3. This is a time of insecurity. The rumor mill circulates horror stories that show the buyer to be rapacious or the seller’s circumstances to be dire. People congregate around coffee machines and water fountains, in lunch rooms and watering holes, to hear the latest gossip. They obsess about how the deal is going and how the combination will affect them. Many find their self-confidence being hacked away. Managers and

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employees who have mastered their jobs now find themselves worrying about what will be asked of them. This is especially troubling for good performers, who feel that they will have to prove themselves to new leaders and teammates. 4. People feel they’ve lost control of their situation and fate. The ability, real or perceived, of being able to exert control over events is a powerful coping mechanism during stressful times. When people no longer have that control, they are thrust into the panic of the Merger Syndrome. For some, walking away from their current job is the only way they can see to exert control. Others choose less severe, but equally maladaptive, responses and seek control through politicking and alliances. Some become paralyzed and depressed by their perceived lack of control. Stress Begets More Stress Basic research on stress highlights four factors that add to the angst:5 1. The amount of stress people experience is based upon their subjective perceptions, not on any objective reality. Certainly, objective events factor into subjective perceptions, but the stressfulness of a situation is in the eye of the beholder. A senior vice president at a financial institution, who headed up three lines of business prior to a merger, had the same title in a combined organization but now had responsibility for two lines. He had more people and responsibilities than before, yet for months all he could think about was what he lost: “Why did they take that line of business away from me? Doesn’t the CEO trust me? I’m better than the person they gave it to.” 2. The threat of an event can be as stress-inducing as the actual event. Threatened loss, with all of the associated worry about oneself and one’s family, can be as debilitating as actual loss. Worrying about not fitting in, lamenting about the loss of one’s track record, or agonizing over what might happen to one’s career all produce stress. At this point, it matters not what senior management intends but what people fear their leaders may do.

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3. The stress of an event is determined by the amount of change it implies, not necessarily whether the changes will be good or bad. Research shows that marriage and births can be as stressful to people as divorce and deaths. Both disrupt the status quo, entangle family and friends, and require that people adapt to new circumstances. Most combinations offer a mix of good things and bad. Both produce stress. 4. The effects of stress are cumulative. That even positive changes induce stress is important to consider because the effects of stress are cumulative. A series of small, seemingly innocuous changes can add up to a large and significant change in the eyes of people. A proposed change in name, location, and reporting relationships stimulates fear of wholesale change. Multiple transitions—a merger following waves of downsizing and restructuring—overwhelm people’s capacity to cope with stress.

Emotional Reactions to M&A Since we introduced the Merger Syndrome, Myeong-Gu Seo and N. Sharon Hill have catalogued studies on specific emotional reactions of people involved in a combination at each phase.6 Four main “classes” of human reactions have been examined; Figure 4.1 highlights their prominence at each stage.

Figure 4.1. Emotional Reactions in Each Phase of a Merger. Emotional Reactions to M&A Uncertainty, Anxiety, Loss of Attachment Loss of Identity/ Membership Acculturative Conflict and Stress Equity and Justice

Precombination

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Postcombination

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• Insecurity, anxiety, loss of attachments. These Merger Syndrome symptoms arise in the early phases of a combination. When companies physically combine, new anxieties arise. The termination of coworkers or voluntary departure of colleagues can stimulate “separation anxiety” that manifests itself in hostility, withdrawal, and depression.7 • Loss of identity or membership. To a large extent, identity is based on people’s membership in and associations with a group— their family and clan at the most primal level and, most germane here, their occupation and organization. All of these facets of identity are at risk throughout a combination, including one’s status as family breadwinner, productive worker, and member of a corporate tribe. A merger marks the onset of ingroup-outgroup social comparisons and conflicts. • Acculturative conflict and stress. Emotional reactions to the culture clash are most pronounced during the combination period, a subject we take up in a later chapter on easing the clash. Acculturative stress increases in the postcombination period as people form new relationships, adapt to new roles, and have to learn how to operate and be successful in a new organization that differs culturally from their old one. • Equity and justice. People are vigilant regarding how “fairly” functions are combined and staffed, how people are handled, and to what extent accustomed ways of doing things are preserved or lost. Relative feelings of equity and justice, as we shall see, can leave people in different psychological states when it comes to joining up and contributing to the new organization.

Challenges in the Precombination Phase Stress, uncertainty, and emotional responses afflict everyone in a deal to a greater or lesser extent. Some selected groups of employees, however, require careful attention.

Retaining Desired Talent With the announcement of an impending combination comes the risk that top technical, professional, and managerial talent will

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leave for what appear to be greener pastures rather than await their fate in the combined organization. Technical people are extremely marketable and can find many employment opportunities. They don’t have to look too hard; recruiters swarm over firms engaged in a combination. The bait is appealing: a well-defined job with spelled-out accountability and some added salary and perks to boot. Compare that with the uncertain prospects of staying where everything seems up for grabs, where conversation is more about what is being lost than what might be gained, and where competitive momentum seems to be slowing as people turn inward rather than stay focused on external customers and competitors. Frequently, top performers in a combination figure that if they have to prove themselves to new leadership, they might as well consider opportunities on the outside. Specialists in employee retention recommend creating a scorecard that rates people in terms of (1) their criticality to the company from the transition onward, (2) their likelihood of turnover, and (3) their replacement costs. These factors dictate whether, for example, people might qualify for an “enhanced severance”—a bonus for staying around until personnel decisions are made or for a “retention bonus”—a much higher reward for active involvement in the transition process. The presence of top talent symbolically reminds other employees of the benefits of staying on board through the transition and perhaps into the new organization. And of course, customers appreciate dealing with proven contacts as an organization goes through a combination. Some advisers suggest making retention of key executives a part of the deal negotiations. This makes sense if they are needed and the financial implications can be sensibly worked out. Yet many of the employment contracts we have seen emphasize financial penalties should an executive depart before the agreed-on time—in other words, they put financial handcuffs on people. It is better, in our view, to emphasize performance bonuses and enrich the payout for their growing the business.

Winning “Their” People Over What is also needed to retain people is a personal bond between leadership from the lead company and desired talent from the

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partner. The keepers have to be identified early in the precombination phase and engaged in dialogue that evinces a high regard for their talents and shows attention to their needs. In successful combinations, leaders find out what motivates people from the partner organizations. What would turn them on in the new organization, and what would turn them off? What perceptions do they have about leadership and management style? What are their best- and worst-case scenarios for the combination? What kind of job do they want? What will they settle for? In this respect, retention is akin to recruiting people to be part of the combined organization. Key performers can—and should—be told that they are needed and wanted, and listened to regarding what they need and want; but no promises about role, responsibilities, or reporting relationships should be made unless there is complete certainty that they can be kept. Like all employees, top talent has to endure some uncertainty as the structure and positions are sorted out. They may press for specifics about their assignment, especially when attractive job opportunities outside the company are being dangled in front of them. Here, the ambiguity enveloping them can be turned to advantage: how often in people’s careers are they in a position to influence the design and start-up of a new organization? Helping people identify with the work of joining forces has been shown to make them less likely to withdraw and more likely to put in extra effort.8 The potential of two in the bush can sometimes overcome the security of one in the hand.

Dealing with the Acquired CEO Many times an acquired chief executive officer is not able to function smoothly and productively in working for a parent organization. After calling the shots from the top job (and usually with a healthy severance beckoning), most acquired CEOs choose to leave and pursue other interests. Those who remain tend to have difficulty in adapting to a new regime; reporting to someone who may be younger, less experienced, or with a lower-status title, and staying out of the way of the surviving CEO. It simply is difficult for most one-time CEOs to play second fiddle after being in the lead chair.

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Nevertheless, the lead company may want the acquired CEO to remain on board for a while and assist in the dual tasks of managing the combination while running the business, or even serve in a broader capacity in the parent company, perhaps heading a business group. Naturally, this is an important part of the precombination discussions. If there is no meeting of the minds during the negotiations, then it’s unlikely to be reached later on. In the meantime, the rest of the combination stalls in a wait-and-see mode until the acquired CEO’s fate is settled. In cases where the acquired chief executive remains temporarily for the transition, the title, responsibilities, and time frame for the assignment also need to be clarified up front. Any ambiguity that seeps into the combination planning period is a major distraction from the work going forward, both for the acquired CEO and for the executives and employees surrounding her. There have been some cases in which the CEO from a large acquiree or merger partner remains on board and serves productively in the combined organization. These instances have key characteristics: 1. The combining CEOs share some history and friendly relations. 2. They have well-defined roles and timetables for departing. 3. The acquired CEO is given a “real” job. 4. The acquired CEO is supported and assisted in the transition.

Middle Managers’ Role Middle-level managers and supervisors play a prominent role in helping the overall workforce manage stress and uncertainty during this crucial precombination period before the sale is complete and integration gets under way. In the communications arena, organizational leaders set the tone and communications professionals make important contributions, but employees want to be kept informed by their immediate superiors. These are the representatives of management that they see every day, and employees know how to “read” them for the subtle signals and cues that help interpret the implications of the facts being delivered.

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Unfortunately, middle managers are just that—caught in the middle. They are bombarded with questions from their subordinates but do not have the information available to those at the top. Thus, they generally need some training in effective communications methods, feedback on their styles, and content in the form of question-and-answer packets and briefings. A large part of middle managers’ communication responsibility in the early going is to establish a climate of “When the information becomes available, you will get it.” Employees quickly learn that their immediate superiors do not have all the answers. The communications imperative for superiors is to acknowledge issues, explain why no answer is yet available, and accept responsibility for getting back to people when they do have an answer. Even if managers have little information to impart to employees, they can nevertheless meet with individuals or groups to solicit their concerns. In these listening sessions, managers are well advised to stay quiet and take notes, allowing employees to express frustrations, concerns, and hopes. Over the course of the combination, people adjust better to changes when they feel their superiors make at least some effort to consult with and inform them.9 Team leaders who anticipate roadblocks to productivity can work with employees to assess workloads, review procedures, and prioritize competing demands. Of course, midlevel managers and supervisors are more than passive agents relaying the missives of senior leaders and using the tools and tactics handed to them by human resources and corporate communications professionals. They have to take these resources, put their own spin on them, and be proactive in helping their subordinates.

Managing the Sales Staff A McKinsey survey of regular acquirers found that companies rated themselves weakest in M&A in their handling of their sales and marketing personnel.10 The challenges are twofold. On the one hand, it is imperative to maintain sales momentum prior to and during a combination. Competitors move in fast when they spot a weakness and customers defect when they see unrest and problems from their suppliers. Sales professionals and managers

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also have deep customer knowledge that is needed to map integration and a combined company customer strategy. On the other hand, sales and marketing specialists are very marketable and often don’t countenance confusion and indecision from headquarters. Keeping them onboard, focused, and productive is essential during the precombination stage.

Connecting to Everyday Employees Many employees assume that once a deal is announced, there is a plan for integration ready to go. Thus, employees need some education on the basics of the combination process even though integration plans are far from set. This preparation also gives employees a realistic sense of time frames, at least some opportunity to participate in the process, and help in coping with the uncertainty and insecurity that are inevitably experienced. Employee communications programs during the precombination phase can go a long way in feeding people’s seemingly insatiable desire for information. Corporate communication departments typically devise a comprehensive communications program during the period between the announcement of a deal and its legal closing. Web sites and print media may include a brief history of the partner company, a profile of its CEO, and details on its facilities and product lines. Other useful topics include a straightforward acknowledgment that change is inevitable for all involved, answers to questions solicited from employees, and guidance by the company’s employee assistance adviser on taking control during the merger. We’ll cover more on communication in Chapter Seven on managing people through a transition.

Preparation on the Seller’s Side Given decades of writings on the human side of M&A, good human resources (HR) departments have become far more active in preparing their people for the stresses of M&A. It is not uncommon, for example, for companies to run sensitization seminars, put together well-designed retention plans, and prepare some analyses on cultural similarities and differences between the combining companies. What is rare, however, is for acquired HR

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departments to step up and prepare themselves and their organizations for a combination. Most acquired HR groups become passive as they wait for counterparts from the lead company to make inquiries. However, a few recent cases show that precombination preparation is not limited to the buying company.

Preparing to Be Acquired Unless the lead company intends to make a preservative acquisition and maintain an acquired firm’s autonomy, the sale of a firm implies the end of its identity. The denial, shock, and anger inherent in the mind-set of an acquiree can result in inertia that plagues the target company immediately following a sale and for months thereafter. With senior leaders preoccupied with how they may personally be affected, and thrust into a crisis-management mode, rarely is the time between announcing the combination and its legal closing used at all creatively. What can HR do to use the precombination period to prepare for the psychological challenges of being acquired? When a large credit service was acquired by a national retail bank, fears and insecurity ensued. The buyer had a track record of rapidly cutting staff and closing facilities when buying local and regional banks. But this was not a “roll-up;” there would be some administrative consolidation but otherwise the acquiree would have a measure of independence—so long as it performed well. The HR head of the credit service prepared a “human resources merger response plan” to guide the allocation of effort and resources under her control (see Figure 4.2). The plan anticipated the needs of various groups of employees, including potential victims of layoffs, surviving employees, and executives with employment contracts. It spanned the dimensions of the human resource function from compensation and benefits to diversity and training.

Preparing People for Divestiture A particularly difficult psychological experience for managers and staff is to have your company “disposed of” through divestiture. One of us worked with the HR Group at Seagram Spirits and Wine

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Figure 4.2. Human Resources Merger Response Plan. • Clear the decks (HR staff) Review projects and priorities Eliminate nonessentials • Engage a merger management consultant Identify and review consultants Make selection Develop merger management “people principles” • Develop employee communications strategy Link with employee communications Review alternatives and media Prepare master Q&As • Implement hiring freeze Establish exception process • Develop morale interventions Recommend appropriate interventions and activities Create a new performance appraisal system to reward and reinforce the right attitudes and behaviors in the new organization Implement interventions • Develop training response Develop and launch appropriate training response for maintaining productivity during transition Offer special programs to support employees (stress management, financial management, interviewing skills) Order career planning tools Respond to training policy questions • Develop severance policy response Anticipate and respond to potential policy questions Develop a contingency negotiation posture for employee severance, benefits, etc. • Development compensation and benefit response Prepare responses to anticipated questions Research and resolve “golden parachute” questions Advise holders on their contracts Consider availability of potential retention bonus strategies in view of rich severance package • Visit the issues from a diversity/career opportunity perspective Look at processes from a diversity point of view Review processes from a career-development point of view

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Group (SSWG) to prepare its people for sale.11 By way of background, soon after SSWG’s parent company, Seagram, was acquired by French entertainment conglomerate Vivendi, the announcement came that the liquor and wine businesses were being divested while Seagram’s film and music holdings were being retained. Employees in SSWG were in limbo as their unit went through an auction process that lasted several months. Rather than sit around and passively await direction from the eventual auction winners, a team of SSWG operating executives and HR professionals convened a three-day meeting to prepare for the coming transition. The agenda included an update of the acquisition and divestiture process; presentations from external speakers reviewing profiles of the potential buyers; a discussion of the fate of employees who would not be retained after the sale; and the development of processes and materials to assist the eventual buyers in assessing, selecting, retaining, and integrating desired employees. The event prepared attendees to communicate the strengths of the to-be-acquired organization to a potential buyer and engage them in envisioning what a desired postcombination organization might look like. Specific integration processes— including methods for providing accurate assessment information for individual contributors—were designed. The meeting concluded with a “taking initiative” activity in which the attendees strategized how to be proactive in dealing with the buyer by sharing the output produced at the meeting and reaching out to form a collaborative relationship with counterparts in the buying company. There was no assurance that the buyer would be receptive to this proactive stance, but attendees left the conference feeling confident that they were doing the best job possible to prepare themselves, their organization, and their new colleagues for the rigors of integrating previously separate organizations. And, in fact, the eventual buyers—Britain’s Diageo and France’s Pernod Ricard—made liberal use of the information and processes generated at the meeting. Critical to business results, the vast majority of employees stayed on board to maintain operations and honor customer commitments during several months of uncertainty. Here the “hardware” of a financial incentive to remain in the organization

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plus the “software” of workshops and other interventions to address employee anxiety—both with their genesis traced to the three-day preparatory meeting—kept the critical talent needed to attain SSWG’s business objectives. In the year following the announcement of the intended sale, only 534 out of 8,500 SSWG employees (6 percent) left voluntarily. Several received job offers from the buyers while others left with the dignity of knowing they were treated about as well as could be expected when an employer dies in a divestiture.

Precombination Checklist The precombination phase encompasses actions to identify a partner and actions to prepare for the combination phase if the deal goes forward. As partner selection ensues, eventual M&A success relies significantly on the extent to which the combination strategy is clarified and adhered to and on how thoroughly organizational and cultural due diligence are conducted and considered. Since our last book, more and more organizations are using the period between deal announcement and legal close to prepare people for the rigors of the combination phase, ready a transition management structure, consider culture, and check for aligned expectations among all involved.

Precombination Phase Action Checklist Strategy Clarify combination strategy and search criteria 䊐 Determine strategic rationale for doing the deal 䊐 Set criteria for partner selection Develop vision, critical success factors, and operating principles of the combination 䊐 Compose clear statement of vision and critical success factors 䊐 Determine operating principles for decisions Organization Conduct thorough screening and due diligence 䊐 Secure broad functional participation in due diligence 䊐 Stick to selection criteria

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Perform organizational review 䊐 Analyze both organizations (for example, senior management structure, policies, practices, sales forces) Establish the basic organizational structure 䊐 Identify key positions reporting to the CEO 䊐 Determine process for identifying other key executives People Prepare people psychologically 䊐 Conduct workshops to help executives achieve objectives while handing employee and cultural issues 䊐 Offer sensitization seminars for all managers and overall staff Prepare a communication plan 䊐 Identify key stakeholders (such as customers, suppliers, employees, community groups) 䊐 Develop a balanced content—the deal’s upside potential along with a realistic preview of what it will take to get there Check for alignment between partners 䊐 Determine the extent to which all involved share expectations for combined organization 䊐 Watch for and address mind-sets of victors and vanquished Culture Conduct cultural audit 䊐 Understand similarities and differences 䊐 Respect precombination cultures Articulate desired cultural end state 䊐 Establish values and norms for the combined organization 䊐 Clarify parameters between partners Transition Management Prepare a plan to manage the integration 䊐 Draft transition structure and timeline

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䊐 Appoint transition manager(s) and consider who to put on transition teams 䊐 Ready employee assistance program (EAP) Survey customers, suppliers, and staff 䊐 Ensure that strategic partners are in the loop Begin critical issue identification 䊐 Identify burning issues that need to be managed immediately upon approval of the deal

Part Three

The Combination Phase After receiving legal clearance and the deal is done, the combination phase of M&A commences. This phase has its own unique challenges: holding on to customers and talent, countering the Merger Syndrome that can afflict both firms, keeping the two businesses running while restructuring one or both of them, engaging people in transition teams, and initiating the physical combination of firms, all the while weathering a culture clash. What complicates the combination process? • Integration seen as a distraction from “real work.” As responsibility moves from corporate staffers to line executives, reality hits hard. Operating managers see inflated projections and don’t know how to meet the numbers. Meanwhile, executives are busy running their current businesses, and their job evaluations and bonuses are based on meeting core business targets— not on how well the integration goes. Many see integration as a distraction from getting products and services to customers. Thus, what on paper seems like a comprehensive integration program is in practice implemented haphazardly and superficially. • Value-creating synergies and critical success factors are misunderstood or mishandled. Corporate strategists may have a clever map for integration, but it is those at the operational level who have to navigate the terrain. Rather than identify and mine sources of strategic synergy in integration, managers focus on

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cost cutting and take shortcuts that save time but result in lowest-common-denominator decisions. Many do not appreciate the political sensitivities involved in making the combination work. • Psychological effects denied or ignored. Many companies fail to fully take account of the “human side” of M&A. Senior executives, once named to top posts, can’t relate to the uncertainty and insecurity experienced by other employees. Middle managers get caught up in their own uncertainty and fail to communicate with their people. Meanwhile, HR departments are busy firefighting rather than moving the combination forward. • Culture clash denied or ignored. It would be comforting if problems in the combination phase were limited to inept management. They aren’t. A survey of European managers involved in acquisitions and alliances found that technical issues were less instrumental in producing conflicts in work relationships than were differences between corporate and national cultures. A majority also reported that senior executives did not initially regard such differences as important. • One-size-fits-all combination plan. Many deals underperform because executives take a one-size-fits-all approach to them— for example, by using the same process to integrate for back-office cost synergies as for sales force revenue synergies. Different kinds of integration profiles yield different kinds of synergies. In this section on combining companies, we begin in Chapter Five with leadership practices for M&A success and highlight lessons from leaders we have worked with and learned from. Chapter Six describes the transition structures and management processes used to integrate companies. What were innovations at the time of our first book are now “best practices” in combining companies. Chapters Seven and Eight drill down into the individual and cultural dynamics of combining people from two separate organizations into one. Here we delve more fully into the Merger Syndrome and show what successful companies have done to bring people and cultures together to join forces and create value.

Chapter Five

Leading the Combination Combination leadership is a special challenge in an executive’s career, not just another strategic exercise or managerial posting. Its success depends on how well a leader effectively works the middle ground between partners and instills professionalism and commitment in staff on both sides. A Federal Trade Commission panel of merger experts concluded that a firm’s combination activity is influenced more by the style and personality of its CEO than by any of the analytic models and planning protocols used by corporate staff.1 A combined company is going to be shaped by what the leader (whose title may or may not be CEO) thinks, says, and does. The top leadership role is typically settled as part of the deal making, though its scope and impact varies depending on the type of combination. In an acquisition, the parent company CEO or an executive leading a business group assumes strategic control of the acquiree. In cases of absorption, it is commonplace for the prior head of the acquiree to depart and be replaced by parent company management. By comparison, when an acquiree operates as a semi-autonomous subsidiary in a parent company, or retains a measure of its independence as part of a business group, the acquired CEO sometimes stays on and reports to the parent company. In these cases, the acquired CEO exercises leadership and works with parent company executives to affect an agreeable level of integration. But this relationship can be fraught with conflict; surveys of acquired CEOs show complaints centering on their loss of decision-making power and constant parent company intrusions by the owner’s bureaucracy. The upshot is that if you

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want acquired CEOs to run the business, you have to give them the freedom and running room to do so. If the acquired CEO departs, the challenge is to find a viable successor within the acquired firm. If not, an executive from the parent company will have to run the subsidiary. The question is, who? For seasoned executives, heading an acquiree is not necessarily a desirable career move. Several executives we have worked with have described this as being in “exile” or sent out to a corporate “outpost.” In taking the job, they will not as frequently see—nor be seen by—parent company executives. Younger executives, hoping to make a mark, are often eager to head a subsidiary but may not be well received by acquired managers who can be ten to twenty years senior to them. In either case, an incoming executive is not as knowledgeable about the business as acquired management and runs the risk of being ostracized. For these reasons, we advise buyers to scrutinize their “bench strength” prior to a deal and identify two or more candidates who might step in if subsidiary management leaves. Besides relevant commercial and industry know-how, the candidates need a thick skin and strong interpersonal skills. In a full-scale merger, decisions about who should lead also can be problematic. In some cases, one or the other CEO is near retirement and sees a merger as the crowning achievement and a signal to depart. More often, one firm’s CEO runs the show and the other CEO exits with a significant severance package. That said, we have worked on mergers where age differences between CEOs offered each of them a chance to leave an imprint on integration. In the merger of two big banks, for instance, one CEO assumed the chairmanship for five years and the other operated as CEO until his counterpart’s retirement.

Exemplary Leadership from Both Sides of the Deal We had the opportunity, early in our careers, to work with two CEOs who were exemplars of effective M&A leaders.2 It certainly didn’t start out that way for William M. E. Clarkson, CEO of Graphic Controls (GC), whose publicly traded firm was hit by an unfriendly takeover attempt and then purchased by Times Mirror

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in a “white knight” acquisition. Throughout the dealings, Clarkson was, according to peers, “the leader we like him to be” in fending off the raider, working with lawyers and bankers, negotiating his company’s acquisition, and ultimately getting a good price for his highly profitable company. Thereafter, he went through weeks of depression, suffering from the loss of personal authority, the breakup of his board of directors, and constant challenges to his company’s ways of doing things by parent company officials in finance, IT, and HR, and by his new boss who insisted that GC had to conform, like every other subsidiary, to parent company protocols.

Preserving an Acquired Company’s Culture Feelings of injustice and anger consumed GC’s top executives. Lyman Randall, head of HR, diagnosed the mood using the aforementioned Kübler-Ross framework—GC was going through stages of grief at losing its way of life. Clarkson concurred, “So few people understand what the trauma is all about. They say you’re crying all the way to the bank. Our mission, our community, our value system—you can’t just dismiss these and say here today and gone tomorrow.” This insight led the acquired senior team to hold a “grieving meeting” to mourn their losses and come to grips with their new situation. In the meeting, the acquired team vented their anger at the raider that put their company into play, reminisced over past glory days, spoke of their sense of loss, and came to a collective agreement to preserve key elements of their highly participative and humanistic corporate culture. The idea of studying how to best connect GC to its parent company was “foreign” to Times Mirror, which had had no experience with cross-company transition teams. Undaunted, GC put together its own blueprint for integration that identified areas where the parent had plausible prerogatives; these would have to be managed “skillfully and well.” GC’s top team focused its time, energy, and analytic power on strategic priorities where they needed more “degrees of freedom.” Working with parent company officials, the team was able to fashion an organizational integration that kept it free from too much corporate “interference.”

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Where Clarkson shined was in keeping his company’s culture alive. Early on Clarkson positioned himself as a “buffer” between GC and the parent to protect its independence. His team confronted him, saying that in this role he was becoming an “impediment” to developing working relationships between the two sides. Mulling it over, Clarkson finally acknowledged that GC had to learn to operate as a subsidiary of Times Mirror and “that changes are and will continue to be necessary.” This admission led the team to identify cultural elements that needed to be preserved for the business to thrive—fact-based analyses, being open to challenge from every level and function, consensual decision making, and full commitment to action once decisions were made. This freed his team to engage parent company managers one by one and press their case for a more preservative type of integration. Subsequent GC management team meetings continued to be highly participative and the team made decisions by consensus, with parent company officials sometimes involved. Over the next two years, the integration smoothed out and GC management team meetings were again marked by joking, poetry, and the occasional song, much like preacquisition days. Some time later, when Clarkson retired from GC, he was replaced by an insider—a GC business unit executive.

Leading a Transformation W. Michael Blumenthal faced a different set of challenges after his firm, Burroughs, put a “bear hug” on Sperry, and took over its historic UNIVAC computing business in what was then the largest unfriendly takeover in history. Blumenthal defended his actions noting that the industry had to consolidate and that only two players—IBM and some combination of the BUNCH (Burroughs, Univac, NCR, Control Data, and Honeywell) were apt to survive. He recognized, however, that the combination needed the technology and talent from both sides to be successful. Hence, he proposed that this become the Sperry/Burroughs partnership. The industry characterized the combination as “two male dinosaurs mating.” Seeing differences between the two firms’ product lines and customers, Blumenthal instead imagined a

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more selective integration—one where each side’s offerings would have to be carefully studied and considered. To effect this, he created a Merger Coordination Council, staffed with top executives from both sides, and a transition organization, populated by transition teams representing every area of the combined businesses. Blumenthal presented his rationale for this structure as follows: “First of all, we have to be substantively sure, say in putting together the field service organization, that you get the best thinking into it. Second, you want to identity the best people to run things … which comes out through this process. And, third, you want people to have ownership, so that both sides feel like they’ve had fair input … so that both are architects.” Blumenthal orchestrated the work of the Council and led several all-teams-present progress reviews. Bringing everyone together for reviews enabled him—and all the executives involved—to get a big-picture look at the combination and see how transition team findings complemented or conflicted with one another across the organization. He also used this forum to share something of his life story—fleeing the Nazis as a youth and settling in Shanghai, working in business and government over the course of his career, and turning Burroughs around in the face of daunting market conditions. This storytelling was seasoned with messages about his leadership style and what would be expected from leaders in the new company—openness, honesty, good give-and-take—and what would not be tolerated: empire building and petty politics. Behind the scenes, Blumenthal met privately with and coached countless executives on everything from their personal doubts and concerns to how to work more constructively across the two companies. We’ll talk more about Blumenthal’s leadership of the combination that would become Unisys throughout this chapter. A few key lessons on combination leadership can be distilled from the examples of Blumenthal and Clarkson. First, each of them recognized that they were leading a “human organization.” Both read about, talked about, and became students of the human, organizational, and cultural elements as they lead their respective combinations. Second, they fashioned themselves as “amateur psychologists” in examining their own leadership and certainly in working with others. Though technically trained and oriented,

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Clarkson, an engineer, and Blumenthal, an economist, each emphasized the human touch in leading their combinations. Finally, and significantly, both emphasized the importance of learning in their leadership work. They sought feedback, from us and many others, reflected on their experiences, good and bad, and established mechanisms for sensing how their combinations were going and responding accordingly. Since those early experiences, we’ve worked with a few executives who are equally sensitive to the human side of M&A, but many more that are not so inclined and have to rely more on their colleagues and staff to humanize the work of leadership. In either case, our early and subsequent research has highlighted a set of leadership tasks common to most every kind of combination.

Leadership Tasks in the Combination Phase Leaders have four central tasks during the combination phase, to which we devote the rest of this chapter: 1. Develop a vision for the combined company. The leader keeps people focused on what is important to the success of the combination, on what has to be accomplished to realize strategic synergies and build a better organization. As it dictates purpose and provides direction, a vision gives people in both companies a shared objective for working together. 2. Establish integration principles and priorities. Guidelines stipulate, say, a merger of equals, or how much autonomy a subsidiary retains, or the extent of partner integration. Leaders also articulate and model ground rules for executive behavior and for delivering on priorities. 3. Appoint senior managers to top jobs and begin building teamwork at the top. Top-team appointments signal what really matters in the combination and its principles; how well individual executives work together effectively determines how fully synergies are achieved. 4. Speak to human purpose and understanding. Both the message (personal communications and evocative language to rally

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the troops) and its tone (displaying empathy and understanding of people’s fear of personal costs in the combination) count.

Vision for the Combination When we stress the importance of a vision to hard-nosed executives, their first reaction is that it sounds “soft.” For them, it is all about strategy. We don’t disagree with the emphasis on strategy. But what a vision does is make a connection between strategy and larger goals: the purpose for combining and what can be accomplished together. We’ve mentioned John Chambers, the CEO of Cisco, and his five rules for acquiring a company that are widely quoted; note that he makes “vision” Rule #1. Commenting on the rationale, Chambers says, “When we acquire a company, we aren’t simply acquiring its current products; we’re acquiring the next generation of products through its people. If all you are doing is buying the current research and the current market share, you’re making a terrible investment.” He has also stated, “We pay between $500,000 and $2 million per person in an acquisition, which is a lot. So you can understand that if you don’t keep the people, you’ve done a tremendous disservice to your shareholders and customers.”3 Authoritative studies emphasize that the most successful companies operate with a strong and clear sense of purpose.4 This sense of purpose comes from a guiding vision (what we hope to accomplish), a defining mission (what we do), and deep understanding of markets served, strategies, competencies, and such that add granularity and distinctiveness to the vision and mission. Equally important are shared values—which define how we work—which are often quite different among combining parties. In a bank merger, for example, each of the two companies had their own human resource philosophy, one emphasizing the “carrot” to motivate employees and the other the “stick” to ensure hard work and thrift. They settled on a shared value of developing a “high commitment” workforce. This would mean upgrades in training and development for staff and increased participation in

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the combined company’s bonus plan. At the same time, it was agreed that people would be held to higher performance standards and that prior expectations of lifetime job security would not prevail in the new competitive context. We can’t stress enough the importance of a “shared” vision in a combination. Google had a lot to say about how its acquisition of YouTube fit with its vision “to organize the world’s information and make it universally accessible and useful.” And it bought a visionary company; Google CEO Eric Schmidt remarked on the deal, “What tipped us over was not the great business success (of YouTube) but the vision they had for delivering content for users. It was the same vision in serving their users as Larry and David had in founding Google.” The combination would bring Google’s business partners and some marketing muscle to YouTube. Still the acquiree’s employees and, especially, its fanatic customers were concerned about what it would mean to their brand and user experience. In typical fashion, YouTube founders Chad Hurley and Steve Chen talked about the implications in a video posted on their Web site. They emphasized that the acquisition would enable the combined firm to “build out the community” while the two YouTube founders would concentrate on upgrading “features and functionality.” The posted video concluded with the comment that “Two Kings (Google and YouTube) have gotten together”—followed by laughter and jostling.

The Combination Storyline An uplifting vision and affirming values can energize and reassure people about to combine, but they also need a “storyline” that connects the dots between what their company is doing now, what it will be doing tomorrow, and how that translates into success in the marketplace. Initially fashioned to convince the two boards and Wall Street analysts of the merits of the deal, the storyline is now directed at selling employees on why they should invest their efforts and careers in a new organization. The best-crafted messages provide a persuasive rationale for a combination, one that goes beyond the numbers and demonstrates how specific

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synergies will result in greater competitiveness, sales growth, and more opportunities (or at least a measure of job security). Even acquisitions in a consolidating industry can be communicated as something more than an exercise in expense reduction. Lockheed Martin’s buys in the past few years, for example, have not been premised solely on responding to a shrinking military budget; on the contrary, acquisitions like UNITECH and Gyrocam have enabled the company to move aggressively into homeland security. Public relations professionals can prepare speeches, videos, PowerPoint presentations, and other media content to communicate a combination storyline, but what really matters is how the two sides work together hands-on to define what it all means. Take the series of acquisitions that enabled Hexcel to assemble businesses making fiber, fabric, and composite materials. According to extant organizational charts, the company was a mix of strategic business units that fabricated lightweight materials used in airplane interiors, boats, and skis, plus structured honeycomb products for building, transport, and some consumer goods. A boom in aerospace, modernization of railroads, and opportunities in Asia aroused the executives in attendance as they contemplated the prospects for growth in each of their strategic business units (SBUs). All agreed that they would have to work in concert to deliver high-performance products on a global scale at a reasonable cost. The question remained, however, of whether or not they had a common vision and aspiration. At a series of meetings, senior executives grappled with “Who are we?” Through interactive dialogues, reviewing the “theory of the case” behind their combination, sizing up the competition and market trends, and sharing their own personal visions of where each would take the company as a whole, a new idea was born. Hexcel would become the “franchise player” in the still-emerging engineered composites industry. This opened up new vistas: automobiles, the wings and engines of airplanes, and a whole swath of industrial and durable goods that were currently constructed from steel or aluminum. “My God,” one SBU head concluded, “We are creating an industry!” Fired up by the prospects, the CEO and his team departed on a whirlwind global tour of customers and plants to prospect market

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opportunities and energize staff still fretting about the future of the business.

Critical Success Factors Critical success factors (CSFs) ground the vision and storyline into tangible objectives and measurable milestones. They give shape to the combination of functions, products, and services and drive integration decisions toward creation of value. The CEO and top team have to define and ensure that these CSFs are kept front and center in the minds of managers if the combination is to succeed. They form the criteria against which combination decisions and execution are evaluated. For a merged computer-products distributor, the central CSFs included increasing market share worldwide; maintaining a low-cost, efficient operation; securing the best brands; and being the easiest distributor to do business with. In the case of Hexcel, the CSFs were to lower the life-cycle costs of products, build a world-class proprietary technical position, provide environmentally superior product alternatives, and structure the business to operate globally with a maximum of fiscal responsibility. To achieve these aims, the combined company had to create mechanisms to coordinate work between hitherto independent SBUs and establish a workable transfer pricing system. With these CSFs, business heads had performance measures correlated with shareholder value and compensation tied to stock performance. In turn, Hexcel’s legal department rapidly ramped up its capacity to develop contracts on five continents. Even with a vision, storyline, and CSFs, leading people through the maze of combination issues and decisions is a mammoth task. In briefing a CEO in the high-technology industry on what to expect from and how to lead his people in a merger, we developed a list of “The CEO’s Ten Commandments” for managing a combination (Exhibit 5.1). The commandments served two valuable functions. First, they established crisp, authoritative guidelines for behavior. Managers understood what their leader expected of them and how their conduct would be appraised. Second, the process of reviewing the commandments helped the CEO himself to clarify what was needed to make the combination a success.

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Exhibit 5.1. The CEO’s Ten Commandments of Combination Leadership. 1. Provide Direction • Define your own critical success factors. What has to happen in your area if this combination is to be a success? • Focus people on short-term objective, deadlines and assignments—long-term strategies come later. • Aim high and push staff hard. People are prone to introspection during a combination—challenge them and keep them busy. Turn that anxiety and stress into productive energy. • Make history—your organization probably never needed a figurehead as much as it does right now. This is your opportunity to become a true corporate hero, part of the folklore of the organization. Be a key role model, inspire others. 2. Expect Change • Expect a drop in productivity during the combination process, and an increase in the stress level. • Prepare staff for change—they want and expect it. They want things to get better as a result of the combination. • Expect a certain amount of resistance to change; without it you have a lethargic, complacent organization. Manage it; tell staff why they are going through this process. • Expect power struggles by the people underneath you in the organization. These may be significantly more intense than they have been in the past. 3. Be Positive • Rise above the noise and confusion, empower yourself, be upbeat and enthusiastic. • Develop a high tolerance for ambiguity—be flexible. • Keep a sense of humor. Try to introduce a sense of play into the process. See the humorous side of problems as they come up. • Keep a sense of balance. Don’t let yourself get overwhelmed by combination issues. (Continued)

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4. Clarify and Manage Issues • Separate urgent from important. Avoid being sidetracked by low-priority issues—make sure priorities are clear. • Sort out issues—those that can be dealt with right away and those that can be left for awhile—get on with issues that are of high strategic importance. • Make sure you have a clear understanding of the problems that need to be handled—don’t always believe your own press releases. 5. Inform Yourself • Take time to understand the psychological change process that the staff is going through—show understanding. • Ask people’s opinions—find out staff names, single out individuals in public, overpraise positive behaviors. • Keep in touch with the organization and its problems— get out with the sales force and into the operating areas. • Invite bad news—don’t shoot messengers and don’t settle for people telling you what they think you want to hear. • Learn about the culture of the other organization, its history, the way it does business—even its dress code may be different. 6. Inform Your Staff • Set out to clear up the unknowns and rumors; be specific and candid. • Give staff the good news and the bad news—don’t patronize people or assume that they only want to hear the good news. Level with people. • Be available and visible to the staff—ask questions and be prepared to discuss concerns. • Give staff a chance to vent and express themselves. 7. Get Your Staff on Board • Be honest. Don’t make promises you cannot keep just to take the heat off in a difficult situation. Rebuild your credibility—assume that staff are looking for reasons to distrust you. • You are a new boss—remember that your staff have to decide if they want to work for you.

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• Give staff reasons to believe that the combination is being well managed; it is their future, too. 8. Build Your Team • Meet with each manager, make sure each knows their decision-making authority, reporting relationships, and performance expectations. • Build confidence in your team to restore momentum to the organization. 9. Let the Staff Manage Their Way Through It • Encourage initiative and risk taking. Try to shape behavior and not judge mistakes—be a good coach, not just the boss. • Don’t try to come up with all the answers. Paint broad brush strokes with your operating principles and let staff fill in the details. • Delegate, or you will be spread too thinly, and people will become demoralized. • Give staff time to settle in and make things work. 10. Get On With It • Get on with the combination process—be action-oriented. • Take the pain and move ahead. Your staff will thank you for it. • Create some positive improvements and high-profile successes early in the game. • Be prepared to make the tough decisions in order to minimize political behavior.

Principles for the Transition Over the past two decades, the idea of creating a transition body to study integration options and guide the combination of businesses has emerged as a best practice. The form varies, ranging from an informal kitchen cabinet of the CEO or business unit president and select senior executives to a formal coordination council of top leaders and task forces representing each function or business in combining companies. The next chapter details the creation and work of this body; here we concentrate on what

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the CEO can do to shape it with principles, establish productive norms, and begin impressing upon people the priorities for the transition period. We find that efforts to clarify principles and priorities early on clear a path for the complex and high-stakes work of combination planning.

Principles for Merging Combinations need principles to guide behavior and decision making. That is, being clear to all involved “what matters” as they make the journey toward attaining the vision. Consider the principles that Michael Blumenthal used in his merger of equals: • Partnership: “Merge functions and operations; maintain distinct product lines.” This no-nonsense directive established expectations that corporate functions and operating units would fully combine. At the same time, the message to technologists was that many development programs would be protected. • Meritocracy: “Best person, best organization.” This affirmed that the combination would be a true merger of equals. But saying it is so doesn’t necessarily make it so. The CEO met individually with senior executives on both sides to reinforce his intentions. Many difficult conversations were held on the value of loyalty versus meritocracy in making executive appointments. • Unity: “New company, new culture.” The principle here was that the combination would involve a wholesale transformation of the two companies into one. The hope was to achieve breakthrough synergies via a new organization and culture. As high-minded as such principles sound, they naturally engender skepticism—on both sides—and are not always honored. We’ve entered several combinations at the stage of damage control only to find that what was supposed to be a merger of peers was turning into plunder. A CEO who pledges equality while the situation dictates more of a three-to-one ratio between top executives from the two sides looks foolish and gains nothing from the attempt at spin. If you intend to fully absorb an acquiree, then

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say so from the get-go and be prepared to defend your rationale. This is how we advise CEOs, and most find that candor is more acceptable to acquired managers than sugar-coated messages. Rules of Engagement Besides these formal principles of integration, there are also rules of the road to establish as guides for everyday behavior. In an entertainment industry alliance, one of the rules was to come to meetings prepared. This directly challenged one side’s culture of not taking meetings seriously. Another was to accept “roughly right” decisions. This addressed the other side’s cultural norm of slowing down decision making by fine-tuning details and wordsmithing language. In the early days of integration, first impressions set the tone for working relationships as the combination is planned and implemented. How well the senior executive clarifies and monitors the standards and rigor of decision making during the combination period substantially determines the quality and effectiveness of the postcombination organization. It helps when the senior executive distinguishes any “absolute” principles and ground rules—those not open to negotiation—from those that may be subject to modification as they are applied through the organization.

Selecting and Developing the Leadership Team The senior leadership team (usually the top executive’s direct reports, but sometimes including other senior executives) amplifies or distorts the CEO’s intentions to capture value and make the combination work. That is, members of the top team either act in concert and embrace the combination principles and deliver on synergies or they go their own way and look out for their functions or business unit. Announcing a combined organization’s senior leadership team is a milestone, often the first concrete decision made. Employees size up the caliber, makeup, and characteristics of the team’s members and draw conclusions about what the CEO truly values in joining forces. Soon, the grapevine fills with reports about how the members are functioning, both

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individually and as a team. This becomes grist for the mill for middle managers and other employees who use it to determine how they should behave. Multiple criteria influence decisions on staffing the senior team. In a merger, for example, two executives may be competing for one job as head of a combined function or business. Do you go with “the devil you know,” as one executive put to one of his prior direct reports, or take a chance on a highly recommended, but lesser known executive from the other side? Obviously, criteria relating to technical qualifications, industry knowledge and relevant relationships, and track record figure into meritorious decisions on whom to pick. Also important are the style and approach the individual brings to the job and his or her values. If a CEO expects and needs a high degree of collaboration among senior team members, then individual “operators” who are otherwise able may be a bad fit for the senior team. A second set of selection criteria consider the overall makeup of the top team. A staff filled with functional superstars with mediocre interpersonal skills sends the message that individual contributions are more important than teamwork. The pendulum can swing too far, though: a senior team made up of generalists may lack the requisite technical know-how and edge. Furthermore, careful thought has to be given to the relative number of executives on the top team from each side. After weighing these considerations, it is often useful to pull back and consider the chemistry between the potential members and the impression that the overall profile gives to the rest of the organization. In an acquisition, of course, decisions on individuals and on collective chemistry take a different twist. Typically, a parent company executive heading an acquiree as a “stand-alone” subsidiary keeps “hands off” when it comes to other management appointments. But unless the acquired CEO stays, other members of the acquired management often leave as well, creating vacancies to fill. When tangible synergies in marketing, manufacturing, and so on beckon, it’s not unusual for a parent company to appoint one of its executives to head these posts. This may seem sensible from the parent company’s perspective but can ruin team chemistry on the acquired side. Again, it is crucial to think these matters through.

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Appointments: Before or After the Deal? Many advisers recommend that companies make senior management appointments part of their precombination dealings. There is much to support their point of view. First, it foreshortens political maneuvering by executives who might otherwise spend months currying favor or discrediting their counterparts in an effort to win top jobs. Second, it gives a target company somewhat more leverage in securing posts for its managers. Indeed, many sellers negotiate employment contracts for their senior executives as part of the sales agreement. Finally, it can help a top team in a combination to hit the ground running and present a united front to the rest of management and the workforce. On this count, a study of 161 acquisitions found that the early appointment of the top team was a strong predictor of the long-term performance of the combined firm.5 At the same time, there are decided disadvantages to making all of the top appointments in advance of the integration period. After doing their deal, the two partners have only “a thirtythousand-foot overview” of their combined strategy, and few closeto-the-ground analyses of how to capitalize on specific synergies. The CEO of the buying or lead company often has only the slightest acquaintance with senior management on the other side. The two company managements have not yet looked closely at the strengths and weaknesses of different organization structures, nor considered the right mix of leadership that is needed to make the combination work. By appointing top executives from the start, companies are betting on appointees’ leadership skills in advance of making informed decisions about strategy and structure. Is it a sensible bet? There is nothing akin to a handicapper’s guide to who’s in the race for top jobs—no detailed information about executives’ past accomplishments nor much more than hearsay about their potential to contribute in the future. A lead company CEO knows the strengths, weaknesses, and idiosyncrasies of his or her own players, but getting reliable data on executives from the other side is problematic. Relatively few firms undertake independent professional assessments of their executives, and even fewer document their drawbacks. To the contrary, it is commonplace for acquired firms to “blow smoke” about the skills of their

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senior executives and to cover up their personal or professional liabilities—particularly before a sale is completed. What should a CEO make of any dirt dug up about one or another executive? How should she react when acquired managers bad-mouth one of their own? Inevitably, it is hard to separate the meaning of the message from the motives of the messenger. In the end, lead company CEOs tend to go with the devil they know when making appointments early on. They then hope to fix things later, if they can. Can their mistakes be corrected? Not easily. The long-term problem with precombination appointments is that they also to some extent preordain the combined company’s organization structure and staffing profile. Naming an executive from company A to run the merged manufacturing organization and another from company B to head marketing may be defensible based on their past performance. But neither may turn out to be the best choice when a combined company concludes that it has to take its manufacturing or marketing in new directions. Additionally, early appointments tend to be duplicated down the line; that is, appointed executives are most inclined to name subordinates whom they know and have worked with to next-level jobs. As a result, to complete the example, company A dominates manufacturing posts and typically adopts its own methods and systems to run combined operations. Marketing looks and operates as it did in company B prior to the combination. Making Appointments as You Go Several companies we have worked with decided to make final top management appointments only after their deal was complete. In the creation of Unisys, for example, Blumenthal created an interim “Office of the Chairman” to house the top brass of Burroughs and Sperry. He then waited several months before finalizing the appointment of the heads of business and functions. This enabled transition teams to test proposed strategies and detail the most desirous organization structures to effect them. It also gave him the chance to observe and work with Sperry executives who were otherwise unfamiliar to him and to see them in action with colleagues and subordinates. This waiting period also allowed the CEO and other senior managers to get acquainted with managers at the next several layers and better gauge their potential to contribute to the new organization.

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As a result, there was a good match between strategy, structure, and the skills of appointed leaders in many parts of the combined company. In several instances, more junior-level managers who demonstrated strong analytic skills and the ability to work well with others on their transition teams secured senior management posts. At the same time, some early favorites for top posts were found wanting because of their lack of teamwork skills or their inability to contribute winning ideas about running the combined business. Still, the process was not without its costs. Paul Stern, then president of Burroughs, chafed in the “Office of” post and left the company in a huff. Profiling and Picking Talent Through Management Ranks The merger of two manufacturing giants provides a good example of how to carry a “merger of equals” appointment process deep into a combined organization. Top leadership in the combined company had external consultants prepare in-depth dossiers on more than one hundred prospective senior managers. These “accomplishment profiles” documented managers’ performance over the course of their careers and detailed their strengths and weaknesses. Top managers then met over several days to conduct a “player draft” to select the next layers of management. A business head would first propose a draftee but then have to defend the selection to all present, who might ask questions for information or challenge the choice. In this way, senior managers had the chance to review the full roster of the future players and carefully consider where best to place them (if at all). In cases of redundancy, a top-flight performer would be recommended for a job in another division. Without this collective selection process, the star would otherwise be outplaced or else go to work for a competitor! Obviously, our recommendation to select executives carefully rather than quickly does not apply to every combination. In the case of a modest-sized acquisition, for example, an early decision in favor of retaining local management is usually prudent. In a turnaround, however, it might be better to wait and see what you have bought. With an alliance, it helps to name a general manager and leadership team from the start because oftentimes they have to launch the venture. Finally, it is important to recognize that such appointments do not apply to everyone. In our experience,

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roughly one-third of top-level appointments are no-brainers. In these cases, one or another of the potential appointees simply has a better track record and superior credentials. In turn, another one-third of the time there is no decision to make. Here, an executive takes a package and exits. The challenge is to use the integration period to sort out which of the remaining one-third of senior executives in competition with one another is best suited for the job, or more crucially, to determine when none is well suited and to look for another internal candidate or hire from the outside.

Senior Team Development Formal team-building activities benefit all teams in a newly combined organization. Team development at the top, however, is critically important early on. The intent is to accelerate development of open working relationships. Depending on the circumstances surrounding the combination, different forms of team building may be useful for leadership groups. In an acquisition, for example, it can be useful to hold sessions with the acquired team first. In the case of Will Clarkson and Graphic Controls, only after a grieving meeting with management to reflect on the glory days past and mourn their loss did they feel ready to engage with parent company management in a more open and forthcoming manner. In the case of a friendly merger, by contrast, a young top team participated in an outdoor team-building session where their ascent of a wall became a continuing metaphor for helping each other surmount obstacles. Whatever type of team building is conducted, the aim is to help executives sort out roles and working relations that cause confusion and conflict in the early parts of the combination phase. The point is to proactively raise and address any issues that may inhibit team effectiveness. Senior team development affords a variety of ancillary benefits as well. First, the senior team is often made up of high-powered individuals who rose to the top of their precombination organization based on criteria inconsistent with the desired culture of the new organization. Team building provides a forum in which the senior executive can reiterate and reinforce what is expected of leadership team members. Second, team building creates a setting in which to review and revisit where the combination is headed.

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The full team discusses the senior executive’s vision, adds its members’ viewpoints, and modifies expectations accordingly. Third, team building conducted at the top sets a standard to be upheld through the ranks. When the senior team members feel team building is a worthwhile experience, they usually conduct similar programs with their own teams and suggest that their reports do the same. As soon as is practical after announcement of the leadership team, a team development meeting should be held. In an alliance between a sporting goods maker and an entertainment firm, one of us worked with the senior team off site for three days to achieve several objectives: • Clarify the team’s goals, roles, processes, and leadership. • Develop a shared perspective of the alliance scope, aims, and targets. • Draft an initial vision of the partnership. • Build understanding of transition management requirements; identify issues to address. • Define management processes and procedures for getting started (budgets, HR, and so on). • Identify next steps and resources for the organization, team, and individuals. The meeting provided a focal point for gaining clarity and consensus among top leaders regarding the direction of the alliance and for determining how the members would work together as a team. It carved out time to address immediate issues, such as financial plans and human resource policies, to get the alliance ready to do business. The meeting also created opportunities for new colleagues to get to know each other as people and have some fun together.

Speaking to Employees In most combinations, people down the line are hungry for purpose and direction. They want to contribute to building something special. Getting people focused on the new organization does not happen, however, until people work through the Merger

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Syndrome. Leaders need to prepare people for the harsh realities of the journey ahead. Combination planning and implementation take more time and energy than people may want to commit, answers to questions do not come quickly enough, initial decisions are second-guessed, and uncertainty and anxiety persist. Expressing empathy for having to live through the combination period is more effective in getting people focused on the right things than a message to tough things out. Empathy means the ability to comprehend with accuracy the precise thoughts and motivation of employees in such a way that they would say, “Yes, that is exactly where I’m coming from.”6 We find that employees have some common questions and concerns no matter what the context of a deal. Thus, effective combination leadership includes ensuring that everyone in the organization can answer, in their own way, five questions: 1. Why is our organization changing? 2. Why is it changing in this particular way? 3. Will my contribution to the old organization be recognized and valued in the new organization? 4. Will I have the skills to survive in the new organization? 5. Will the structures, systems, and so forth, change in a way that will adequately support the changes we are making? Naturally, CEOs and senior executives who have the ability and style to talk about these issues in a combination with evocative language and high energy generate more enthusiasm among staff than those who rely on written messages or who treat communications as more or less matter of fact. Nowadays, people expect both steak and sizzle in communications, and want to participate in two-way dialogue. The following three examples of how executives address human purpose in a combination will illustrate.

The CEO Address An address by the CEO to multiple layers of management during a merger has elements of a command performance. At a banquet of over two hundred executives launching the merger of two firms, the CEO first gave a concise account of current year results

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for the businesses, pro forma combined, and then detailed the next year’s business plan and challenges ahead. This included both firm and stretch targets to achieve for orders and profits and must-hit cost reductions. He reviewed current customer commitments and whose responsibility it was to deliver on them, and he enumerated what synergies were expected and from whom. This detailing served two purposes. First, the CEO demonstrated his understanding of his partner’s business and showed how the parties could achieve more by working together than on their own. Second, he grounded the vision of the combination in shortterm targets and deliverables. This latter point should be stressed. Many executives we have worked with speak eloquently to their vision of the combination but do not emphasize the critical need to keep the business going during the integration period. Importantly, he also spoke to the human side of the combination. Working with an internal consultant, he had gathered data on the hopes and fears of employees and fashioned the following guidelines for the months ahead: • • • • • •

Use each other’s strengths. Help each other. Share everything—no secrets. Include everyone—share the excitement. Enjoy the journey and each other. Operate with highest integrity.

Getting Managers Ready for Their Speech In another case, the head of an alliance had her team of sales executives develop an “elevator speech” about the combination —a brief synopsis that could be conveyed in the time of an elevator ride. The sales executives and reps from each side prepared a pitch on the strategic intent of the alliance, its upside, and their own concerns. All forty in attendance then made videos of these speeches and critiqued them in the company of peers. This gave them practice in relating their story of the alliance, and feedback on how they told it. In teams, they then highlighted hopes, fears, and unanswered questions and reviewed them with the alliance coleaders. In a fishbowl-type session, containing a spokesperson

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from each team and the two alliance leaders, and observed by the rest of the workshop, there was an open and candid discussion of these matters. As a result, the alliance leaders got a clearer picture of what was on the minds of the sales managers, who in turn learned answers to questions that had not been addressed. The sales managers subsequently held sessions with their teams featuring their speech plus in-depth Q & A. By all accounts, communications sessions were well attended and generated a surprising and welcome degree of buy-in from frontline staff on both sides. In large part, the success stems from the efforts that senior leadership took to promote human purpose and understanding in building the alliance: modeling effective communication, listening to upward input, sanctioning and participating in programs to address both business and interpersonal issues, and, in general, raising and keeping in front of people the requirements for effective combination.

Rallying the Ranks A giant telecommunications merger brought together two sides with a history of bitter competition and a strong dislike for one another. Executives at the top of the combined organization forged good working relationships, but middle managers continued to hold onto their precombination attitudes and behaviors. The senior executive heading one major business unit grew increasingly pessimistic about his managers’ ability and willingness to let go of their old ways of viewing and doing things. Wanting to make a dramatic move toward building a common culture, he commissioned one of us to assist him. To begin, each of the eighty middle managers in the business unit took part in either individual or group interviews that collected their views on impediments to building a unified culture. Without much prodding, the managers offered numerous obstacles, ranging from distrust between the sides to strongly divergent precombination styles (one group viewed its counterparts as “undisciplined mavericks”; they in turn viewed the other side as “uptight clones”). Then, at an off-site meeting, managers reviewed the interview findings and identified the few critical issues that needed to be addressed for the group to move forward together.

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Small teams described the issues and outlined actions that they and their leaders could take to minimize negative impact. A presentation on common issues and success factors in combining organizations broadened managers’ awareness of actions that could be taken to build better working relationships. The problem-identification process and presentation succeeded in raising awareness intellectually, but the managers needed to be moved at a deeper, more emotional level if they were to let go of their precombination ways. The highlight of the meeting, therefore, was a “graduation” ceremony. Managers were asked to write down “the three worst ways in which the merger could affect me personally.” They also received a sheet of their pre-integration letterhead and an old business card. They were then asked to walk outside, where a wooden coffin awaited them. Off to the side, a marching band sounded a somber funeral march. One by one, each of the eighty managers stepped up to the coffin; crumpled his or her worst-case list, letterhead, and business card; and tossed them in. As the last managers stepped back from the coffin, the group heard a low, rumbling noise. A onehundred-ton paver rolled around the corner, heading straight for the group. At first the managers stood paralyzed, unsure of what was transpiring. The band broke into a rousing rendition of “On, Wisconsin,” and the paver veered toward the wooden casket, flattening it and its contents. Spontaneous cheering broke out among the managers as the paver rolled back and forth over the coffin. Abuzz with excitement, the managers went back inside. Entering the building, they received academic caps and gowns and instructions to put them on. Banners proclaiming “Congratulations, Graduates!” awaited them. Once all were seated, their senior executive welcomed them and embarked on the classic graduation speech: “The day has come for which we have all worked so hard to prepare you. It is now your turn; our destiny lies in your generation’s hands.” The managers sat quietly, absorbing the speech, appreciating the meaning of these words for them. Then ushers escorted the graduates to the stage, where the senior executive presented each one with a diploma, a “Master’s of Merger Management,” and a graduation gift: one share of company stock. After all had returned to their seats, as a group they turned the tassels on their caps from left to right, to proclamations that

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they had graduated into their positions as contributors in the new organization.

Speed of Integration Senior teams consistently underestimate the time and energy required to identify, assess, and address the many decisions that arise when two complex organizations combine. More than a few CEOs have done the glamour work of negotiating a deal and thereupon handed off the dirty work of meshing structures, systems, and procedures to operations managers. In successful combinations, by contrast, CEOs play an active role in the integration process and keep space available on their calendars for the many public and private activities required to steward a major organizational change. “We established integration as the number one priority for the year,” recalled the chief operating officer in a large mutual fund merger, “We made it very clear in our words and actions that this attention could be placed in no more important area.” How fast should the combination proceed?7 On the one hand, most involved want to move forward quickly—executives to capture synergies, managers to get refocused, and employees to get on with it or at least learn of their personal fate. Corporate staffers who prepare time projections for integration invariably overestimate the ease of combining operations and underestimate the costs and time involved. Indeed, one management consulting firm recommends to its clients that all employees be assigned new jobs or “sent home” within forty-eight hours of a combination announcement. This is nonsense. Contrast that advice with the experience of a consumer products merger veteran: “You can come in and say, ‘you stay and you go,’ or you can be more careful. The careful model is much more time-intensive and stressful, but well worth the investment.” Or listen to a CEO who, midway through a combination, surmised, “I’ve learned to not move too quickly on integration decisions, because once you alleviate one concern you create another. So, I don’t rush.” The senior executive has the choice of insisting on quick combination decisions—and living with the consequences—or of

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directing executives to take the time to make more careful choices. Realistic timetables take into account the many tasks involved in the combination phase: • Validate the “real” versus “theoretical” synergies in the combination. • Keep suppliers, customers, and other stakeholders informed and on your side. • Develop integration and transition plans for all functions. • Identify the best talent, systems, and procedures. • Help people work through the Merger Syndrome. • Address the “culture clash.” • Handle appointments, departures, and layoffs. • Train people on new systems. • Learn from mistakes and disseminate the learnings. And all this while continuing to run the two businesses effectively and efficiently! Realistic timetables also consider what is going on in the partner organizations aside from the combination. Is a crucial new product launch or an important industry event scheduled during the integration period? Is a significant upgrade to IT or implementation of a major change such as a reengineering project anticipated? If so, the time and resources allocated to these events detract from managing the combination and should be reflected in expected timing. Focusing and Prioritizing Executive Attention The enormous number of decisions to be made in a combination can be overwhelming. We have worked with several companies to sort the issues in terms of their value to synergies and savings versus the riskiness of integration (see Figure 5.1); our counsel is to move quickly in areas that yield real synergies but are relatively easy to combine. Actions here do not require extensive analysis and debate; instead, you can put energy into developing and executing implementation plans. Areas that have the potential to produce high synergies and savings but are relatively difficult to combine require careful up-front study and should be the focus of transition task forces. Areas that have relatively minor impact

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Potential for savings/synergy

Figure 5.1 Prioritizing Combination Issues. High Study It

Do It

Forget It

Get Around To It

Low Low

High Ease of Integration

on synergy and savings, but are somewhat easy to combine, can be addressed less urgently. Finally, areas that produce little gain in synergies or savings and are difficult to combine should be dropped from consideration; they are too fraught with conflict and there are too many other issues competing for (and more worthy of) attention. As we have noted, successful combinations are characterized by flexibility and midcourse corrections. As the months of combination planning and implementation ensue, it is likely that conditions will change within the organization and that competitive pressures will change outside the organization. However, knowing where leadership stands on the combination’s vision— and the principles and priorities that matter in getting there— builds employee confidence in the deal’s prospects and in their leadership in attaining the combination’s goals. Establishing this clear vision also creates the context required for the transition structure we discuss in the next chapter to support high-quality planning and decision making.

Chapter Six

Putting Companies Together: The Transition Structure A transition structure focuses executive time and talent on finding and mining the strategic synergies of a combination. This is a temporary—but formal—system that sometimes starts prior to a deal’s legal close and continues from three months to up to a year afterward to provide for coordination and support during implementation of plans. Why is this so important? In the bestconceived and best-managed transitions, this is where “theoretical” synergies are tested and transformed into real ones. However, simply putting people into transition management positions does not by itself keep a combination on a successful course. You need a well-designed structure, able leadership and participation, and systematic work processes to guide analyses and generate progress.1 This means melding diverse individuals into transition teams and helping them handle the many operational and political factors that can thwart progress. We begin this chapter with an overview of transition management activities and discuss the variety of transition structures. We then more fully describe the “transition organization,” one form of transition structure, and relate the many benefits it contributes to combination management. Because just about every merger, acquisition, or alliance today uses some form of transition structure and most still fail, we then turn our attention to how to create an effective transition organization as well as how to accelerate the quality and pace of transition team work.

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Transition Management Activities There are several components to transition management whose onset, length, and complexity vary depending on the scale of the combination and depth of integration. While different deals proceed at different paces, these activities tend to coincide with the three phases of the combination process (see Figure 6.1). • Independent planning. This is when the parent company in an acquisition or lead company in a merger outlines plans for a transition, including the transition structure and its scope and charter. Typically, this occurs as part of precombination preparation. Decisions have to be made about who will oversee integration planning, how it will be done, and how to divide up the analysis into sensible workstreams. • Integration planning. Here the two sides come together to jointly plan the integration. For legal and competitive reasons, the depth of analysis required cannot begin until the combination has received legal approval. However, we have worked with a few firms to conduct “separate but equal” planning in the precombination phase—teams from the partners collect similar data in similar formats but operate independently as a third party shuttles between them to coordinate. • Transition planning. Integration planning segues to transition planning once analyses are completed, recommendations for

Figure 6.1. Transition Management Activities by Phase of Combination. Precombination

Combination

Postcombination

Independent Planning Integration Planning Transition Planning Implementation

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integration are reviewed and approved, and integration tasks are prepared for “hand-off” to operating managers. • Implementation of plans. Transition planning sets up implementation in the postcombination phase. As operating managers are appointed, they take over plans and drive them through their organizations. In many cases, implementation cascades down layer by layer in an organization. Some companies keep their transition structure in place during this cascade to exercise oversight and keep it on track.

Transition Structures Transition structures vary greatly from one combination to another. Here are some options—not mutually exclusive—that range from simple to more complicated: • The hierarchy. This is a workable option when the requirements for integration are clear and new management is in place. It is typically found in combinations where a parent company acquires an unrelated business and retains its management. Transition teams may be formed to effect changes in corporate functions and adopt parent company reporting requirements. But teams in these cases are tasked primarily with implementing requirements and are supervised by their own management. The appropriate parent company leader, often the head of a business group, exercises oversight and helps run interference. • Coordination group or kitchen cabinet. Where an acquisition calls for strategic integration in key areas, the chain of command may be too “siloed” to coordinate the proper pacing and sequencing of integration and to spot issues that fall through organizational cracks. Some companies create a coordination body or informal working group to monitor integration. This typically includes key executives from both sides who advise the business head and influence function heads in the two businesses. • An integration manager. Several companies we have worked with appointed a single project manager or coordinator to oversee integration. This can be effective in cases where

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operating units have to combine but there is manageable controversy over what and how to integrate, and the power relationships between the two sides are clear and agreeable. The general manager of an alliance serves this same function. However, it is important that the coordinator have substantive knowledge and real power, should conflicts emerge. Frequent acquirers, such as GE, carefully select, train, and empower acquisition managers for their many deals. • A transition organization. In cases where integration is deep and partners hope to extract respective strengths in creating the new organization, we strongly recommend creation of a parallel organization of transition teams. Our early work in Burroughs and Sperry featured this structure, which was at the time an innovation in combining companies. Since then, this has become best practice in complex mergers and large acquisitions, such as FedEx’s acquisition of Kinko’s and Hewlett-Packard’s purchase of Compaq, as well as smaller ones in which leadership wants to fully support high-quality planning and decision making. Moving down this list of transition structures means that more time, people, and resources are devoted to integration. Although the structures are not mutually exclusive—many companies rely on both an integration manager and a formal transition organization—there is no denying that it’s faster, simpler, and cheaper to use the hierarchy or a senior management council to put two companies together. Why, then, are we biased in favor of a transition organization? First, and most important, it creates a forum where the two sides can study and test whether or how hoped-for synergies can be realized in practice. This is what we call the knowledge-building function of the transition organization. It brings on-the-ground knowledge and experience to bear on the potential impact of cost cutting and what it will take to join product lines or make gains with customers and increase revenue. It can also highlight otherwise hidden linkages across workstreams, say between marketing and manufacturing, that are part of the tacit, rather than explicit, knowledge base of one or both companies as they join forces.

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Second, a transition organization is a petri dish for relationship building. Building trust is integral to developing knowledge. Until the two sides get to know and trust one another, they will not reveal the details—and particularly the weak points—of how they each do their business. Finally, there is the work of transition management. Calling on the hierarchy to simultaneously run the business as is and plan in-depth the integration of people, processes, and cultures often means that something has to give, and that’s usually the work of building something innovative and new. In turn, although appointment of a coordinator and use of a kitchen cabinet have their place, integration on a fuller scale works best when key people are dedicated to planning integration and making sure that it succeeds. Effective combination management cannot be an after-hours or weekend assignment. Nor can it be in “competition” with core business activities. Let’s face it: if a manager’s annual bonus is based on getting so many products to customers or delivering certain levels of service, then combination management will literally be a distraction. That’s why we recommend that the CEO oversee the operations of a transition organization, select members, and participate fully.

Components of a Transition Organization We’ve seen just about every way you can imagine to structure a transition organization. In cases involving full-scale organizational and cultural integration, the structures tend to be more elaborate and can involve hundreds, even thousands, of people from both sides of the combination. The work of knowledge building, relationship building, and transition planning is complex. Hence you need a complex organizational structure that runs in parallel to the business to get the job done.2 Here is the transition organization configured for a merger of two professional services firms (see Figure 6.2): • Integration steering committee (ISC) provides oversight of integration planning, determines integration teams’ charters, approves or amends team recommendations.

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Figure 6.2. Sample Transition Organization. Transition Manager

Integration Steering Committee

ISC Sponsor for each Transition Team

HR Team

R&D Team

Procurement Team

Manufacturing/ Operations Team

Marketing Team

Sales Team

IT Team

Finance Team

Support for Teams • Team leader • Team facilitator • Team expert advisors

• Integration teams gather data and conduct whatever analyses are needed to inform and support recommendations; work within parameters established by the ISC; in some cases, teams have subteams that focus on specialty areas or key integration issues. • Integration team sponsors are liaisons between the ISC and individual teams; they are ISC members who make sure that team members understand the letter and spirit of the ISC’s intentions and bring issues that may arise in the teams to the attention of the ISC. • Team leaders are appointed by the ISC or, in some cases, selected by the team members to set agendas, run team meetings, and take care of team logistics. • Team facilitators advise and support the teams’ work process; can take an active or advisory role, but is not responsible for note taking or logistics. • Team advisers are subject matter experts who participate in the team meetings in their areas of expertise, but do not have a decision-making role. • Transition manager coordinates the work of the various teams and undertakes project management tasks across teams and with the ISC.

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How does the structure work? The ISC sets a context for integration team activity. This includes team charters, decisionmaking criteria, critical success factors, and aspirations for the “desired end state” of the integrated organization. The integration teams and the sponsors develop the content for making integration recommendations in their areas of responsibility. Teams may also identify issues that the ISC needs to address or should be assigned to other teams. The ISC reviews and either accepts (as is or with changes) or rejects the team recommendations. Recommendations that are accepted are handed off to the appropriate business head for implementation. Recommendations that are rejected are returned to the teams, along with the reasons for rejection, for further review. Let’s look at the major groups. Integration Steering Committee Top leadership directs the combination through a coordinative body that sets goals and guidelines, oversees analyses and recommendations, and fits integrative actions into the big picture. In a merger or alliance that calls for the formation of a new organization and, hence, a new senior group, the steering committee likely has a balance of members from the partner organizations. In an acquisition where a target organization is to be integrated into the buyer, the ISC includes senior managers from the lead company with the addition of a few senior executives from the acquiree. Whether called a steering committee, integration council, or something else, the group plays a key governance role. In the “merger of equals” that formed Montreal-headquartered AbitibiConsolidated, the world’s largest producer of newsprint, the steering committee set the direction and tone for the combination. As a focal point for how executives from the partner organizations would operate, the steering committee’s responsibility included important oversight and coordinative activities early in the integration program: • Establish transition team charters and responsibilities. • Communicate and enforce combination goals, principles, and the desired end state. • Give teams guidance on the alignment of people, structure, and processes.

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• Translate the critical success factors (CSFs) into transition team deliverables. • Define the decision-making and evaluation criteria for integration recommendations. • Review and evaluate recommendations regarding their adherence to the CSFs and their ability to achieve the strategic and financial aims of the combination. • Identify gaps and opportunities not covered in recommendations and take needed actions. Later, as plans were being implemented and the two companies integrated, the steering committee took on more of a transition management role: • Coordinate major changes via a coherent, prioritized, and understandable implementation plan. • Anticipate and monitor the impact of change and address gaps between the espoused operating principles and actual management of change. • Define, promote, and support necessary changes in behaviors and mind-sets to successfully realize the desired organization. • Be role models on how to “work together” for the good of the organization. • Identify means by which to measure and monitor the progress of the transition. Transition Managers Transition managers or coordinators act on behalf of top management and work with transition teams and businesses throughout the combining organizations. In many instances, they assume fulltime responsibility—and accountability—for making the integration work. The time required may take one or two executives from both sides “off-line” for a year or more to oversee analyses, plans, and implementation of the combination. When an executive team does not have the bench strength to free up key people for this assignment, it can be an early warning sign that the transition will not receive the resources necessary to succeed. Reporting to a governing group—either a steering committee or the combined company’s CEO and top management—

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transition managers have to rely on their competence and credibility to get the job done. We’ve worked with transition managers in several organizations. In the merger of Pfizer and SmithKline Beecham’s worldwide animal health operations, a line executive and staff specialist shared transition manager titles and responsibilities. Prior to their appointments, Jim Cary and Sylvia Montero were, respectively, a veteran line executive who had been president of a major region and a senior human resources professional with a reputation for working closely with line managers to solve business problems. In addition to their personal competence and good standing, they had the full support of the senior executive leading the combination. Indeed, they were characterized as extensions of his senior team. Because some of the integration managers’ job was to assist in gathering information from business managers and coordinate integration planning, Cary and Montero were soon regarded as both a resource and an “ear” by line managers. They proved their value by helping executives think through organizational designs and by coaching acquired executives on how to work with their new president, adapt to the Pfizer culture, and master financial and information systems. Their transition manager “job description” shows the range of their responsibilities (see Exhibit 6.1).

Exhibit 6.1. Job Description for Transition Manager. 1. Support the process of consolidating the SmithKline Beecham and Pfizer Animal Health organizational structures worldwide. a. Support the Animal Health Group (AHG) president in selection and appointment of management team (MT) members. b. Support each MT member in design and proposal of corresponding organizational structures. c. Support each MT member in the selection of physical location for the new organizations around the world. d. Manage the proposal and approval process up the organizational ladder. (Continued)

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2. Coordinate with corporate support groups in the integration of the financial and employee resources systems. a. b. c. d. e.

General ledgers Payroll Compensation systems Benefits program Information technology systems

3. Coordinate with corporate finance on the acquisition financial issues. Ensure that the acquisition is nondilutive. 4. Coordinate with corporate support groups in determining appropriate employee relocation programs and severance programs. 5. Coordinate with the International Pharmaceuticals Group in the integration of financial and employee resources systems throughout Europe, Asia, Africa/Middle East, and Latin America regions. 6. Ensure appropriate communications between AHG and corporate groups and between AHG and other Pfizer divisions. 7. Ensure appropriate communications throughout the new AHG organization. Manage the employee communications strategy. 8. Ensure appropriate coordination and effective communications between MT members. 9. Identify and develop action plans to address cultural integration issues throughout the organization. 10. Support, coordinate, and monitor the work of external consultants in the merger integration process.

In the Pfizer case, the transition managers operated within a broader transition structure. The several cross-company transition teams studied options and made recommendations for securing strategic synergies and achieving critical success factors for the combination. The core business hierarchy staffed positions, implemented strategies, followed budgets, and built teams. Cary and Montero complemented and supported the work of others in the transition structure. Their competence and support from senior leadership, along with the strong need from executives

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contending with managing the transition while running their businesses, kept them in high regard and high demand. Transition Teams The nucleus of the transition structure is made up of integration planning or transition teams, usually cross-company groups of talented managers and professionals who study integration options and make recommendations on how to design the combined organization. Typically, transition teams address functional areas and lines of business, but sometimes they support transition management activities such as communications, training, or customer relations. Transition teams take the raw material of vision, highlevel strategy, and the hypothesized synergies identified before the deal; study the realities of the combining units and functions in light of competencies, technology, competition, and customer needs; and craft proposed actions to yield value. What these teams are called may vary (task forces, transition teams, planning groups, and so on), but what they do is universally important. Transition teams may be staffed by a small number of managers but can involve hundreds of employees in fact finding and analysis. In the merger of small professional services firms, the HR transition team was no larger than the two HR directors; in an energy mega-merger, by contrast, scores of managers and specialists participated in either the HR transition team or one of its several sub-teams (in such areas as compensation, training and development, employment, HR policies and practices). In the Lotus-IBM combination, where there was substantial disparity between the two cultures and intense politicking, the combination planning process was the only forum where the two sides could have an open debate of the issues. Engagement centered around eleven functional transition teams (in areas of manufacturing, marketing, sales, service, and so on) and spread to a series of initiative-based teams that resolved a number of complex organizational and product questions within the first one hundred days of the combination. The teams also defined and set priorities and monitored progress on key initiatives required to extract value from the combination. The clarity of charters and quality of staffing can make or break transition teams, but the seriousness assigned to their

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deliberations and recommendations is equally important. Any exercise in “faux participation” (in which team may be convened but their work is not taken seriously) adversely affects the combination. Cynicism and distrust flourish, and subsequent efforts at participatory management are ignored. Top leadership does not have to accept team recommendations verbatim, but it is obliged to provide feedback on why and how recommendations need to be revised.

Transition Structure Benefits Transition structures—encompassing senior leadership, coordinators, and transition teams—can yield substantial benefits beyond the immediate gains in knowledge and better relationships among upper management. For instance, in their fact finding, transition teams often involve frontline people close to the technical aspects and key business issues implicated in the combination. They also formally and informally connect with scores of other employees down the line to solicit their input and ideas and convey the progress of combination planning. This allows team members to learn much more about their partner’s practices, cultures, histories, technologies, styles, and the like, all of which are needed to seriously test synergies and identify areas of fit versus misfit between the two sides. Importantly, the transition structure can be a laboratory in which the chief executive experiments with ideas and observes the behavior of managers from the two organizations. This provides the boss with an opportunity to see how well people carry out their responsibilities; what rules they play by; how they work with others; and how they deal with stress and ambiguity. In addition to learning about managers from the other side, senior executives can also assess their own staff in a new and demanding situation. Chief executives with whom we have worked have used the transition structure as a testing ground to determine whom to appoint to permanent positions in the combined organization. The transition structure helps ensure that sufficient time and attention is focused on combination management. We counsel leaders to not give the work of integration planning to a carbon copy of their regular management structures. If they do, then inevitably each day’s business crisis or issue will push integration

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planning to the back burner. Though there will be some overlap between those working on the combination and those keeping the business going (especially in smaller firms or those with little bench strength), the identity—and the agenda—of the transition structure should stay focused on the combination.

Enhancing the Effectiveness of Transition Teams Not all transition structures are effective. Consider this manager’s experience: “The chairman brought the top ten people from both firms together and told us that we had a lot of potential if we could merge product lines and use each other’s systems. He then told us that, although there would be some start-up costs, he was confident that synergies would more than outweigh these and that we shouldn’t have a performance dip. The two sides were left staring at each other wondering why we were there and how we were going to make it work.” Many disappointing combinations have used transition managers and teams; just because people are assigned to a plan transition does not mean they can do so proficiently. Some transition teams drift aimlessly; others succumb to politics and horse trading. Conflicts can erupt within teams and destroy any benefits of group decision making. At other times, transition teams have too little conflict and hence insufficient debate to produce productive decisions.

Organize the Work What makes a transition team successful? To identify and test sources of strategic synergy, transition teams need to conduct their work in a carefully organized manner. Organize teams around value creation. Boeing’s acquisition of North American Rockwell is a good illustration of how to organize transition teams. Two sets of what they called synergy teams were created. The growth synergy teams were chartered “to analyze market segments, customers, and competition, and to assess future trends relating to products and programs.” The major teams covered space, missile systems, military aircraft, electronics, and global developments concerning

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modification and privatization. Subteams were formed under several of these categories. Interestingly, these teams were cochaired by Boeing and Rockwell executives. To achieve growth, it was reasoned, the two sides would have to work together collaboratively, and cochairs were both a substantive and symbolic way of stressing the importance of mutuality. Efficiency synergy teams addressed business development, general management, information systems, operations, engineering, and human resources, among others. Their charge was “to align organizations and leverage combined capabilities,” in other words, to eliminate redundancies and integrate functions. Boeing exerted more influence in the leadership of these teams. The intent was straightforward: Rockwell would conform to the Boeing organization structure and adopt Boeing systems. Employ a credible and rigorous issue-identification and decision-making process. Effective transition teams collect valid data and conduct, as dispassionately as possible, an objective analysis of the data and options. There is more to this than just generic project management. Decisions have to be made with an eye not only to selecting from current or novel approaches, but also to realistically appraising what will be “workable” in the combined organization. In a mutual fund combination, for example, the overriding rule for selecting policies and procedures from the two partners was to find “which was best for the customer.” But if that option required extensive computer programming or incurred other costs or problems, then a more workable solution was sought. Attend to teams’ internal processes. Transition team leaders and members are well advised to stay on top of the group dynamics influencing their deliberations and devote some time to group development and maintenance. Members of transition teams need to maintain a sense of humor and get to know one another as people as well as professionals. At Abitibi-Consolidated, internal facilitators were trained to assist each transition team and work with team leaders to ensure positive and productive relations among team members.

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Mind relations with the rest of the organization. In most instances, the transition structure is not in competition with the core business structure; on the contrary, it supports the management structure in moving from separate to integrated entities. Transition managers and teams do not make high-level decisions or mandate how the firm should go about its business. Rather, transition managers facilitate the work of others, and transition teams collect data and make recommendations. This lack of formal decision-making responsibility—coupled with the respect for normal decision-making channels in the enterprise— makes the support and commitment of senior management to the transition management process essential. Again at AbitibiConsolidated, function heads were purposely kept off transition teams so that “fresh thinking” would prevail. It is important that transition team leaders were prompted to review recommendations with function heads as they were being formulated.

Select Skilled Transition Team Members and Leaders A transition structure can be no more or less effective than its members. In our experience, individuals who have most successfully filled transition roles benefit from a mix of technical expertise, managerial proficiency, and interpersonal skills. They also require sensitivity to deal with the egos, anxieties, and needs of people above, below, and beside them in the organization. Beyond this, members of the transition structure should truly believe in the prospects of the combination and be genuinely excited about the opportunity at hand. In combinations that work, appointment as a transition manager or transition team member is regarded as an honor and a spur to career progress, not as drudgery or a sidetrack from career advancement. Knowing the business, competitive environment, and their functional specialty gives transition team members a foundation for making real contributions. Having strong analytical skills and the capacity to see issues from multiple perspectives helps in sorting out options. In addition, being comfortable in exercising responsibility without complete authority helps transition team members contend with the pressures that come from others outside the process. This means selecting people who are more

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diplomatic than political, more open-minded than narrowly focused, and more inclined to consensus than domination. Considering whom not to give transition assignments to is as important as whom to give them to. Transition positions should not be staffed by second-tier managers; those seen as being “second stringers” will lack credibility. People with dominating personalities, poor interpersonal skills, or tendencies to build personal empires at the expense of the company also do not make for effective participants in the transition structure. A transition team chair stewards the group’s work and exerts substantial influence over the quality and timeliness of its output. When already appointed, the leaders of businesses and functions most often serve as team chairs or cochairs. At other times, heirs apparent serve this function. But there are cases when there is a “horse race” between contenders for a top job and a person’s success as head of a transition team will ultimately determine whether he or she will lead the combined business or function. In addition, there are instances when current management is so vested in the status quo that their inclusion will almost ensure absence of fresh thinking and give-and-take in the teams. In these cases, it can be useful to assign leadership to some upand-comers and see what they have to offer. In several instances we know of, success in heading a transition team resulted in a middle manager getting on a fast track to run the combined business.

Clarify Team Charters and Guidelines Ask survivors of ill-fated transition teams about their experience and they usually trace their problems to a lack of clarity about what was expected of them. Successful teams, in contrast, start with clear charters that answer some core questions: • What is the group responsible for—designing a function, deciding on product lines, establishing a geographic plan of offices, recommending systems and procedures, or all the above? • Where does the domain of this transition team start and stop relative to other teams and the core business organization?

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• Is the transition team supposed to generate opinions, make recommendations, or make decisions? • Should the transition team make recommendations based on “best of both” or should the team look outside existing practices and strive for breakthrough thinking? A transition team’s charter is shaped by the desired end state for the combination. If one company intends to absorb the other, then the work of transition managers and teams is to recommend how to best implement the transition. If, alternatively, the mandate is to select the best from both or wholly transform operations, then fact finding and analysis is more open-ended and the scope of transition teams greatly expands. With a clear and agreed-on charter in hand, transition teams then need some guidelines to direct their work. These include a clear definition of sought-after synergies and critical success factors as well as a no-nonsense set of combination principles issued by senior management. Teams take the transition management principles and formulate them into their own set of rules for the road. In a health care acquisition, one partner’s culture was notorious for not taking its own past transition team meetings seriously and for blatantly ignoring recommendations after they were agreed on in meetings. Thus, in this case, the operations transition team representing both sides established some specific ground rules: • Speak up in the room, not in the outside hallways, if you disagree with anything said. • Leave the room with consensus. • Respect transition team meetings—show up on time or alert others if you will be late or absent. • Do your homework and come to meetings prepared. • Test emerging decisions with people in your work areas.

Determine Deliverables and Timetables Transition teams also need clear deliverables and timetables. These elucidate what is expected of the transition teams, when, and in what format. Some CEOs want only an overview in interim

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reports; others demand detail. Clarity regarding the style and format of transition team communications is especially important for teams led by people from the partner organization. Energy and focus that otherwise would be placed on creating combination opportunities need not be wasted preparing PowerPoints and scripting speeches. At Pfizer Animal Health, transition managers informed transition team members what senior leadership expected of them, provided formats for reports, and employed diplomacy between the teams and leadership when issues heated up. Periodic reviews between the teams and top leadership at Pfizer aided transition teams immensely. They spurred dialogue about options under investigation, further clarified leadership’s expectations, and educated leaders about what the transition teams were learning. The interim reviews also circumvented the keen disappointment that would have developed had transition teams worked long and hard to develop a line of thinking only to have it shot down by a leadership expecting something else but not disclosing what it wanted.

Overcome Resistance to the Process Most of the resistance we encounter regarding transition teams tends not to be related to the content of their work—that is, what they are charged with doing—but with the process through which they go about doing it. We don’t get much push back from managers about the relationship and knowledge-building benefits of the teams or about the value of generating high-quality recommendations for mining the combination’s synergies. But, we do get an earful when they feel uncomfortable with or unsure of methods imposed upon them by external consultants. As a result, we overstructure the teams’ “input” and “output” but purposely understructure their “throughput.” Clear charters, critical success factors, and operating principles set a context within which teams conduct their work—they offer clarity on what is expected of a team and what criteria should matter in generating its recommendations, as well as a starting point for discussions among its members. The more structured the input, then the less wiggle room there is for those who are politically motivated to

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protect their turf or for those who are time-challenged to search out shortcuts to the process. We don’t want members unnecessarily consumed with debating the format or detail of deliverables, so we also overstructure the output. In a transportation industry merger, for example, we provided teams with a template for presenting recommendations along with how they supported each critical success factor and their cost and revenue impact. The template also created a bridge to transition planning by getting teams to list any anticipated implementation issues. To make sure that key matters did not fall through the cracks, the teams also listed any outstanding issues they did not fully address and a proposal for how to attend to them—either by extending the current team, assigning the issue to a different transition team, or handing it off to the regular business management. Finally, we understructure the “throughput”—how the teams go about their work. Matters such as how often the groups meet, how the labor is divided, the agenda for specific meetings, and all the other details are best left to the members to determine as a group. This avoids the predictable resistance when a lock-step process is imposed upon experienced and talented contributors. As an added benefit, coming to consensus on the process of how to conduct the work builds a sense of teamwork. Many a new transition team member has bonded over “early wins” on such matters as where and when to meet.

Transition teams require resources—staff support to assist in gathering and analyzing data; administrative support to prepare documents; IT to track and monitor work; and logistical help to schedule meetings, arrange travel, and do other tasks. This sounds simple enough, but in today’s lean organizations, such resources may be difficult to come by, especially when the core business is vying for its share. Infrastructure has to be readied for the crunch before crises or embarrassments occur. On this point, dedicated conference rooms ensure that transition teams do not have to compete with other groups for meeting space. And dedicated support staffs—even temporaries hired in for the purpose— ensure that at least someone is “worrying” over all the details that would otherwise detract from team effectiveness.

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Accelerate the Work of Transition Teams Like any other start-up group, transition teams go through stages of forming, storming, and norming before they get down to performing. To accelerate this process, one of us designed a twoday launch meeting for transition teams in an entertainmenttelecommunications alliance. The morning of the first day ensured that transition team members received a solid foundation from which to pursue their work. This began with a review of the rationale, vision, critical success factors, and operating principles of the combination and of each team’s specific charter, responsibilities, and deliverables. The session also included lively presentations on pitfalls in group decision making and tactics for creative problem analysis. During the afternoon of day one, members met to determine ground rules for their teams. Facilitators led each team through a structured set of questions regarding its “process”: matters such as how often the group would meet, what constitutes an excused absence, how decisions would be made, and what norms would guide interactions among the members. The transition teams conducted their first meetings on the morning of day two. Then, that afternoon, team members proposed any new or revised ground rules required to facilitate the transition’s effectiveness. In a concise format, this launch meeting helped the transition team members understand their responsibilities, formulate rules of engagement, experience how members dealt with one another in an actual meeting, and raise issues and questions that could be brought to the combination executive committee for their immediate attention. Plus, it created opportunities for members from the partner organizations to spend time with one another and get to know each other as people. Breaks and meals were filled with informal conversations between the partners, and an evening bowling match with pizza and beer added some playtime. Without some developmental kick-start like a launch meeting, transition teams usually take several weeks or a few months to make this much progress. Knowledge Building When transition teams are charged with planning the full integration of companies, each side needs to teach the other how it goes

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about its business. To make the process work, transition team members on both sides need to draw on each other’s knowledge. Accurately assessing partners’ respective budgets, head counts, and operations depends on “apples-to-apples” comparisons. One partner may house its security and transportation office in the HR function while the other may have them elsewhere. It would be unfair to compare the relative costs and staffing of the two HR groups without taking this into consideration. Common procedures can help transition teams to compare their two functions and build the baseline knowledge required for effective combination planning; teams we worked with in a high-tech merger used this template: • Functional analysis. Identify common core functions to be compared and noncore functions that can be handled separately. • Baseline budgets. Develop baseline figures on costs and head count core areas. • Synergies. Detail cost savings, process improvements, and revenue enhancements based on “best of both” criteria or finding a new way of operating. • Organization structure. Recommend an organization structure in line with CSFs and organizational effectiveness criteria. In this case, the criteria included simplicity, broad spans of control, connection to essential businesses and customers, and so on. • Staffing plan. Prepare position descriptions, with competencies required, and a list of qualified candidates including their years of service, time in current position, precombination company affiliation, rating of readiness, and other pertinent information. • Management processes and support systems. Identify management policies, processes, and support systems that relate to function’s performance; liaise with appropriate transition team. Relationship Building Both structured and unstructured team-building activities aid in developing relationships among combining managers. The launch meetings conducted in the entertainment-telecommunications

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alliance included dinners and social time to facilitate informal bonding among the transition team members. In any combination, much of the work of learning about one another and of each other’s business gets done after hours and outside of meeting rooms. Occasional off-site meetings, recreational outings, and dinners allow for unstructured discussions of issues and build better relationships among new partners. Team-building activities can be beneficial throughout the course of integration planning. Team building conducted early in a team’s tenure can not only identify and address small issues before they mushroom into major obstacles, but can also take a relatively well-functioning group of individuals and propel them into a highly creative, productive, and effective team. This overcomes the tendency in some transition teams to move too cautiously and to waste precious time in the early weeks of a combination. In other cases, team building is required to offset the bad blood generated in a hostile or otherwise less-than-friendly deal. Process Improvement What complicates fact finding, analysis, and development of recommendations in so many cases is that the synergies sought are not well defined or can only be realized by people working together effectively. Behind each company’s way of doing business is tacit knowledge that comes to the fore only through deep conversation and considerable give-and-take. Important executives and coalitions are often defenders of “how we do things” and have lots at stake if things change. Thus attempts to clarify facts and resolve differences can threaten the pecking order within companies and challenge past precedents.3 As a final example, consider IBM’s acquisition of Lotus, which had all the characteristics of a free-for-all. The two sides could not agree on strategy, nor was it clear that they could resolve differences amicably. After forming transition teams, Hemang Davé, the integration manager, took innovative steps to promote transparency and reduce mistrust. The following guidelines were adopted for team analyses: • Make analyses of the market and the logic behind the organization transparent. The databases, analyses, and work plans of each

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transition team were available to other relevant parties through an electronic filing system. That way, all concerned could see and verify what was behind proposals and make any questions or challenges a part of the electronic record. • Prepare political maps of integration that identify what is at stake for every interest in the partnership. Recognizing that their “facts” were disputable and would not carry the day in any case, teams devised “political maps” that highlighted the extent to which functions in the parent company might be affected by different strategies and identified who was in favor, against, and open to influence in specific integration options. • Mark progress by increments. Once the parties had access to the full range of information, options, and political ramifications on the table, they then worked a series of tactical and operational issues through to agreement. This approach enabled the two sides to gain some “small wins” before tackling more divisive issues.

Cross-Team Coordination Boundaries between transition teams may not be discrete; hence their work must be coordinated. A manufacturing or supply chain team cannot weigh options for how many plants or suppliers will be required or affordable in the combined organization if it is unaware of the products team’s progress on which lines to retain or of the finance team’s view of the overall budget. Various methods have been used to integrate the work of multiple transition teams. In some cases, transition team chairs can act as integrators who keep their teams abreast of the goingson of other teams. Many companies we have worked with use periodic reviews in which leaders of the transition teams come together to update one another on their progress. Issues of coordination and controversy are raised and discussed by the full group after each transition team presentation. Other firms rely on staff support (from people affectionately known as “runners”) who move between transition teams. Sitting in on one transition team’s meeting, they may hear an issue discussed that influences or is influenced by work being conducted by another group. Or, runners may be requested by one transition team to gather

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information from or advocate certain viewpoints to another group. When the stakes are high, this role usually is taken by the transition manager, who has the stature and the skills to broker shared solutions across teams. In an international consumer products merger, for example, the transition manager had to perform some shuttle diplomacy between the marketing and product transition team leaders to get them to see eye-to-eye on reporting relationships between customer support staff and country managers.

Challenge Sessions and Reviews There simply is not enough time for transition teams to gather and digest all the needed facts or to fully vet the assumptions used in developing recommendations. Usually, once a transition team centers on a course of action, commitment escalates because the costs of going back to ground zero are simply too great. To prevent escalating commitments and to reduce groupthink, it is advisable to set aside time for transition teams to reevaluate previously abandoned courses of action and recalibrate the costs, risks, and benefits of the chosen courses. In addition, we also advise that there be team-on-team challenge sessions, in which transition teams get together to compare findings and recommendations with one another. In an alliance, teams preparing product-and-marketing plans for different industry segments presented their ideas to one another in a structured challenge session. After presenting their ideas and plans to another transition team, the presenting team would receive specific written feedback in which its proposals were ranked from 10 (complete and compelling) to 1 (dead on arrival) followed by suggestions on how to improve analyses or recommendations. Then there was a full-scale discussion of the ratings and suggestions. It is worth noting that the team providing feedback was evaluated by another transition team. This reduced the tendency to lob softballs in hopes of getting the same in return. The Integration Steering Committee—or whatever name the transition oversight group goes by—is the final arbiter of transition team recommendations. It should query transition team leaders on the matter of horse trading or compromises by asking

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them to review their rationale for decisions and make a case for how decisions abide by the CSFs and support productive combination. It should also ask about rejected options. In some transition teams, devil’s advocates criticize their recommendations and speak in favor of abandoned alternatives. In one acquisition, a team undertook a role reversal wherein the buying company argued in favor of the acquired firm’s methods, and vice versa. This unlocked the conflict and led to a resolution of differences. What about cases where too little conflict hinders a transition team’s work? Some transition teams duck the issues and conduct their sessions like ballroom dancing, with politeness and courtesy. Here, too, top-level oversight and team building can be used to apply a healthy amount of controversy and debate to generate high-quality recommendations.

Looking Outside the Box Integration planning often results in horse-trading or compromises between the two sides in combining functions. Obviously, there are key strategic, financial, and operational criteria to apply when evaluating the recommendations of transition teams. Our experience suggests other factors to consider in ensuring that transition teams look outside of their own situation to find best practices: • Benchmark the best of the best. When team recommendations seem to be half-baked or represent a low-commondenominator solution, it is important to compare them against best practices from industry leaders or even firms outside the industry. In one deal we worked on, the integration steering committee insisted that teams provide benchmark data that compared their recommendations versus global best practices and a full explanation of how the combined company should “bridge the gap.” Several teams visited best-practice companies to prepare their analysis and came away with breakthrough ideas on how to transform their functions. This opens up eyes and deflects the mine-isbetter-than-yours dynamic that deflates the creativity of many transition teams.

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• Look at the long haul. Although choosing one or the other partner’s systems may be appropriate for the current situation, is it suitable for the future of the combined business? This question can be a stimulus to benchmarking outside of one’s industry for breakthrough ideas. • Bring in outsiders. Especially when jobs and careers are at stake, it may be necessary to bring in an outside consultant or expert who can be more objective in assessing options and evaluating recommendations. • Use the 80–20 rule. Watch out for too many supposedly new ideas. Transforming to a third way of doing things is sometimes called for, but it is always more difficult to implement than adopting current systems. If you have a solid system in place that fits CSFs, or at least gets you 80 percent of the way there, then use it.

Transition Planning and Implementation The work of transition teams does not end with developing recommendations. Many times they prepare change management plans to complement their proposals. All too frequently, however, sound recommendations by transition teams are rejected or watered down by core business managers who are locked into their current way of doing things, or simply do not have the leadership skills to effect change. Ideally, the segue from integration to transition planning is seamless and implementation proceeds smoothly. To effect this, transition teams need to bring core business managers into their confidence before recommendations are set in concrete and gain a manager’s “buy in.” Two sets of tasks make up implementation planning. One involves coordinating and monitoring the many changes being introduced as part of the combination. The timing and sequencing of change implementation is critically important to maintaining productivity in the switchover from the old to the new. It also has an impact on customer satisfaction and employee morale; there are few situations more deflating than the introduction of a much-heralded new system that is then bogged down by glitches and snafus. Mindful of this, combined companies set realistic timetables for implementing new procedures and they

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ensure proper redundancy in systems until the changeover is complete. The second set of tasks pertains to the human side of change. For transition teams’ recommended changes to truly engage the workforce during implementation, they should be positioned as being essential to achieving synergies and as adhering to the combination’s CSFs. When this connection is clear, recommendations have higher face validity and the path toward successful implementation is smoothed.

Chapter Seven

Managing People Through the Transition While those involved in combination planning busy themselves with collecting data, analyzing options, and formulating recommendations, others in their organizations wait to learn their fate. Even when the majority of people understand the rationale for the combination and sense that some truly productive potential can result from joining forces, they retain a constant concern for self-preservation and an equally constant craving for information about what is going on around them. Many executives label the transition period the “twilight zone” between the old and the new: it’s murky and can be scary for individuals who long for stability and their accustomed norms. Confusion and uncertainty reign as the organization is no longer what it was, but not yet what it intends to be. People are not sure how and where they fit in, largely because the organizational structure has yet to settle into place. Systems and procedures that were designed for the old regime may not be relevant in the new organization. New work teams have not yet been formed or settled into a modus operandi. In this chapter we examine how managers can best handle their people through the combination phase. We build on theories of adaptation-to-change and highlight what measures to take to enable people to let go of the past and make a new beginning in a combined company. We give special attention to communications, handling the traumas of downsizing, and making staff decisions in line with the desired end state of the combination. Finally, we address the HR function’s role in the combination process.

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Combination Stress Versus Commitment Two basic tasks make up the agenda for managing employee uncertainty and insecurity throughout the transition. One aims to minimize the stress experienced by employees and help them cope with its effects. The second is to maximize the upside by building employee understanding of and commitment to the combination and the opportunities it offers. As Figure 7.1 shows, stress among employees rises dramatically before and during the transition and then decreases only gradually. Commitment to the new organization builds slowly. Although these patterns are inevitable, it is possible to decrease stress and increase commitment—and as a result eventually improve productivity, quality, and employee wellbeing—through careful management of the transition process. No matter how confident senior executives feel about the rationale for a combination and how much potential gain it holds for the organization and its people, employees will always experience stress and Merger Syndrome reactions. Although the negative effects cannot be eliminated, their detrimental impact can be mollified by helping people understand and cope with their situation and supporting them in adapting to the transition. Figure 7.1. Stress and Commitment Cycles in a Combination. High Stress

Commitment

Low Rumor

Announcement

Transition Planning

Transition Implementation

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Managing Front-End Fears—The Four I’s A merger of two international consumer products firms was greeted by employees, industry analysts, and the business press as a great move. Consolidation in the fragmented industry had been predicted, and observers heralded the marriage of two of the strongest players as creating the new industry leader. Contributing to the optimism, the two highly respected CEOs both agreed to stay on, with one running manufacturing and administration and the other sales and marketing. Employee spirits rose when newspaper accounts of the deal cited their intentions to select the best of the premerger companies and also to look for new ways of doing things in building the combined organization. However, rumors soon began to fly around both companies that the executive in charge of the sales force had decided to staff senior positions exclusively with people from his side. Adding fuel to the fire, the head of sales from the other side began arriving at work late, moping around the office, not returning phone calls, and leaving early. Word spread that he was not offered a job in the combined company; this escalated into grapevine gab of a complete “takeover” of sales by the partner company. To make matters worse, some sales reps heard from customers that counterparts from the “winning” side were acting cocky about their people controlling the merger. Morale plummeted in the “losing” sales organization and later throughout the firm. With their own senior sales executive out of the picture, sales representatives assumed that no one would be representing them in selection decisions. We’ve discussed why sales force integration is tricky: it involves not only sales reps, but also sales support staff and customers. In addition, sales reps typically operate within a relatively short time horizon, have many more contacts with company competitors and others who might woo them away, and, in many industries, are more prone than, say, operations managers or procurement specialists, to “jump ship” when prospects in their current employer are uncertain or unappealing. The simple message, of course, is to overcommunicate with sales reps at every stage of a combination. But about what? How often? And through what media and channels?

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In this case, one of us began working with a team of line executives and internal human resource and communications professionals to develop a comprehensive program to minimize the psychological and behavioral consequences of joining the two forces, and to maximize employee understanding of and support for the deal. Four objectives guided the program’s development: 1. Insight. Raise employees’ awareness of combination-related stress and how to control it. 2. Inspiration. Make an intellectual and emotional case for why people should let go of their accustomed ways of thinking about and doing things and accept those of the new organization. 3. Information. Keep employees informed about the combination’s purpose, promise, process, and progress. 4. Involvement. Find ways to get people to feel more like architects of change and less like victims. To achieve these objectives, the design team identified leverage points that the merging senior executives could use in managing employee mind-sets. These included the executives’ own actions in setting expectations for middle managers and supervisors, working with human resource and communications programs, and maintaining employee engagement throughout the merger.

Insight A first step in helping people cope with M&A stress is for them to understand its sources and what they can do to control it. Employees engaged in a combination need to be prepared for a period of high-level activity and for the pain, pressure, and decreased productivity that lie ahead. They need to see the confusion and concerns they experience not as signs of personal weakness but as natural consequences of a combination. The key is to get people to accept and control their emotional reactions to events, instead of letting their emotions control them. In the consumer products firms, the two CEOs took firsthand responsibility by increasing their visibility in their respective organizations. Both men scheduled “road shows” to talk with

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employees at each of their firms’ location, arranged meetings with key talent, and had informal visits with small groups of employees. In particular, the CEO from the “losing” sales side took the time to meet with his key sales staff to remind them that he knew they were talented and to let them know that they were needed to build the new organization going forward. Customers, he noted, would not tolerate the decimation of one side’s sales force in the combination; nor would he. In one-on-one meetings, he acknowledged that the other CEO intended to keep his own direct reports but pointed out that no commitments had been made beyond that level. But he pledged that a process involving managers from both parties would be used to design and staff the new sales organization, using a broad set of criteria including past performance, fit with the desired organizational culture, and the quality of current relationships with customers. In the meantime, the CEO asked his sales staff to stay focused on their customers. Note that the CEO made no promises to anyone about their job security. What he did do was acknowledge the legitimacy of their concerns, remind them that their talents were recognized and needed, alert them to the process to be used for making decisions, and ask them to remember their short-term work responsibilities. Next, a seminar on human and organizational issues in combinations provided guidelines for managing oneself and others during this stressful time. It was delivered in “separate but equal” forums with the same content delivered in the two organizations. The day-long program, on the “Challenges of Combination,” combined presentations, small-group discussions, and time for individual reflection and planning. The program was offered initially to staff who managed people and then to others. This cascading enabled midlevel and lower-level managers to leave the seminar better informed and prepared to discuss the situation with reports who attended subsequent sessions. Evaluations of the seminar showed that attendees received many benefits from the program. First, they reported a greater understanding of the potential pitfalls that bring down combinations. Second, their self-confidence was bolstered by learning that others before them had made the treacherous journey through a combination and emerged as strong survivors (though sometimes bruised and battered). Third, they felt better prepared for the

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work-related challenges of combining. Finally, they appreciated the opportunity to discuss openly how managerial missteps and attendant rumors (as in the handling of senior positions in sales) were already affecting this combination. These real-life episodes brought a dose of reality to the seminar and distinguished it from a generic program on change management. The reviews from sales were so consistently positive that the program was then offered to employees in all areas.

Inspiration In today’s world of regular downsizing, reduced career opportunities, and a less compelling psychological contract between employers and employees, inspiring people in a combination does not come easily. On an intellectual level, the CEOs in the consumer products case used their road shows and informal gatherings to present employees with a persuasive argument for why the combination made sense. A vision of a new and better organization helps people divert their attention away from what is being given up and toward what is being produced. It also breeds confidence (if not a sense of relief) that management has thought through where the organization is headed. Finally, the new vision provides a template for organizing thinking and action toward attainment of the desired end state. To address healthy employee skepticism about “What’s in it for me?” the CEOs expressed the combination’s potential benefits in human as well as business terms. The strategy for the combined organization called for more emphasis on revenue growth, international business development, and a broader product line than either precombination organization had supported. This would translate into more opportunities for individuals, international assignments for those interested, and a wider array of products for salespeople to market to customers. Moreover, with its increased size and resources, the combined company could offer career development and skills training programs not affordable in the predecessor companies. Inspiration has an emotional component as well as an intellectual one. Despite all of the turmoil wrought by corporate upheavals, our conversations with employees confirm that people

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have retained the human desire to make an important contribution in the work they do. People want to know that their jobs make a difference and that their collective efforts result in something special. In this case, the two CEOs made an emotional pitch to employees framed around their own commitment to the combination. With both men near retirement age, the combined organization would be their legacy. They urged employees to see the creation of a new organization as a great event in all employees’ careers. “How many times in your life,” asked one of the CEOs at a visit to a manufacturing plant, “do you have the opportunity to be in on the ground floor of the creation of a brand new company?” A value-creating combination presents leaders with the chance to tap into and resurrect employees’ aspirations to build a new and better organization and life for themselves.

Information The velocity with which rumors spread through their companies took the CEOs by surprise and prompted them to commit resources to a comprehensive communications program beginning immediately. As a first step, the CEOs asked their staffs to circulate articles on the Merger Syndrome and related literature to the workforce, as well as to distribute to managers books on the human and cultural aspects of combinations. Next, as described below, a comprehensive communications program ensued. Importantly, it included upward communication vehicles such as a toll-free telephone hotline on which employees could leave accounts of any rumors they heard. Every two weeks, a list of the “top-ten rumors” was published, along with factual information addressing the content of the rumors. Even when information was not yet available to respond to employee uncertainty, by noting and addressing the rumors head-on management helped employees recognize the dubious quality of the grapevine’s contents and become better “consumers” of the rumor mill.

Involvement As with other forms of organizational change, the more involved people feel in a combination, the more likely they are to

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understand and support its rationale, and the more they commit to successful implementation. In the consumer products firms, one activity that set the pattern for fuller employee participation later on in the process was built around an early key decision regarding the location of the combined company’s headquarters. More than 90 percent of all employees returned questionnaires soliciting their views on the factors that should be used in selecting the site, the relative attractiveness of the business environment in the current headquarters sites, and the potentially adverse business and personal effects of locating in either city. Some also participated in focus groups to gain deeper understanding of employees’ feelings and thoughts. When announcing which city was selected for headquarters, the CEOs cited findings from the employee research in addition to the other criteria used in making the decision. Involvement can be either direct or through representation. Scores of employees from the combining consumer products firms participated in transition teams. To increase involvement throughout the ranks, transition teams conducted informational sessions with employees to review progress and solicit reactions. An executive-level task force charged with defining values for the new company commissioned focus groups to explore what employees valued about their prior companies, what they did not value, and what they felt should be carried forward in the combined organization. The task force used this employee input, along with their CEO’s vision and values statements, to define a desired culture for the combined organization.

A Comprehensive Communication Campaign Managers engaged in a combination may offer many excuses for not communicating with their people: • “There’s nothing to say.” Managers are uncomfortable communicating when they themselves don’t know what is in the works. They figure that employees will be suspicious that something is being kept from them if told “I don’t know.” In our experience, however, so long as employees are prepared with insight into the combination process and stress

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dynamics, they understand that integration decisions are complex and that answers to their questions may not be immediately forthcoming. • “I want to protect my people.” Many managers like to think that they can buffer their employees from combination-related stress; they rationalize to themselves that talk about the situation only exacerbates concerns. Rumors fill the communications void, however, and the grapevine always thrives on the downside of developments. • “Let the communications people do it.” Corporate communications staff can be of help, of course, but they should not serve as the primary mouthpiece of management. Employees want to hear from and be heard by their leaders and managers, not substitutes. Moreover, multiple waves of downsizings over the last several years have decimated many internal communications departments. • “We’ve already told them that.” Employees have an insatiable thirst for information about what has happened and is happening. Regular updates, even if containing nothing new, are important reminders that management is still in touch with people’s concerns. Information contributes both substantive and symbolic value to a productive combination. People want to know what is going on and why. They also, however, want the peace of mind that comes with feeling in the know. Efforts toward effective communications on the part of managers and staff reduce the energy expended by employees to search for answers to their questions (and, thus, reduce their distraction from performance) and increase the accuracy of information being circulated.

Communication Content The core of the communications program in the consumer products merger was its content. In sharp contrast to the there’snothing-to-say mentality that prevails in most combinations, top leaders in this merger found much to say. First, they reviewed the business case and strategic rationale for the combination, along with a strong argument for why maintaining the status quo was

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not in the best interest of either the organization or its people in an industry embarking on considerable consolidation. Second, they provided information on the partner organizations: their histories, offerings, customers, culture, personalities, and recent accomplishments. Third, they educated people on the combination process and its inherent complexities. Finally, they announced the purpose and structure of transition teams, as well as the criteria to be used in decision making, and provided periodic updates. To generalize from this case, consider what kinds of information to communicate: 1. The “case” for combining and change. Effective M&A communications create a clear business “case” for combining and change, based on market, competitive, and customer realities. This means honest communication with facts and figures about business conditions, spelling out the financial and strategic reasons for a combination, and, we would emphasize, acknowledging criticisms and risks reported in the media and internally. The logic here is that people have to “face reality” as a first step in countering resistance to change. Also, stating the “case” establishes that employees can expect balanced communications as integration moves forward. 2. The “storyline” for the future. Second, employees need a “storyline” about how the combination will lead toward a more effective and competitive organization. This includes the visionary and inspirational elements noted above plus more detail on the strategic story behind the combination, including the potential implications for plants, products, services, and people. In many cases we’ve observed, companies sugarcoat the degree of change implied by a combination. This evokes skepticism among thoughtful employees and yields high levels of cynicism when the storyline changes and management is discredited for misrepresenting or even lying about what would happen. At the same time, it is essential to show how painful changes are necessary and will result in a better organization. 3. The “roadmap” for the transition. Employees also need a “roadmap” of how the combination will unfold and a rough

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timeline of when things will happen. This enables employees to interpret what might otherwise come across as seemingly random and even painful events and focus more on their significance for moving the organization forward. This also provides a basis for communicating progress in a combination and for explaining midcourse corrections. 4. The “ground rules” for a successful transition. Finally, effective communications helps employees know what “ground rules” guide the transition from precombination to postcombination. Initially identified by company leaders to guide integration planning, the combination principles and critical success factors also convey to the overall workforce insights into what matters in the new organization. Ideally, these demonstrate that leaders’ intentions are rational and well considered. Of course, if they are neither rational nor considered, all the communications in the world are not going to change things. But if such actions are well reasoned, the resulting connections can be very reassuring and give people a sense that their leadership is on top of the game and that their own work plays a meaningful role in getting the organization to where it is headed.

Communication Processes Back at the consumer products firms, the CEOs desired to build a company where communications would be timely, open, complete, multidirectional, and checked for accuracy. Their communications program featured many such characteristics. • Use of multiple media. Communicate in writing (office memos, letters sent to employees’ homes, newsletters, and question and answer packets), electronically (videos, e-mails, Web sites, and telephone hotlines), and in person (large and small group presentations, informal chats, one-on-one discussions, and road shows). • Balance the upside with current realities. Communications emphasize the positive but acknowledge problems and pain. • Recognize there will be more questions than answers. Communicate what is known, and be clear about what is not known.

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• Anticipate communication breakdowns. Recognize and speak to employee stress and “wishful hearing,” both of which distort intended messages. • Overcommunicate. Respond to the insatiable employee need for information, and repeat the same message through multiple channels. For example, follow e-mail announcements with a streaming video. • Check communications. Get feedback on clarity of understanding, and do not assume that the message received was the message sent. • Do it. Recognize that effort spent up front to set the right communications tone is less costly than overcoming distrust and miscommunications down the road.

Regular Updates The two principles of communicating a lot of information and communicating often apply throughout the transition. In the integration planning phase, for instance, the purpose of the transition structure, the people participating on teams, criteria used for recommendations, and the timetable guiding their work can all be reported. Several companies we have worked with have created internal Web sites where employees could access up-todate information about the progress of transition teams and submit questions and suggestions to team leaders. Later, as integration decisions are made, they can be announced through formal communications vehicles and followed up with informal in-person discussions. This one-two punch ensures that employees get a clear account of decisions and the chance to mull them over. Employees are certain to hear the bad news through the grapevine, so it is important to promote progress made in the combination. Even small wins give a boost to people who have been cautious, or even cynical, about the combination’s benefits.1 In a merger between two financial institutions, one based in Europe and the other in the United States, a culture clash cut deeply across national as well as corporate boundaries. Cross-border usversus-them feelings were pervasive, as were turf battles over who could call on new accounts. In the firm’s Asia division, far from the center of conflict, representatives from the two sides joined

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together to call on a prominent prospect who had never done business with either side. Citing the combined resources of the two banks, the prospect became a customer. This accomplishment was widely promoted on the company’s internal Web site and repeatedly mentioned in executive speeches. It became a symbolic point for instructing U.S. and European cross-national teams in what could be accomplished when the two sides worked together.

Managing Emotions as Companies Combine Many of the actions we suggest to support employees prior to the legal closing of a deal can be extended into and through the combination phase. Senior executives still need to visit with people, acknowledge their concerns, and inspire them with a positive picture of their future organization. If anything, communications have to be increased to keep up with demand and to counter rumors, because in the combination phase there is more content and news to impart. In turn, training or sensitization seminars need to be tailored to a new phase of the combination that sometimes includes significant restructuring and layoffs, many and varied changes in policies and practices, and introduction of new leaders and a new corporate culture.

Sensitization and Surfacing Knowledge of the Merger Syndrome does not necessarily lessen stress and anxiety, but it helps people understand how they and others might be responding to the combination. Ideally, managers are given insight into the Syndrome as part of their emotional preparation for a deal, and employees take part in sensitization sessions (like those we described on psychological preparation in Chapter Four) before the deal is complete. In many instances, however, the deal is done and the combination is in motion before people down the line have a chance to get together and discuss what is happening and the implications. Using “Play” to Surface Merger Issues One of us has conducted sessions with several combining companies where the two sides used various forms of play—picture drawing, skits, role plays—to surface merger issues in their coming

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together. In the case of a merger between two large consulting firms, for example, executives from each side were asked to prepare PowerPoint “pictures” of their combination. One manager’s slide presented this as a merger between the left and right hemispheres of a brain—the economic specialty house (planning) in the left brain and the business consulting firm (doing) in the right brain. Another featured a dog with two heads—Milton Friedman, the probusiness pragmatist, at one end and Karl Marx, the revolutionary theorist, at the other. These slides provided grist for the mill for each side to talk about its origins, philosophy, and market niche. Yet another slide showed the two organizations armed to launch guided missiles, each missile labeled with their respective business lines. That these missiles seemed to be aimed at the other side, rather than at competitors, sounded a cautionary note and led the executives into dialogue about their two companies’ relative strengths and weaknesses. Another kind of sensitization session involved acquired staff from an office products maker along with senior leaders from the parent company. The all-staff meeting began with asking everyone in attendance to draw a picture of their view of the combination. Flip charts were posted around a large auditorium, and with markers in hand employees began to illustrate what was in their mind’s eye: a dragon breathing fire, a giant clomping over villages, and diners preparing for a “feast”—with the acquired staff on the plates. The images evoked the underlying emotion: people were fearful of being destroyed or swallowed up. Other pictures had stick figures rallying and pulling together; some even showed teams, representing the two different sides, joining forces to excite customers (see Figure 7.2 for additional samples). These reflected the upside of the deal. The point that a picture is worth a thousand words was repeated over and over again as employees walked around the auditorium surveying visual images of their peers’ hopes and fears. An intense but often lighthearted discussion followed, involving an analysis of the themes in the pictures and their connection to the Merger Syndrome. Counseling and Support Group meetings are useful forums for educating employees about merger realities and surfacing fears, but sometimes individual

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Figure 7.2. Employee Drawings of the Impact of Their Combination.

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counseling is called for. It helps when employee assistance specialists are at the ready to identify people in need during a combination and provide them with advice and support. This is particularly true in cases where there are or will be evident losers in a combination—ranging from those with lesser responsibility to those who lose their jobs. Because there is a seeming stigma attached to seeking this help, employees often attempt to tough it out and go their own way. To counter this, EAP staff often need to work with supervisors to identify troubled staff and take care to reach out to them in ways that preserve their dignity. It is not just everyday employees who need counseling during a combination. The aforementioned senior vice president in the financial services combination who fixated for months on the line of business he had lost benefited from counseling geared toward reality testing his perceptions of loss. In another case, a chief technology officer found herself one additional layer removed from her mentor, the CEO, following a reorganization of top management in a merger. Furthermore, she lost some broadbased responsibility as the combined organization adopted a more decentralized approach to IT. For several weeks, she brooded about her loss and left her own management team adrift. With appropriate counseling and a strong sense of commitment to do the right thing, she regained form and led an aggressive effort to integrate technology services and build her team. Walking the Talk Inspiration bred by rallying speeches will not persevere through the combination unless leadership’s actions align with their words. The operating principles for the combination and desired end state come to life through the behaviors modeled by leaders. Momentum either builds or dissipates based on what employees observe from their leadership. At the very least, consistency between words and actions subdues naysayers. Anything less promotes cynicism and distrust toward leadership and drains and diverts energy away from contributing to a value-creating combination.2 How do executives build credibility during the transition? First, they are careful about what they say and sure about what they promise. Employees remember pledges like “We are partners

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in this together” and operating principles such as “equal opportunities independent of affiliation”; and they weigh the words against actions (how many people from each organization are appointed to senior positions?). This is not to suggest that equality is a requirement for a successful merger, but if it is promised, it should be delivered. A senior executive in an alliance between two health care providers publicly praised managers from the partner who “brought so much to the party.” But he ridiculed them in closed-door sessions with managers from his side. Picking up the cue, they began to disparage their counterparts. The result was an exodus of talent from the partner; first-year results were significantly below even the most conservative expectations, and the alliance itself suffered an early demise. By contrast, combination principles, when lived up to, can be a source of confidence for people. One of the principles guiding a retail combination was to be “development oriented.” To back this up, the combined entity immediately offered new training programs in customer service and marketing skills. This affirmed to employees that management was investing in them, kept many staff occupied through the planning phase of integration, and aroused their enthusiasm for working in the combined organization.

Dealing with Staffing and Redundancies In combinations resulting in substantial redundancies, acquirers need to complement their focus on cost cutting and organizational enhancements with increased efforts to motivate the managers who are implementing these steps and are critical to the long-term success of the organization. Certainly, executives can and should entice prospective acquirees by talking about their companies’ direction and the values that matter in getting there. But, as a global survey of over sixteen hundred managers found, concentrating communications on the big picture may be insufficient for retaining middle managers and others when confronted with new responsibilities in an atmosphere of great uncertainty.3 Three tactics help zero in on retaining needed managers. First, personalize the “signing up” by making a connection with individuals in such ways as expressing interest in their recent or

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past accomplishments and even their lives outside of work. Second, be up front about sources of stress including a lack of operational flexibility, repeated rounds of cost cutting, and, of course, uncertainty about job security. Third, help managers find meaning in the work and position the difficult job of combination cost cutting as an important step in achieving the desired post-combination organization. What about acquisitions designed specifically to obtain the seller’s know-how? In industries characterized by rapid innovation, technological complexity, and reliance on highly specialized skills and expertise, human capital may be the most sought-after resource. Here, losing the people—or even entire teams—with desired knowledge and skills means losing the value of the deal. One way to increase the likelihood of retaining them is to offer them a place on integration planning teams—this gets them feeling close to the action and seeing that they are well regarded by the buyers. Often, however, these employees are not top managers and, thus, are not considered for participation on transition teams. Financial incentives certainly have a role. However, studies of biotech, computer equipment, computer software, computer services, electronics, and communications acquisitions reveal something that matters more than money in retaining talent—the extent of autonomy in the combined organization. Granting autonomy increased feelings of status relative to the acquiring firm among acquired high-tech talent and, thus, reduced their tendency to leave.4 Important here is to convey any expectations set with acquired talent with counterparts in the lead organization—domineering actions from middle managers can quickly offset the power of pledges made by leaders.

Staffing Scenarios Staffing decisions follow top-level management appointments in a combination. Typically these follow four patterns, progressively more complicated when it comes to appointing and retaining top talent: • Staffing for back office and support function consolidation. This is common in acquisitions where the parent company takes

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over the bulk of its acquiree’s corporate functions and, depending on the level of integration, to some degree its communication, procurement, marketing, and sales activities. To be frank, the majority of acquired executives previously heading these functions typically depart. A key staffing challenge, then, is to hold on to the most capable personnel “next in line” at least through the integration phase and then to rescope skill requirements in light of diminished responsibilities. • Staffing to support a combined strategy and organization structure. This is found in combinations where corporate functions of an acquiree or merger partner may be consolidated but strategic functions, such as R&D, product development, and even manufacturing and marketing have to be carefully knitted together. Here a clear definition of the desired strategic, organizational, and cultural end state is essential. Then the challenge is to find “horses for courses”—choosing the best talent suited for realizing the desired ends. • Staffing for a full-scale merger. Here, despite proclamations of drawing from the “best of both,” it is not unusual for one side or the other to dominate the staffing in specific combined business units and functions. When Chemical Bank and Manufacturer’s Hanover merged, for instance, executives engaged in “horse trading” where specific units took on the premerger characteristics and staffing profiles of the better-run organization. This seemed an expedient compromise and it worked beautifully for a while. Then, when it acquired and took on the name of Chase Manhattan Bank, structure and staffing fault lines came sharply into focus. The new Chase undertook a full-scale review of all managers’ résumés and competencies and selected those best suited to advance strategic objectives. • Staffing for transformation and the future. As Pfizer’s Hank McKinnel announced when he began to integrate WarnerLambert, the process is about how “the best get better.” In this case, and others worth emulating, the human resource department assembled dossiers on managers and professionals at every level in the company and worked together with unit managers to ensure that the most capable

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employees were selected for jobs. Criteria for appointments were carefully defined and candidates were thoughtfully vetted in line with these criteria. Scorecards were maintained that highlighted staffing profiles for merged units not only according to premerger affiliations but also with an eye to fairness and diversity by gender, race, and national origin.

Downsizing Redundancy in corporate staff and capabilities in M&A may require staff layoffs and plant closures. There are humanistic reasons for treating layoff victims fairly and compassionately, but layoff policies should also be developed with an eye toward how survivors respond.5 As with every other management action during the combination phase, employees look for signals as to what life is going to be like in the new regime. Outplacement counseling, severance pay, extension of health insurance and other benefits, job-location assistance, and stress-management workshops are among the services that directly assist victims but also send a message to survivors that the organization cares and is ready to devote resources to soften people’s landings. Surviving employees’ perceptions of the fairness of layoffs are determined by their beliefs about why the layoff occurred as well as how it was implemented.6 They assess whether layoffs are truly necessary or are motivated by management greed or incompetence. Survivors also judge whether management could have achieved cost-savings targets through less severe methods, such as attrition. The implication here is that a strong case has to be made for why a reduction in force is essential to building the desired organization. In drawing their conclusions about what the layoff process says about their organization and its leaders, survivors consider the amount of forewarning given, the frequency and content of communications about the firings, the extent to which cutbacks are shared at all levels of the organization, and, of course, how victims are treated. The criteria for the cuts are also weighed. The specific criteria tend to be less important than whether those criteria are administered accurately and consistently. If leadership says that

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layoffs will be determined on the basis of performance and contribution but supervisors and managers are allowed to retain their favored people, then employee despair and distrust grow as quickly as faith and trust in the new organization decline. Certainly, exceptions to any rule must be allowed, but the reasons need to be explained. Also, if merit is measured through a questionable performance-appraisal system, an otherwise well-intentioned decision may be viewed as unfair. Finally, successful combinations allow time for people to grieve the loss of their coworkers when layoffs are required. The mourning process is natural, and people will not be ready to move ahead to the challenges and prospects of the new organization if they have not worked through their loss.7 All societies have some form of mourning ritual to help people deal with the loss of family and friends. Organizations, too, can sanction such rituals to help individuals grieve loss, let go of old attachments, and prepare themselves for new realities. Individual managers need not wait for formal company programs to help survivors mourn; listening sympathetically helps individuals work through their grief and anger over losses.

Maintaining Morale Managing people through a transition is delicate. All actions create reactions, and even the best intentions misfire. In the combination of two brewers, for example, management attempted to appease union officials and layoff victims through generous severance payments. This prompted surviving employees to feel like they were suckers; many cried out, “Give me one of those fat severance checks, and I’ll take my chances out on the street!” The challenge is to develop methods of helping people cope with uncertainty, loss, and transition that catalyze action toward the desired objectives of the new organization. How does this happen? The answer lies first in careful selection, and then mainly in accountability for the desired behaviors. Once leaders make clear what they expect and need from people to make the combination work, then they seek out and appoint to positions those who can enact the desired behaviors. Compromises made in staffing always exact a toll in the combined organization. Although

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sorting out expectations and experimenting with new methods are part of the transition from old to new, the time for moving on arrives and individuals either have to get on board or get off the bus. The senior executives we have seen leading successful combinations laid out in unambiguous terms what was expected of their management team and then were willing to back up their words with actions such as demoting or even firing people who did not abide by the operating principles. They did this not impulsively but only after clearly setting out expectations, providing feedback and support for desired change, and allowing time for individuals to let go of old attachments and get on board. After a realistic assessment of the situation, however, they acted decisively. It was time to move forward.

Putting HR Together In addition to contending with changes in their own function, human resources professionals have to support others in the organization. How people are handled during a combination and thereafter are of course influenced by how the HR departments of companies come together. The merger of HR in the HPCompaq deal provides some textbook examples of how to do this right. The cultural end state identified for this merger was “one new company, one new culture.” The HR integration team, headed by Susan Bowick, then EVP of Human Resources for HP, operated through three phases. In the first phase, the HP team conducted a current state analysis that compared the two firms’ HR strategies, structures, functional capabilities, and respective technologies. In the second phase, prior to close, the HP team was joined by counterparts from Compaq, validated the analysis, and set up “adopt and go” teams to recommend which side’s approach to adopt. At the integration phase, these recommendations were synthesized into goals and an operating plan. Each team had a disciplined methodology for integration covering four steps: 1. Scope the work. Define the tasks, responsibilities, and activities of each HR unit and function; determine geographic and business unit scope.

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2. Structure the work. Delineate the desired organization structure and processes; determine interfaces with the rest of the organization and accountabilities. 3. Staff the work. Define positions; nominate and select staff; enlist new staff and downsize accordingly. 4. Synchronize the work. Establish and monitor the schedule for a coordinated launch across HP functions, business units, and global organization. Behind each of these steps was a set of architecture principles. These included (1) customer and partner focus, (2) simplicity and operational excellence, (3) structure to enable winning in each business independently, (4) parallelism across organizations, and (5) ability to fuel new business—better time to market and accelerated innovation.

Accelerate Integration Appointments went quickly. HP delivered over sixteen thousand “fast start” appointments of key managers and professional staff. Day 1 “playbooks” on combined company policies, practices, and guiding principles were available on its corporate Web site. There were over 100,000 hits in the first hour. Meanwhile over seven thousand employees participated in online training that covered psychological and operational aspects of the combination. HP also delivered product cross-training in every region and prepared sales, service, and support personnel to represent the combined product line within months of the formal combination. Workforce Reductions This deal involved consolidation of corporate staffs and support functions along with staffing to support the combined company’s strategy. On the appointment side, the HR team scoped and structured work in the combined company and then worked with managers on the appointment process. When it came to handling reductions-in-force, personnel were notified by their pre-merger manager, continued to receive regular pay and benefits, and were invited to apply for open positions or be included in an electronic employment skill bank for job opportunities outside their current

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functions. Those who were let go received severance packages that were, by industry standards, generous. Upward Communication To track the combination, HP designed a 30/60/90-day survey response process to voice-of-the-workforce polling: survey results tallied in thirty days, issues identified and action plans formulated in sixty days, and implementation of responses under way by ninety days. Total Rewards The HR team developed a new compensation system that included base and variable pay, equity arrangements, reward and recognition programs, and fringe benefits. Typically, it can take up to three years to consolidate reward systems for merging companies. The HP-Compaq pay system was merged within six months and benefit packages were merged within a year. People Strategy Finally, the combined HR group took leadership on shaping the human combination broadly. A new HR strategy emphasized and provided Organization Development support to units to achieve a high-performance workplace. Policies and programs were benchmarked against best in class to make HP the “best place to work.” Balanced people management scorecards were created to ensure that managers emphasized people development as part of their postcombination management practice. In addition, executive training programs were revamped to focus on talent management alongside other strategic challenges.

Addressing Identity and Acculturation During the early phases of a combination, the overriding principle for minimizing the prospective loss of identity that people face is to respect premerger cultures. This is true even if the ultimate intention is to absorb a company and assimilate its culture. Managers who display consideration for their partner’s way of doing things, rather than denigrating it, are likely to gain a reciprocal sense of respect for their own culture. In cases where one

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side’s culture is going to dominate, respectfulness aids in helping employees see what the lead company is all about and what it has to offer in the way of structure, processes, and business behavior. And in cases where a new culture is being built—either through transformation or by selecting the best from both organizations —a tone of cross-cultural consideration helps employees open up to different ways of doing things rather than tightly hold on to their ways. One simple way to show respect for the other side’s culture is to ask its people how and why they do things. Most appreciate the chance to describe how they go about their work. Keep in mind that many of the people from the partner organization contributed to its history. Their contribution needs to be honored. Ultimately, though, integration decisions will be made that will impinge on company cultures and cause acculturative stress. For example, in their merger, Mt. Sinai and Samaritan hospitals in Milwaukee had similar organization structures, but the former had a well-entrenched bureaucracy and the latter had been through waves of downsizing, leaving it lean and mean. Here was a case, one physician opined, where the “anatomy” matched but not the “physiology.” Accordingly, we turn next to the challenges of managing a culture clash.

Chapter Eight

Easing the Clash of Cultures Scholars, businesspeople, and M&A specialists know that culture matters in M&A success. We’ve noted that managing cultural integration has historically been a low priority for executives consumed with the financial, strategic, and operational aspects of integration. Yet, with 20/20 hindsight, most acknowledge that underestimating the importance and difficulty of combining cultures was a major oversight in their integration efforts. In this chapter, we highlight why cultures clash and how the conflict unfolds in combinations. We then address best practices in easing the clash of cultures between firms.

Culture in Combinations Culture encompasses the way things get done in an organization. Typically, corporate culture is depicted as an iceberg where, above the surface, you see the physical manifestations and symbols of a company—its buildings, the layout of offices and facilities, its logo, official communiqués, advertising, and, if you look closely, the dress and manner of its personnel. Underneath the surface lay the bulk of the iceberg or, by analogy, the foundations of corporate culture. Here you find a company’s operating mission, roles, and norms, in addition to people’s understandings of how the business works, how it operates in the market, and its role in society. Deeper still are often unstated assumptions, beliefs, and values that shape its business philosophy and practices. Consider some examples of cultural factors in combinations:

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• Do managers make quick decisions and spend time selling others on their merits, or do they take time up front to build consensus and then implement decisions relatively quickly? • Does a business have monthly or quarterly meetings? Are there formal presentations, or do managers roll up their sleeves? Is the emphasis mostly on financials or on all aspects of the operation? • Does an organization typically attempt to promote people from within, or does it go outside to find the best person possible? Of course, there are subcultures within companies that center around divisions, specialties, or occupational groups. Engineers from two combining companies, for instance, may have more in common than the engineers do with the marketers in the same company. In many large companies, built through combinations, there are often subcultures based on people’s prior affiliations. Years ago, we were introduced to the senior executive team from the former Sperry Corporation. After meeting one particular individual, our host whispered, “He’s an RCA guy.” Sperry had acquired RCA’s computer operations a full twenty-five years earlier, but people still labeled their coworkers by their corporate heritage. In certain laboratories it was easy to tell who came from which side—technicians still wore their RCA lab coats and name badges. More recently, we found that people from HewlettPackard are quick to note whether a colleague is from HP, Compaq, or Digital Equipment Corporation (which was acquired by Compaq prior to its merger with HP). Lee Bolman and Terrence Deal call the power of a shared and cohesive culture an “invisible force” that gives a group of people its drive.1 In particular, they note how specialized language, history, and values foster cohesion and commitment and reinforce identity. Every organization develops words, phrases, and metaphors unique to its circumstances that both reflect and shape its culture. Additionally, in most highly successful organizations, stories keep traditions alive and provide real-life examples to guide daily behavior. An organization’s history and the values that underlie its past behaviors also reinforce both current and future behaviors. Common culture, language, and history are lost when an organization is merged or acquired. Indeed, continued reliance

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on that language, and reference to the glory days past, can set companies apart in a combination and emphasize differences rather than similarities in their values and experiences. This afflicted a newly formed management team following the combination of two international bank groups. A transition team dinner, attended by the combined bank’s North American and British executives, coincided with the retirement of a senior vice president from the lead company. After cocktails, wine with dinner, and glasses of port, stories rolled out about the executive’s outrageous behavior at social functions and meetings over the years. The dinner and storytelling was a cherished way for people from the one side to deal with the loss of a respected and loved colleague. They roared with laughter at the stories, lamented how his antics would be missed, and expressed genuine regret for the departure of a friend. Meanwhile, attendees from the acquired side, outnumbered two to one, sat passively and unengaged. In an impromptu debriefing a few days later, acquired executives reported that they were somewhat put off by what they regarded as an essentially “private” ceremony. They acknowledged, however, that they had garnered rich insights into the lead company’s mores by listening to the stories and observing their counterparts’ camaraderie.

Why Company Cultures Clash Companies have distinct histories, folklore, and personalities, in addition to distinct products, markets, and ways of running the business. A combination brings together companies with different cultures. What people notice first are differences between the two company cultures and what makes their own unique. Think, for example, of traveling abroad. What one notices is how a foreign land is different from one’s homeland. The same is true of a combination: people notice how their own company is different from a partner’s and begin to pay attention to what makes their company unique. Stages of Culture Clash The culture clash in a combination begins when people start to compare their company’s culture with that of another company.

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We’ve noted how the clash of cultures unfolds through several steps: • Perceive differences. At this first stage, people notice differences between the two companies, including their leader’s style, their products and reputation, the ways they make decisions, the kinds of people that work in the two firms, and so on. • Magnify differences. Next people begin to magnify differences that they observe. Instead of merely “different,” the partner’s ways become “very different.” Distinctions become sharper and more polarized. This is the start of “we” versus “they” when talking about cultures. • Stereotypes. Then people start to typecast others in a partner company as embodiments of the other culture. Every contact in a parent company is characterized as a “bean counter,” every engineer in an acquired software house is a “whirlybird,” and the buyer’s entire corporate staff are “storm troopers.” • Put-downs. The culture clash reaches full height as the partner company is put down as inferior. “We” becomes the superior culture and “they” are denigrated. The “innovators” in an acquired firm put down their parent company managers as “pants pressers” who were more concerned with neatness than running an entrepreneurial business. In turn, the “seasoned hands” at the parent company felt obliged to teach the “greenhorns” in the entrepreneurial shop a thing or two about running a “real” business. What’s behind this progression? Social identity theory suggests that people show a positive bias towards members of their own group and tend to hold a negative view about the members of an “out-group” in order to enhance the relative standing of their own kind.2 The in-group bias and “us-versus-them” comparisons are likely to be greatest when there is a perceived external threat, such as that posed by a combination. Particularly in the case of an acquisition or merger with a more powerful company, cohesiveness among members of a target firm is likely to increase and culture change may be fiercely resisted.

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Losing and Winning When individuals in a combination turn inward, they typically come to revalue key aspects of their organization and company culture. Implicit knowledge of how their company works, and how policies and systems sustain the firm, come to be explicit as employees reflect on what might be lost in a combination. Even as individuals begin to accept the inevitability of change in their personal circumstances, they may still reject the idea that their company and its culture will become subordinate to another firm and its ways. The difficulty here is that in accepting another culture’s way of life they anticipate a higher risk of failing as individual performers and as part of an enterprise. Beliefs and values embodied in a company culture are not just about how you dress, what you pay attention to, or how you make decisions, however much these may be manifest in the surface culture of a company. At a deeper level, these provide guidance for being successful. People in companies that are traditionally decentralized often believe that this gives their operation its market focus, and themselves the running room, to get close to the customer and effect change “on a dime.” At least these were the themes reported in a meeting with acquired North American Rockwell managers and engineers. They fit together into a recipe for success in the marketplace; take any one ingredient out—or, worse, centralize operations—and the recipe is no longer reliable. Rockwell employees fretted that they would not be successful working under more-centralized Boeing’s tight fist. Furthermore, they feared that the combined company would move like a snail and lose out on peripheral business. On the other side, culture clash affects self-described winners in a combination as well. They also notice and magnify differences in cultures and feel a sense of cultural superiority. After all, their side has made the buy or is on top in an alliance. Affiliation with the dominant side in a deal is received as vindication that one’s own ways are superior to the other side’s. Headiness develops and reinforces the winner’s recipe for success. Hence Boeing managers, while cognizant of the merits of decentralization, nevertheless insisted that the economies of scope afforded by centralization was a key to competitive advantage in the marketplace.

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Stepford Wives Versus the Hell’s Angels One of us worked with Apollo when it was acquired by HewlettPackard two decades ago. Apollo was, at the time, number one in the computer workstation market, HP was number three, and Sun Microsystems was number two.3 In an early gathering of managers and technologists, word went out that HPers were all gracious and polite or—to stereotype—like clones from another world in the film “The Stepford Wives.” Meanwhile, Apollo’s top technologist rode into the meeting on his Harley-Davidson motorcycle; actually through the main door, up the stairs, and into the second-floor meeting room. That captured the cultural story of this combination: “The Stepford Wives” acquire the “Hell’s Angels.” Certainly there were cultural differences in the ways the two sides operated their businesses (see Figure 8.1). HP, for example, had core competencies in engineering and in marketing. Apollo’s core competency was R&D. HP was noted for its quality-mindedness and management. Apollo was all about speed. The acquisition was based on theoretic synergies that Apollo’s leading-edge technology could reach a broader user base through HP. In turn, its fast time-to-market strength could be combined

Figure 8.1. Hewlett-Packard Versus Apollo Cultures. Company Cultures

HP

Apollo

Theoretic Synergies

Engineering and Marketing

R&D

Leading Edge Technology

Quality

Speed

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Functional

Planning

Ready, Fire, Aim

Professional

Entrepreneurial

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Our Way

My Way

Broader User Base Faster Time to Market Product Reliability Technology Transfer

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with HP’s superior quality manufacturing. The combination logic was to have Apollo take over leadership of design and HP to build and distribute the workstations. The problem was that the two companies didn’t fit together. HP’s organization structure was matrixed and operated through a global planning and coordination system. Apollo was much smaller, functionally organized, and tightly integrated with fast feedback loops from the market to the designers to the manufacturers. That’s how they kept leapfrogging Sun. HP’s taking control of manufacturing would break up this competitive capability. But the costs of running separate manufacturing operations would be substantial. HP took over manufacturing, Apollo slowed down, and Sun revved up and, ultimately, gained the lion’s share of this market. End of story? Certainly an “organizational misfit” hampered success. But, a postacquisition review concluded that the new organization could have worked, if only the two sides had learned to talk together and “get along.” Here deep cultural differences were pronounced. HP people were very professional and collegial. They were accustomed to working things out. Apollo technologists, by comparison, were highly entrepreneurial and political. When conflicts arose, they typically slugged it out. HP had great teamwork. Apollo operated with a “star system.” People who had their “name” on an innovation dictated their own working terms. All of this was based on two very different cultural models. HP, ever since its founding in the garage in Palo Alto, had operated according to the “HP Way.” This included the values and business-related behaviors listed in the figure, reinforced by selecting people that fit the mold, grooming them in corporate customs, and producing collegial HPers who, in the eyes of another culture, could seem like clones. The model at Apollo, without much history and high turnover, was that everyone did things “My Way.” Inarguably, the cultural clash between HP and Apollo also figured into its failure. The irony, interestingly, is that the biker stayed with HP and helped to transfer technology that ultimately gave the company leadership in the printing business. A consultant laughed, with some justification, that this, in and of itself, made the deal pay off.

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Managing Culture Change in a Combination Acculturation results when contact between two autonomous cultures requires change in one group or both. Although, theoretically, acculturation can result in a balanced merging of two cultures, anthropological studies suggest that this balance rarely occurs.4 Instead, one group typically dominates the other and influences the direction of cultural change much more strongly than the subordinate group. Despite the cacophony of a culture clash, the opportunity to proactively build a shared culture remains one of the great benefits of joining forces. We have worked with executives who used a combination to replace entrenched aspects of their legacy culture with more desirable cultural characteristics. Two large health care systems, for example, freed themselves of bureaucratic constraints and nurtured a more entrepreneurial approach to conducting business; two consumer products firms found a comfortable medium between one side’s labored decision-making style and the other’s shoot-from-the-hip approach; and two aerospace companies melded one side’s engineering orientation with the other’s penchant for sales and marketing. Of course, the work of building a desired culture is difficult. It requires breaking down old norms, articulating new ones, convincing people why the new way is superior to the status quo, being patient as employees experiment with bringing their on-the-job behaviors in line with espoused cultural norms, and reinforcing the new ways through rewards and recognition. All of this takes time. People who study culture change in organizations say it takes seven to ten years to break down the old and build the new culture. There are four sequential tasks for harnessing the power of culture to contribute to achieving a combination’s financial and strategic objectives while minimizing the potential culture clash: 1. 2. 3. 4.

Define a desired cultural end state. Deepen cross-cultural learning. Pace the combination with cultural sensitivity. Drive the combination toward the desired end.

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Define a Desired Cultural End State Earlier, we highlighted the importance of conducting cultural due diligence to identify areas of potential “fit” versus “misfit” between companies joining forces. We stressed, too, the importance of defining a cultural “end state” to inform the vision of the combined company and to set parameters around levels of integration. This has four key benefits in the combination phase. First, it sets a context for leaders’ roles on both sides of the deal and creates guidelines for transition teams to plan desired levels of integration. If a buyer is clear that it intends to fully integrate a target, then saying so means that energy is less likely to be diverted from planning to politicking by acquired managers who otherwise may plot ways to maintain their autonomy. By contrast, when cultural preservation is desired, lead company managers need to take their cues and back off from attempting to dominate the action. Second, cultural definition can help to clarify any disconnects between the expectations of combining managers. Research by Afsaneh Nahavandi and Ali Malekzadeh finds that acquired parties typically approach integration decisions based on the extent to which they want to preserve their own culture versus how willing they are to adapt to the acquirer’s culture; in comparison, acquirers approach it based on the degrees of multiculturalism in their own organization and the relatedness of the two firms.5 Incongruence between expectations is likely to lead to “acculturative stress.” Key employees may leave, active resistance to integration may occur, and conflict is likely to erupt. A third reason to clarify the desired cultural end state early in the M&A process is to provide some behavioral anchors for employees as they develop expectations for life in the combined company. Research finds that unless people can locate fixed points, dependable principles, or stable benchmarks, they are apt to make up their own behavioral rules.6 A statement of a desired end state counters ambiguity and shapes outlooks. A fourth benefit is that statements of the end state can help employees determine whether or not their leaders possess the skills and fortitude needed to successfully move the organization in a desirable direction. Again, research finds that a leader who

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conveys specific and challenging standards as part of a broader vision is more apt to gain a following than someone who “doesn’t know where they are going.”7 Multiple Modes of Acculturation There are instances, of course, where the cultural end state may not be the same for different components of an acquisition and merging partners. Certainly, at the broadest level, senior executives need to decide how much to culturally integrate two firms in their combination, but when it comes to putting together, say, manufacturing or marketing, the synergies therein may dictate different levels of cultural integration. Pfizer’s acquisition of Warner-Lambert provides a good example of how initial conceptions of end states differed for various parts of the organization: • Prior to the acquisition, Warner-Lambert made an investment in a biotech firm but never fully integrated it. Recognizing the huge cultural distance between biotech start-up and the pharmaceutical behemoth—and the need to not disrupt the human capital being acquired—Pfizer leadership swiftly called for cultural preservation. • Warner-Lambert’s finance function was fully integrated into Pfizer’s. Pfizer’s financial reporting and control systems had prevailed during many previous acquisitions and there was no strategic reason to modify them in this one. • Warner-Lambert had a much larger consumer products business than Pfizer, so Pfizer’s operation was assimilated into that of the acquired firm in a reverse acquisition. Pfizer leadership admired the target’s approach to brand management and sought to adopt it. • Human resources was best of both—although Pfizer’s team knew they had a reputation for being a “best place to work,” they were not so arrogant to assume they could not learn something from their partners and, indeed, adopted former Warner-Lambert practices in such areas as college recruitment. • Transformation was the cultural end state for R&D—to have any chance at achieving the bold promises made by Pfizer’s CEO when he pitched the deal to Wall Street, the very

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process of discovering and developing a pipeline of new medications had to be reinvented in the combined organization. It is common for the cultural “end state” to evolve as the combination proceeds and partners learn more about one another. Thus, establishing an end state is more of a journey than a destination and it benefits from on-the-ground fact finding and twoway exchanges between the two sides. This, in turn, calls for dialogue and deep cultural learning from both sides of the deal.

Deepen Cross-Cultural Learning Easing culture clash rests on acknowledging its presence, educating employees as to its dynamics, and preparing people to appreciate how initial impressions influence enduring cultural perceptions between the partners. Several companies we have advised include modules for easing a culture clash in training programs they offer to managers and employees. These sessions help people to recognize differences between the companies and to expect a clash of cultures. Select firms go further and engage in what is termed deep cross-cultural learning. In a rare field study, David Schweiger and Philip Goulet examined three levels of cultural learning during an acquisition— none, shallow, and deep—and found an interesting relationship between them and the subsequent integration of plants in an acquired firm.8 In the case of no learning, they found, not surprisingly, no relationship to eventual integration success or failure. By contrast, deep culture learning interventions, involving crosscompany dialogue, culture clarification workshops, and the like, had a strong, positive effect on integration success. Measured results included greater cross-cultural understanding, smoother resolution of cultural differences, more communication and cooperation between combining parties, and greater commitment to the combined organization. What fascinates in this study is that shallow learning—for example, show-and-tell presentations, official communiqués, informal Q&A, and such—did little to clarify and eliminate inaccurate cultural stereotypes or to reconcile differences between the partners. On the contrary, these

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had the undesirable effects of strengthening perceptions of cultural differences and reinforcing stereotypes that contributed to conflict between the organizations. Based on this research, it seems that it is better to do nothing about culture clarification than something superficial and perfunctory. The best approach, of course, is to devote time and resources to deep culture learning, especially during the combination phase. Culture Clarification Exercises To understand a culture, you need to appreciate the whys behind the whats that you observe; you need to get below the surface. Misunderstandings and communication breakdowns result from managers’ lacking the means to decode, translate, and contextualize the overt messages and publicly available information about their partners. Unless key players from the combining organizations learn to read these deeper roots of the other side’s culture, then mutual working relations remain under threat. Several practices have been developed to help combining managers gain a deeper understanding about each organization’s culture and ways of doing business. We have used a hands-on cultural-clarification activity to help teams joining forces to learn about one another. The activity has both partner groups make three lists: (1) how we view our organization’s culture, (2) how we view the other side’s culture, and (3) how we think the other side views our culture. The rosters include business practices, interpersonal behaviors, and values. It is important that participants are instructed to include characteristics that either have been experienced firsthand or heard about secondhand. The intention here is to unearth all the perceptions and stereotypes that are circulating about the partner. Figure 8.2 shows a sample of the output completed by the combining senior executive teams from an energy-industry alliance. The two groups had been working together for about two months, so they had plenty of time to develop initial impressions of each other. In the lists, we see how both sides tend to describe their own culture positively and be more critical of the other side’s culture. For example, company A views itself as having a balanced business and technical approach but regards company B as being primarily financially driven; subsequent conversation

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• Bureaucratic • Consensus management • Too polite • Unwilling to change • Vertical career path • 1950s organization • Decisions made at the top • Big-customer oriented • Project-oriented • Too serious about themselves

How Company B Views Company A’s Culture • Bureaucratic • Consensus decisions • Gentleman’s club vs. “hard assess” • Arrogant • Layers of management • Respected competitor • Willing to take business and technical risks • Overfacilitized

How Company A Thinks Company B Views A’s Culture

How Company A Views Its Own Culture • Responsive to the customer • Program-management-oriented • Collegial decision making • Respectful of people • Participative • Civil • Balancing business and technical approaches • Emphasizing ethics and integrity • Having structured management • Having problems with small projects

• In your face • Processes not documented • Line-of-business orientation (not project orientation) • Decisions don’t hold — need to argue and revisit • Darwinian system • Financially driven

How Company A Views Company B’s Culture

• Rude, in your face • Undisciplined • Nontraditional energy company • High risk takers • Stubborn • Technologically neophyte

How Company B Thinks Company A Views B’s Culture

How Company B Views Its Own Culture • Push back required • Empowered • Setting the bar high • Delayered organization and small staff • Broader career path • Change-oriented • Minimal oversight • Giving priority to financial performance • Having sense of humor • Preferring speed and simplicity

Figure 8.2. How Two Companies View Each Other’s Cultures.

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revealed that company A regards B’s technological expertise as inferior to its own, a sore point because company B didn’t see it that way. Frequently, the two sides agree on their differences. In the energy alliance, company B has a behavioral norm of confronting people head-on over disagreements. They cite this in their roster as “push back required.” Executives from A describe it as “in your face” and “decisions don’t hold—need to argue and revisit.” Interestingly, executives from B know this behavior irritates the “too polite” A group. In their list of how they think A views them, the company B executives unambiguously report “rude, in your face.” When this cultural distinction was aired, it led to a discussion between the two groups regarding the desired norms for their combined culture. Both sides agreed that A’s style was too reserved and polite; a faster-paced style of decision making and more head-on debate of the issues were required. But A’s executives felt that B’s style went too far in the other direction. Together, the two groups settled on a desired end state of “polite confrontation”: speak up and challenge, but not rudely. The example shows two of the values of the culture clarification process. First, it reveals for both partners the language that is used behind closed doors as one side discusses the other. What B values as “push back,” A distastefully regards as “rude.” Second, this activity engages the two sides in discussing which aspects of the existing cultures should be retained in the combination and which should not be carried forward. When this culture clarification exercise was used in a large bank merger, for instance, both sides characterized their cultures as bureaucratic, and neither wanted to retain so many layers of staff and decision approvals. Perhaps as testimony to why culture change takes so long, their follow-up action step was to establish a committee on eliminating bureaucracy!

Pace the Combination with Cultural Sensitivity Cross-cultural dialogue, clarification exercises, and survey data all inform not only which elements of two corporate cultures to combine or leave intact, but when to sensibly move toward integration. How do you factor in timing and the potential for a

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Integration: How important to our Strategy, Savings, Synergy?

Figure 8.3. Benefits Versus Ease of Integration. High

Combine Quickly

Combine Carefully

Coordinate, Combine Slowly

Low

Combine as Needed

Separate

Easy

Hard Culture Clash: Ease of Integration?

culture clash when planning integration? We worked on a study of more than one hundred banking mergers with the Management Analysis Center of Cambridge, Massachusetts, to develop a framework for this purpose (Figure 8.3).9 The vertical axis considers the business case for how much to integrate companies. The key question is, “How important is it to integrate this function for purposes of strategy, savings, or synergy?” The horizontal axis considers the cultural case for integration; its key question is, “How easy will it be to put the two functions together?” This latter question considers the degree of culture clash that will erupt and attendant consequences for staff turnover, customer defections, operational hassles, and managerial headaches. Figure 8.4 shows how this model was used in a high-technology merger. Managers chose to combine quickly in the areas of marketing and product development. The two sides were familiar with each other’s product lines and had worked together in several large customer accounts. As for the sales force, the case for rapid consolidation was compelling. However, the two sides had different sales approaches, and there was a considerable risk that salespeople would leave for competitors unless their needs

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Importance to: Strategy, Savings, Synergy

Figure 8.4. Cultural Integration Map for High-Tech Companies High Sales

Marketing

Create Technology Council

Product Development Corporate Services Human Resources

R&D Manufacturing

Low Easy

Hard Integration

were addressed. Thus management went on a campaign with the combined sales forces that included seminars on how the product lines fit together and incentives for selling package deals combining products from the two partners. In addition, there were off-site sessions held where the two sales forces could mingle and socialize, with hats, T-shirts, watches, and other corporate identity material. At these events, senior sales management did plenty of ego massaging. Plainly their aim was indeed to combine carefully. In turn, leaders decided to combine as needed several human resource programs and various policies and procedures where savings would be modest. Importantly, they also agreed to keep the basic research-and-development functions of the companies separate. At the same time, the company formed an internal technology council that brought together researchers and manufacturers to build camaraderie and inform strategy. This council held regular brown-bag lunches, where technicians and professionals from the two sides could mingle and compare notes. What emerged was a kind of cultural coexistence between hardware and software types under an overarching company culture of technical excellence.

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Finally, leaders decided to run several corporate systems— such as sales order entry, scheduling, and the like—in parallel at least through the first year of the combination. That way, sales personnel could focus on customers, and manufacturing could focus on deadlines, without the hassles and hang-ups entailed when integrating systems. In most instances, the lead company with its generally superior systems took over things, but the changes were eased into place.

Drive the Combination Toward the Desired End The tasks of setting a cultural end state, deepening cultural learning, and pacing the combination are fairly similar across different types of combinations. At this point, however, the mind-sets and methods involved in moving from the precombination cultures to the postcombination culture depend on the desired end state. Although there are many possible levels of acculturation in a merger or acquisition, four are most prominent: • Cultural pluralism, in which the partners coexist • Cultural integration, in which the partner companies blend current cultures together • Cultural assimilation, in which one company absorbs the other • Cultural transformation, in which the partner companies abandon key elements of their current cultures and adopt new values and norms Let us consider the key issues and best practices in driving combinations toward these different ends. Cultural Pluralism: Preserving a Culture Cultural preservation is most common in highly technical industries, such as pharmaceuticals or biotechnology, where acquirees need the capital, management support, and technical assistance to bring new ideas through to the market, but also the freedom to invent and develop them. IBM’s acquisition of Lotus is an interesting counterpoint to HP’s challenges in trying to fully integrate Apollo. The parent company paid a premium for the

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software and groupware house in Cambridge, Massachusetts, and sold the deal on the basis of its full integration into the fold. And there was an obvious culture clash between the global “Big Blue” and the “Lotans” based in the People’s Republic of Cambridge. But as transition teams analyzed integration options for the two companies and future market prospects, they concluded that Lotus needed its cultural autonomy to maintain its technological edge. Yes, IBM would absorb its sales force and exercise strategic control. But otherwise Lotus would have the freedom to do its own thing. What did this look like in practice? First, two Lotus executives, Michael Zisman and Jeffrey Papows, assumed dual leadership of the company upon the departure of Jim Manzy, the Lotus head at the time of the acquisition. Zisman, who joined Lotus via an acquisition, and Papows, a longtime veteran, had the confidence of the staff and the skills to work with a parent company. Second, Lotus retained many of its cultural traditions and artifacts. For example, staff continued to receive Lotus paychecks and benefits and, more important, Lotus kept its brand identity and product portfolio. Moreover, John Thompson, head of IBM software, kept a full-time executive on his staff who served as a gatekeeper for Lotus, making sure that corporate staff, armed with systems and procedures typically foisted on subsidiaries, were held at bay. On the other hand, Thompson encouraged Lotus people to engage his staff. Indeed, he was quoted as saying “Frankly, I wanted some of our employees to behave more like Lotus employees.” Finally, there were key signs that the parent company could learn something from the Lotans. At his first meeting at Lotus, IBM CEO Lou Gerstner was asked whether or not Lotus would retain its domestic benefits policy covering same-sex couples. This was rare among employers at the time and very much in the news with protests by conservative groups and business leaders, including some big IBM customers. Gerstner deferred commitment in the moment but understanding the symbolism, later announced that not only could Lotus keep this benefit, it would be the policy for all IBMers. On the more substantive side of acculturation, IBM effected a reverse merger when it consolidated its software manufacturing in Lotus facilities and under Lotus leadership.

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Nowadays, few remember IBM’s legacy software OS2, or Lotus 1–2–3 for that matter, but customers know Lotus Notes and the company behind it. Cultural Integration: Best of Both In a merger of equals or an acquisition with the intention of selecting best practices from the partner organizations, the consequences of how culture is managed are substantial—the two sides will either work through their differences or fight over them like cats and dogs. To begin working through, it is helpful to have the partners identify the values and practices of which they are most proud. The top teams in a major financial services merger separately listed cultural elements that they wanted to carry forward into their combined entity. The “new” firm that emerged emphasized reliable work processes and speedy delivery— strengths that the respective partners brought to the deal. This activity also highlighted “undesirable” cultural characteristics, such as bureaucracy, which were present in the premerger partners and were weakened in the process of combining the banks. Obviously, a best-of-both combination looks toward cultural integration. But will the market reward it? Is it the best model for employees and customers? Can you pull it off? In a merger between two hospitals with different religious affiliations, for instance, attempts to create distinct medical specialties in each generated resistance from both patients and staff. Furthermore, cross-hospital meetings and dialogue were met by a collective “blah” from nonmedical staff and nurses; physicians did not even bother to attend. Thus, executives focused integration on consolidating the two back offices and a variety of administrative functions such as purchasing. In essence, a holding company was created and the two hospitals retained their unique identities in the market as well as for the majority of employees. This result solves, to an extent, any culture clash problems but robs a combined company of value-creating synergies that could come from transferring best practices across company lines and from shared learning. Proctor & Gamble’s acquisition of Gillette is an example of how to do these two things right. This was a very big acquisition: P&G had sixteen billion-dollar brands in its portfolio and Gillette had five. The lead company had over 110,000

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employees at the time of deal, the target 30,000. As one P&G manager put it, “that’s a lot to digest.” There were plenty of similarities in their markets and complementarity between their brands. Gillette, for instance, was a leader in men’s shaving and grooming products. P&G had stronger brands among women. Both had storied histories of innovation. This led some to believe the two sides could be folded together smoothly, like shuffling a deck of cards. A closer look at their traditions and culture, however, recommended otherwise. The combination was overseen by a top-level steering committee and activated by over a hundred transition teams looking into every function, brand, category, market, and country. Tough decisions on structure and staffing were based on which company had the best to offer. Gillette would operate as a global business unit (GBU) in P&G with razors and blades, Braun, and Duracell. Its oral care businesses, by comparison, would fold into a more P&G-dominant GBU. Was this all just a matter of strategy and savings driving the integrated structure? Not fully. Surveys and dialogue revealed many similarities but also some sharp differences between the two sides’ cultures. For instance, Gillette was far more centralized and top-down than P&G, where local markets owned more of the decision making. (“More decisions flow out of Boston than Cincinnati.”) P&G was far more data driven than Gillette, which tended to rely on “intuition and experience.” Gillette was leaner, simpler, and faster than its much larger partner. By contrast, P&G was far more open and communicative with staff. These cultural factors argued to let Gillette operate as a subsidiary in the GBU and, in effect, to allow the two companies run in parallel for a time. What about best practice sharing and learning? Transition teams and, later, operating managers kept to their pledge to pick the best of both. In procurement, a merged function, synergy summits were held involving large numbers of the combined companies’ 115,000 suppliers (who accounted for 25 percent of P&G’s product innovations at the time of the deal). The two sides worked carefully to engage one another’s suppliers, extolling them on the advantages of doing business with one bigger company, and inviting innovations across GBUs and category boundaries.

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When it came to putting the combined procurement organization together, Gillette’s expertise in contract manufacturing and customized distribution integrated with P&G’s know-how on optimizing distribution center’s location and operations. On a broader scale, there is more and more open communication with staff in the “old” Gillette and P&G is piloting a new “streamlined” decision-making process linking marketing and distribution in Western Europe.10 Cultural Assimilation: Absorbing a Culture Cultural assimilation is probably the most common end state in acquisitions. Regular acquirers, such as Cisco, have worked out successful methodologies for more or less assimilating subsidiaries; however, because of the human talent and technology transfer potential involved, they also permit acquired designers and engineers plenty of cultural autonomy. General Electric, by comparison, has its own formula for successful integration that calls for the rapid absorption of acquirees. We’ve described how GE carefully selects, grooms, and orients its acquisition leaders. In addition, a cultural assessment is part of GE’s due diligence and is used to identify potential barriers to integration success. In the combination phase, GE has what it terms a “rapid integration” plan. On the culture end, this involves interviews with acquired leaders, focus-group discussions, a survey of acquired management and sometimes staff, followed by analysis and a “cultural workout” session with both sides, preferably at GE’s training center in Crotonville, New York.11 Here’s how the process works. Using the results of focus groups and interviews with customers and employees, a computergenerated analysis is developed that plots the acquired company’s culture on a scattergram across four dimensions: costs, technology, brands, and customers. The analysis also contrasts how employees see the company with the way customers see it. A similar survey is done for the GE Capital business. Next, as part of the first hundred-day integration schedule, the two sides meet and share information about their respective histories and culture, and their cultures’ differences and similarities. Particular emphasis is on business-related behaviors: how to go to market, emphasis on innovation versus costs, how authority is exercised, and so forth.

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The latter half of the workout concerns future directions: where the company is going, its future aspirations, and how being part of GE can help to fulfill those ambitions. This results in a revised business plan based on goals established in the original deal and new considerations developed in discussions of business directions and cultural issues. One of us has worked with GE and the process is not as mechanical as it sounds. Still, it is very clear that it is about assimilating into GE and learning to work with tools, processes, practices, and language common to all GE units. GE power and medical systems divisions have their own versions of rapid integration, as their deals are larger, involve greater ownership by GE, and often involve cross-fertilization and technology transfer. But the end state is the same. We advise adding some points on the human touch. Overcommunicating the benefits in combinations of this type means not only selling people on the business case for the deal, but also on why embracing aspects of the lead company’s culture is appropriate for the combined organization. The more that people see a direct link between the lead company’s ways of operating and enhancements in getting work done, the more likely they are to accept them. Employees may even welcome the new culture if a case is made for how it will address perceived weaknesses in the target’s ways of doing things—for example, when an established firm with big marketing muscle takes over a start-up with a great product but little marketplace experience. Cultural Transformation: Building a New Culture Cultural transformation, unlike the other types, is about creating a new identity and way of operating—not “blending” the two legacy cultures but rather creating a new one. In transformational combinations, rather than valuing premerger strengths, interventions that allow people to find fault with their “old” cultures can be helpful. Research has shown that self-criticism is an important element in attitude change.12 It can free people up from prior attachments and discredit sacred cows. When wireless transmission network providers Harris Microwave and Stratex Networks combined based on its board’s vision of a transformational merger, executives from the partner companies initially selected the name Harris-Stratex Networks.

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Early integration planning met resistance and generated outright hostility between the partners. When the board brought in new CEO Harald Braun from outside the company, he encountered employees holding on to mugs, posters, and other everyday reminders of their precombination affiliations—as well as their systems and procedures. Practically no progress had been made on transforming to a new company with new ways of doing things. Braun wanted to demonstrate visibly to people they were part of something new and not a hyphenated continuation of the past. He commissioned a new company name—Aviat Networks—and introduced it at an energizing and tightly choreographed corporate global rebranding event. Executives led employees in pronouncing the company’s new name and then gave strict marching orders: Erase all traces of the previous name from the office by the end of the day. That meant taking coffee mugs, packaging materials, and marketing items out of the office or to the trash. In Indian and Asian locations, employees burned symbols of the old in ceremonial fires. Next came new business cards and e-mail signatures and re-recording voice mail greetings. “I wanted to create a positive ‘wow’ event,” noted Braun, “People jumped out of their chairs when we unveiled the new name—that showed me they were really ready for something new.” In another transformational merger, work groups from the two sides exchanged videotapes of people destroying their premerger work badges. In a third, a “Trash Bin Project” was established for employees to submit examples of work processes and policies that they did not want to carry over to the combined organization. We will see a transformational combination in the case of Unilever and Best Foods in a later chapter.

Cross-National Culture Clashes To conclude this look at easing the culture clash, it is important to consider the case of cross-national culture clashes in M&A. Part of a firm’s cultural heritage is linked to its roots in the national culture of its home country. Differences in native language, customs, business practices, and interpersonal norms all enhance the difficulty of establishing positive and productive working relationships in cross-national deals. Matters of title and salutation,

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expectations as to dress and demeanor, and even how one shakes hands and enters a room have different meanings in different national cultures. Protocols exist, and combining managers can be put off when their customs are disregarded, inadvertently or not. A review of academic studies has yielded competing points of view regarding the relationship between national culture differences and M&A performance. One set of studies finds that such differences have a negative impact on functional integration and organizational effectiveness. The conclusion is that national differences can compound corporate cultural differences and thus slow the pace and hamper the physical integration of firms. Other studies, however, find that differences in national cultures between parent and target firms can have a positive effect on product synergies and sales growth. Certainly buying across borders gives a firm access to unique capabilities that are embedded in a different national culture. This can also benefit a buyer by expanding the knowledge base available to establish distinctive competencies worldwide. The rationale here is that differences rather than similarities between combining firms create more opportunities for synergies and learning. Managers also tend to be more alert and sensitive to cultural dynamics in cross-border combinations than in domestic deals. In sum, there is no definitive answer to whether or not national cultural differences help or hurt the success of M&A. Certainly they add complexity to integration and can exacerbate a culture clash. We found this in a Dutch-German merger where one manager remarked that the two sides were “refighting WWII.” It was very much a factor, too, in the supposed “merger of equals” between Daimler-Benz and Chrysler.13 However, to put national culture differences into greater perspective, a useful study by Right Management Consultants of 156 mergers joining U.S., European, and Pacific-Asian firms found that, though they can be significant, national culture and language differences are far less of an obstacle to M&A success than differences in corporate culture.14

Managing Culture Clash in International Combinations The impact of cross-national cultural differences on eventual M&A performance depends on how they are embraced and

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addressed. Combining across national borders ratchets up the importance of understanding and respecting cultural norms and taboos. Organizations prepare managers to work more effectively in international combinations first by increasing their awareness of personal learning and communication styles and, second, by getting them to understand the significant aspects of their own culture, how it influences their attitudes and behaviors, and how it is perceived by others. Managing cross-border issues requires people to have the communications skills and cultural awareness to bridge differences. Some organizations only select managers with multinational experience to key positions in international alliances or to lead foreign acquisitions. Language is a fundamental consideration. Key personnel involved in international acquisitions and alliances should certainly speak the language of the country where business is to be conducted. Even if a manager can hold only a simple conversation, the other side recognizes the effort and appreciates the symbolic gesture of reaching out to their culture. Many organizations train their expatriates in the norms and business practices of other countries before sending them off to combination duty. Some go a step further and prepare people for cross-border combinations through programs that give managers insight into their own styles of sharing information, giving and receiving feedback, listening, and developing open lines of communication. These sessions also impart actions for developing a climate that recognizes differences and sees them as a positive basis for building the combined organization. Although cultural boot camp helps prepare managers, frontline skirmishes inevitably occur. When they erupt into full-scale battles, the parties need to come together to mutually understand and address the underlying issues. In the acquisition of a mediumsize British engineering firm by a large Swedish company, leaders invited British managers to discuss and defuse a consultant’s diagnosis of cultural misunderstandings and differences.15 At the opening of the meeting, British managers vented their feelings and frustrations with the Swedish parents—and with Swedes and Sweden in general. They identified those areas of cultural differences they found most incomprehensible in their day-to-day work and then moved on to discuss the company motto, “Be of

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humble spirit.” For the British, “humble” was a term encoded with servility (such language confirmed their fears that they had to behave passively), whereas for the Swedish it was encoded with respect. The Swedish leadership described what they intended by the phrase, acknowledged differences in meaning from the British and Swedish perspectives, and urged their British counterparts to consider the underlying message and not the literal translation of what was meant to be a philosophy of respect and not domination. The aim of the session was to shift the British managers’ perceptions of the problem and its meaning away from their ethnocentric perspective and more toward a shared perspective. Additionally, the session indicated to the British that the Swedes were sensitive to their situation and willing to work together to understand the deeper issues that were afflicting the combination. In summary, it is undeniable that cross-border deals add cultural conundrums to combining companies. Yet many succeed on the commercial and cultural front. Our hypothesis is that, because of the obvious integration challenges, managers are more attuned to managing a culture clash in cross-border M&A and more apt to display cultural sensitivity in their dealings with counterparts. As the combination phase segues into the postcombination and integration planning and dreaming turn into implementing and reality testing, employees will be confronted with multiple—and almost always conflicting—forces for and against the desired culture. Some of these forces will be internal to individuals—on the downside, some people may have wishful yearnings to stick to former and familiar cultural values and norms; more positively, others will feel a genuine desire to be part of something new and exciting. Many forces influencing the extent to which culture clash persists or a desired culture prevails, however, will be external to individuals. As we discuss in the next section, organization and culture building head the list of tasks in the postcombination phase to keep a deal on the successful track.

Combination Checklist As the combination gains approval, the transition structure generates recommendations within the context of the deal’s strategy and vision. The senior team models teamwork and attends to inevitable outbreaks of culture clash and to culture building opportunities. As structural and staffing decisions get made, proactive steps are taken to help people cope with transition, minimize the impact of painful actions like downsizings, and build energy and excitement for the combined organization.

Combination Phase Action Checklist Strategy Follow strategy and vision 䊐 Abide by critical success factors 䊐 Establish integration principles and priorities 䊐 Remain flexible as more and more is learned about partners Develop business unit strategies 䊐 Set interim goals 䊐 Identify interim budgets Organization Study opportunities to build a new and better organization 䊐 Exchange information across partners 䊐 Use the relatively unfrozen period to initiate the change process

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Establish the senior team 䊐 Appoint senior managers 䊐 Begin building teamwork at the top Cascade the structure down the organization 䊐 Unfold the organization down from the senior positions People Make staff selection decisions 䊐 Develop competency profiles of people needed to be retained 䊐 Take actions to retain key talent 䊐 Develop management skills to “re-recruit” desired employees 䊐 Roll out staff selection process Establish and implement redundancy processes 䊐 Identify staff who will be required to leave or offered a voluntary exit option 䊐 Notify each employee individually with customized package and provide outplacement counseling Conduct management capabilities workshops 䊐 Deliver programs for managers and supervisors to communicate effectively and maintain productivity during transition 䊐 Continue transition stress management programs for employees Roll out communication program 䊐 Clearly define who will receive what, when, how, and from whom 䊐 Provide the why underlying the what 䊐 Communicate the purpose and progress of the combination in multiple formats 䊐 Ensure that success stories are promoted 䊐 Do a lot of management by walking around

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Culture Continue to clarify desired culture 䊐 Uphold the desired cultural end state 䊐 Identify desired cultural characteristics not present in either partner Be proactive in culture building 䊐 Establish and abide by principles and rules of engagement for the transition 䊐 Recognize how early leadership behavior affects eventual cultural norms Minimize culture clash 䊐 Respect combining cultures 䊐 Conduct deep cultural learning interventions Transition Management Launch the transition structure 䊐 Set transition teams and determine their charters 䊐 Nurture the structure with teambuilding and other resources Coordinate transition management activities 䊐 Have steering committee review and advise on transition team recommendations 䊐 Find ways to involve people in the transition process Identify emerging issues 䊐 Establish vehicles for upward communication and employee research 䊐 Develop norms of open communication and learning from mistakes

Part Four

The Postcombination Phase The postcombination phase commences with executives in place and charged with putting their own stamp on the new organization and culture. This is when the new organization structure takes on life, cultural norms develop, work teams form, and people dive into their responsibilities—but seldom in unison. No sharp line divides the combination and postcombination phases in a deal. Often, because of their smaller size or lesser complexity, some areas begin to mesh while others are still in limbo. We’ve observed common problems that regularly arise in this phase: • Renewed Merger Syndrome. People can experience a renewed surge of stress. Up to this point, many worried about their job security. Now they have to worry about job performance as they contend with new systems, coworkers, leaders, and ways of doing things. There can be also be signs of “survivor sickness” as people cope with the loss of friends in a downsizing. • Unanticipated obstacles. No matter how diligent transition teams have been in planning out the new organization, some obstacles cannot be anticipated. Only when they begin to execute plans can managers understand fully what it takes to make two companies combine. A highly touted new telephone customer service center designed

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in the merger of two banks debuted ominously when the higher-than-anticipated call volume overwhelmed the system. Coordination snags. Many managers build their new units in silos. But many issues fall between functions and business units. In a hospital merger, a much-publicized, state-of-the-art maternity ward sat empty for months because the legal function had not secured all the required government permits to operate the new unit. Inattention to team building. In many cases, too, as managers and employees scurry to adopt new procedures, scant attention is given to building postcombination teams. It takes time for new members to feel part of the team and assume an emotional stake in its mission; they need to clearly understand what is expected of them and what they can expect of others. Culture by default, not by design. Too often, leadership hasn’t done much—beyond a few bromides—to define a desired new culture. Posters with uplifting value statements are contradicted when managers fail to “walk the talk.” Postcombination performance declines. People in the postcombination organization may have aggressive goals but often don’t have the tools, information, and other resources needed to achieve them. Insufficient time is allotted to train people in new systems or to let them experiment with new approaches to getting work done. Those most upset are top performers whose frustrations can infect everyone around them. Missed opportunities for organizational improvement. Even when leadership rallies people to draw upon the “best of both,” unresolved cultural differences can lead them to “go with what they know” and regress back to the “old ways.” Leaders do not leverage the relatively unfrozen period to mold individual behaviors or enhance team performance and overall organizational effectiveness.

Study after study confirms that execution is the real culprit in M&A failures. In this section, we look at what it takes to manage

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the postcombination period successfully. In Chapters Nine and Ten, we show how two of the forces that impede execution— impatience and underresourcing—can be countered by engaging people in organization and culture building and by investing in value creation. Still, things don’t always work out as desired. In Chapter Eleven, therefore, we turn our attention to damage control and what it takes to right a sinking combination.

Chapter Nine

Building the New Organization and Culture Recall the image of former President George W. Bush atop an aircraft carrier claiming victory in the Iraq conflict. Of course, troops in the war zone knew otherwise and, eventually, so did the populace back in the United States. Similarly, employees on the front lines of two organizations combining are apt to shake their heads in disbelief when they hear executives prematurely claim that “the merger is over.” They conclude either that their leaders are out of touch or, worse yet, putting up a false front for the media or anxious investors; either way employees’ confidence in the combination and their own futures is called into question. Ultimately, this unease seeps into conversations with suppliers, customers, and other stakeholders who lose faith in the combination as well. To say that the postcombination phase is an afterthought in most deals is an exaggeration, but to describe it as typically undermanaged and underfunded is not. We have observed three factors that impede executives from giving their full attention to organization and culture building in this phase: • Fatigue. One factor is fatigue. After months of working out the deal, planning integration, and arriving at structure and staffing decisions, many senior executives simply have no patience and scant resilience left for managing its implementation. They are prone to regard issues that crop up around cultural differences and communication gaps as

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distractions from the “real work” of delivering bottom-line results. As a result, operating managers and department heads often lack needed guidance and support on delicate organizational and personnel matters. Some plow ahead anyway while others gloss over complex integration hang-ups with motivational speeches. Either way, postcombination problems tend to get worse rather than better and gyrate firms into damage control. • Focus. A second factor is focus. When it comes to executing combination plans, people who have been considering the overall integration redirect their attentions to operational matters in their areas of responsibility. As a result, integration gets short shrift and no one keeps track of the bigger picture. Managers have problems getting things done because they don’t know what levers to pull or have access to familiar communication channels—upward, sideways, and even downward. All of this puts tremendous pressure on them to deliver results in spite of systems that are not in sync and two cultures that are far from combined. • Funds. Third, firms simply haven’t budgeted enough time, money, and human resources to handle the scale and scope of the postcombination period. Figure 9.1 shows the relative demands on company time and treasure during the three Figure 9.1. Resources Needed in M&A Process. Precombination: Scouting and Deal Making

Combination: Integration Planning and Transition “Hand Off”

Postcombination: Organization and Culture Building

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phases of a combination. Note how resource demands ramp up dramatically in the postcombination period. Too often, firms don’t allocate sufficient funds to effectively execute integration plans. The old adage “you pay now or you pay later” is especially germane in this phase of M&A. In this chapter we examine how executives muster energy, sharpen their focus, and invest in value creation when building a postcombination organization and culture. Organization building takes months; culture building takes years.

Building the Postcombination Organization Flexibility is needed to successfully put two organizations together. Transition team recommendations on how and where to integrate functions are only blueprints; and, as builders know, things are different once actual construction begins. New competitive conditions and unanticipated obstacles may require minor or even major adjustments to plans. Dilemmas typically arise and tradeoffs are called for that can throw schedules off and ignite conflicts across units. Operating managers tasked with putting their functions together also discover that many things—structures, systems, and people—simply don’t fit together as planned. As the combination unfolds, senior management and business unit heads have distinct but complementary responsibilities. The top team’s primary jobs are to monitor implementation, make sure new structures and systems are aligned with strategy, keep expectations clear between themselves and their managers, and promote dialogue across business units and groups. Business unit heads surely have to reach out to customers and hold on to and motivate staff. But they face a natural tension: needing the flexibility and autonomy to shape their units as they see fit, but also needing direction and support to ensure that their unit meshes with others and aligns with the organization overall. Organization building naturally unfolds hierarchically and follows sequentially from the appointment of leadership at successive layers. There is also a horizontal dimension: different units may have different value-creation responsibilities and thus different integration requirements and challenges. Let’s look first at

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the vertical dimension in a combination in which one of us was involved.

Top-Level Oversight The integration steering committee guiding the acquisition of SmithKline Beecham’s animal health business into Pfizer’s animal health group (AHG) designed a new organization by selecting the best practices from each side and proposing some novel ways to transform the combined business toward a stronger external focus. With integration plans complete and senior management appointed, the agenda for the top team seemed finished. AHG’s president handed implementation responsibilities over to his senior leaders. Merge over? On the contrary, reflecting on their experiences, the combined management team recognized the value of focusing together on the whole of the business. Going forward, they vowed to build the organization as a team to ensure that all combining units were positioned strategically and that they played by the same set of rules. The financial goals were enumerated as follows: “Become number one in every market, grow at twice the rate of the overall market, and improve profitability by at least 4 percent each year.” Dubbed the “1, 2, 4 goals,” these were easy to communicate and understandable to employees. They sent a message that although growth was important to the animal health group, so was profitability. The senior team also developed “guiding principles” for behavior in the combined company. These defined how people should approach their work and how contributions would be evaluated. Among the key principles was a commitment to “serve customers better than our competitors do,” to “be the leader in market segments in which we choose to compete,” and to “be recognized for the quality of our people.” In turn, the team agreed that “authority, responsibility, and accountability are inseparable,” and that the “speed and quality of communications is a competitive advantage.” Like any such pronouncements, to an outside observer the words come across as vanilla and the message sounds like motherhood and apple pie. What gave them meaning and brought them to life in this case was management’s

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use of these principles in their ongoing reviews of the integration of business units. We cannot stress enough the importance of regular, high-level reviews of change implementation through the postcombination period. Reviews are particularly important in two instances: (1) when synergies depend on cross-fertilization from each side of the deal and (2) when the combination seeks to blend together companies with different cultures. Take the case of a bioengineering alliance, where the two partners came from extremes of being centralized versus decentralized. In planning reporting relationships, the combination’s top team had staked out a middle ground, centralizing many staff functions and decentralizing business lines. Solomonic intentions aside, when the structure took shape all hell broke loose as business managers resisted intrusions on their turf. Following several skirmishes between business and staff functions, the top team went off site to surface and address the conflicts. Now, with tangible issues on the table and areas of conflict identified, the intricacies of staff-and-line working relationships could be hammered out.

Repurposing a Business Unit The vice president of AHG’s technical operations group prior to the SmithKline Beecham acquisition retained that title after the combination. Technical operations saw as its mission to bring “science” to the creation, production, and sale of animal health products. Its services ranged from doing applied research to the training of nontechnical business and sales personnel. With structure and staffing set, the VP convened a meeting of his management team and a cross-section of people from operations, marketing, central research, finance, and employee relations. The objective was to collect ideas on how the technical unit should define its mission and purpose in the combined company. A breakthrough point came when each of three small discussion groups, one of people from technical operations and two of internal customers from other parts of AHG, drafted lists of desired organizational changes. The technical group produced a roster of incremental changes in its current activities, such as running better clinical trials and speeding up regulatory approvals. By

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contrast, the two groups of internal customers, working separately, proposed that technical people get more closely involved in the business, especially in setting strategies and monitoring service performance. The challenge to the technical group was to step out of the lab and connect to internal customers and stakeholders. The VP used this challenge to establish a new identity and mission for the technical group: to focus on the needs of the business, not simply on technical excellence, and deliver superior service. The VP took advantage of AHG’s “1, 2, 4” vision and guiding principles to further clarify how his group would operate in the new organization. Two months after the rollout, he again invited managers from other units in AHG to further refine the implications of the group’s mission. Two central questions were addressed: (1) how to achieve successful partnerships with stakeholders (both internal customers and external groups such as regulatory agencies, academia, and industry consortia) and (2) how to institutionalize AHG’s guiding principles in the animal health group. Through structured activities, the attendees provided rich feedback on how others at AHG viewed the current versus desired behaviors of technical staff. Latin American managers, for example, reported that technical staffs were often dictatorial in the design of clinical trials. These field managers found that no matter what they produced, technical staff from New York headquarters invariably would redo their work. The result was repeated paper shuffling between HQ and the field. After discussing the inefficiencies, Latin American managers and New York staff agreed to follow the guiding principles and embarked on a more supportive, trusting, and productive working relationship. Together the groups reduced the time required for approval from weeks to days.

Building Cross-Functional Relations Building a new organization horizontally is often very difficult. It’s not unusual to have silo problems when companies combine. As executives focus on building their functions and teams, fissures between interdependent units commonly develop. Nobody seemingly owns this horizontal space, and many problems figuratively fall through the cracks. In a rare eight-year study of the merger of

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two managed health care systems, researchers observed how the managers of different organizational units undertook wellintentioned actions for integrating their own part of the organization. Although their actions made sense from a functional vantage, they often conflicted with the needs and work patterns of other organizational units. Over time, the two sides began to work reasonably well within silos but cross-unit cooperation plummeted. Policies intended to integrate operations throughout the organization were ignored and cross-unit conflicts festered. As a result, people were caught in a double bind: be loyal to their unit or work for the greater good. Not surprisingly, touted synergies of seamless service were lost.1 Being proactive about horizontal organization building helps keep a newly combined company aligned and averts conflicts that require considerably more effort to address later on. Let’s continue with the case of AHG to illustrate.

Clarifying Cross-Unit Needs Mindful that an ounce of prevention is worth a pound of cure, consultants used an intergroup relations exercise to help AHG headquarters staff to build better relations with the businesses. One meeting brought headquarters staff directors together with executives from the field to address roadblocks to an effective working relationship. The goal was to clarify what each unit needed from the other, identify any gaps, and agree to cross-unit working arrangements. The process involved breaking the units out into separate rooms and having them respond to two generic questions: What does our group need and want from the other group? What can the other group expect from us? The units posted their needs and expectations on flip charts and reconvened in the main meeting room. Field directors presented their cross-unit needs first. They compared their list of what field executives needed and wanted from the headquarters staff with that staff’s list of “what the field executives can expect from headquarters staff.” Many similarities appeared across the two lists, but some key gaps jumped out. One concerned the field directors’ expectation that headquarters staff consult them early on when developing policies and establish information-reporting requirements. Staff responded that it preferred to formulate

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policies for the whole of the combined organization and then check them with the field. After hearing field directors give instances where consultation might have improved what in fact came across as ivory-tower policies, the headquarters staff concurred and agreed to invite representatives from each of the three regions into their planning sessions. Jointly, the two groups determined specific areas in which the field input would be of benefit, so as not to burden either side with unwarranted meetings. After working through what was needed from headquarters staff, the focus turned to what the headquarters staff needed from the field and what field executives said could be expected from them. Again, the two groups identified and mutually addressed gaps in expectations and needs. This meeting enhanced understanding of what each group needed from the other to accomplish its objectives. It also established in the still-fledgling organization a workable process for raising and addressing issues. The cross-unit dialogue here set a new tone and demonstrated how the combination could yield tangible enhancements to organizational effectiveness.

Meshing Policies and Practices Integrating systems in a large-scale combination is a complex and delicate undertaking. Thus we urge system architects and transition teams to align systems integration with long-term strategic objectives and to think through potential problems of technical glitches, operating disruptions, and a clash of cultures when choosing one side’s systems over the other’s. The case of two merging banks illustrates what to do. The chief information officer (CIO) overseeing systems integration in a large financial services merger formed a crosscompany transition team to develop a template for joining the two sides’ information systems. The CIO first had her team identify the many corporate versus line-of-business information systems and data-management practices. After several months of study, they then gave recommendations about data entry, access, and storage; the physical location of databases and facilities; various make-or-buy options; and information security. But when it came to implement the team’s recommendations, business heads balked

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and a slew of questions and conflicts confronted the new IT leadership. Who would govern the definition of databases in a decentralized environment? Who would ensure there was compatibility between multiple systems? What, people asked, was HQ’s need for “common” data? Would its interests prevail? Recognizing that her function could not insist on conformity, the CIO created a standing committee of corporate IT officials, technologists, and business heads to set principles for current systems integration and future development. The council met several times and through long discussion agreed on three key points: 1. We need to structure the information environment to satisfy diverse needs (top and local management, product and business groups). We should define the minimum structure to provide commonality yet also provide the flexibility to add local value. 2. Information required to perform the job effectively needs to be redefined and made available with a minimum of bureaucracy. 3. We must be able to get access to relationship information from other areas. To effect systems integration, the council devised a template for decisions that highlights the competing interests for IT services (see Figure 9.2). The challenge for the council was to navigate these competing interests. It was agreed, for example, that information essential to top management or of strategic value would be centralized and governed by common practices instituted by the corporate IT function. In turn, information used primarily by a line of business for tactical purposes would be governed by local management. In the case of regional or globally relevant information, subcommittees of the council, composed of both corporate and appropriate business managers, would set policies. In cases of disagreement, the issues would then be brought to the council as a whole. This template was applied to twenty-plus system integration issues by the business and technology management council and used thereafter in decisions about IT architecture and data management.

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Figure 9.2. Information Technology Decision-Making Template. Corporate Central

Strategic

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Global

Tactical

Decentral Line of business

Culture Building A senior vice president in an industrial products acquisition told us, “Corporate culture is a lot like the Queen Mary: you don’t swing it around in five minutes. Whether our leadership likes it or not, it’s going to take a long time to implement any culture changes here.” Acculturation is a several-year endeavor. (If you doubt that, consider how little progress in culture building was made in the nine years that both DaimlerChrysler and AOL Time Warner tried to make their respective corporate marriages work.) In the precombination period, we emphasized how important it is for executives to articulate a cultural end state—whether it be preservation, assimilation, integration, or transformation. In the postcombination period the challenge is to combine companies with that end in mind. For a corporate culture to change, change must occur at the individual level, particularly in how people interpret the environment in which they operate.2 To make sense of their world, people rely on representations, or what learning theorists call mental models, that explain the rules for getting along and getting ahead and how things actually work in a company.3 In putting people together from two different corporate cultures, the first key challenge is to “open minds” to new ways of doing things. Next is to engage people in “sensemaking,” where they can try out new ways

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of thinking and operating in a combined company context. New mental models emerge in a new culture.

Three Culture-Building Scenarios As the shock waves of the transition from old to new in a combination begin to subside, people settle into patterns of thinking and acting in their new environs. One of three scenarios prevails: 1. The combination experience does not significantly alter people’s mental models, and they retain the assumptions, perceptions, and behaviors that served them in their “old” organization. 2. The combination experience alters people’s mental models, and they settle into and rely upon the assumptions, perceptions, and behaviors that are reinforced inadvertently during the transition. 3. The combination experience alters people’s mental models, and they settle into and rely upon the assumptions, perceptions, and behaviors that are reinforced intentionally during the transition. There is so much real and imagined turmoil and so much at stake in a combination that people look for stability and constancy wherever they can find it. If the first scenario prevails (no change in people’s mental models), employees hold on to accustomed ways of thinking about and doing things. There is often a certain amount of comfort in this. In one company we know of, as things settled down, employees sported badges with the moniker “I survived the merger!” In this case, unfortunately, line staff needed to effect a more substantial change but instead settled back into a comfortable routine. A wholesale reorganization nine months later forced at least two business units to “redo” their merger. Keeping the “Old Ways” It can be argued that culture change is not always needed in a combination, particularly when the value-creation objectives

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behind the deal hinge on an acquiree maintaining its operating independence and sense of identity. This cultural autonomy can be appealing to an acquired firm’s customers and employees, and surely minimizes transition costs and conflicts. The strategic problem is that this limits the exchange of knowledge between the two companies and their ability to learn together. The organizational problem is that it doesn’t provide a platform for adding acquisitions and putting together a robust business line. The cultural problem is that the “old ways” that served a company well as an independent business simply don’t work when it is part of a larger parent company. Take, for example, a parent company that fosters a multicultural environment among its many subsidiaries. Acquirees, in this context, may retain their own identity and folkways, but some degree of acculturation is required to the extent that subsidiaries have to learn parent company protocols and conform to certain rules of interaction, whether in hard areas like budgeting, forecasting, and compensation or soft ones like communication, HR policies, and the like. Acculturation by Default A ten-year study we conducted of the white-knight acquisition of a small manufacturing company by a large conglomerate shows a case of acculturation by default.4 The lead company’s intentions were to keep the target company’s top management in place. It insisted, however, that the acquiree keep far more detailed financial records and conform to its corporate reporting practices. Leaders from the acquired company lurched into crisis management as they experienced remorse at losing their independence, became overburdened by the joint responsibilities of running operations and preparing mountains of financial reports, and met among themselves to strategize how to fend off additional demands for information and conformity. Meanwhile, parent company comptrollers and aggressive young MBAs began to question local management’s resistance to preparing the complex financial analyses used by the parent to control its subsidiaries. Acquired senior management, which had maintained close informal relations with rank-and-file employees, became clannish and invisible to staff. Employees felt abandoned

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and out of touch with their leadership. In an attitude survey conducted a year after the combination, employees expressed how trust in management had plummeted, and conveyed feelings that their leaders were obsessed with the combination and not concerned about their welfare. Interviews with senior executives revealed that they were no less concerned with people but had to fight to protect them from intrusion. Yet their behavior inadvertently sent a different message to staff. One short-term implication was a union drive that, although defeated, required expending tremendous resources. The longer-term result was “de-culturation” of the acquired company. Its prior culture was lost in the combination, but no cohesive sense of identity as part of a parent company emerged.5 Acculturation by Design In sharp contrast is the case of the combination by design of two hospitals of equal size. The chief administrator, who came from one of the hospitals, insisted on drawing on the best of both and used the integration period to revisit all facets of organizational effectiveness, from operating procedures to core competencies of managers. Her intentions were met with disbelief by the two management teams: those from her side assumed they would have an edge in the combined organization, whereas those from the other side suspected they would be at a disadvantage. Both sides were startled when she announced that every manager and supervisor would have to apply for a job in the “new” hospital and compete against one another (and perhaps outside applicants). This approach had short-term costs: a sense of abandonment on the part of her former colleagues and some interpersonal conflict among individuals vying for jobs. But in the long run, it had the intended effect of breaking down old mind-sets and setting the stage for designing and developing a new and better organization.

Culture Building in Cross-National Combinations We noted in the previous chapter how cross-national mergers and acquisitions sometimes result is a dual culture clash—between companies and between nations! Does this mean they are twice

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as likely to fail? To the contrary, several studies find that crossborder mergers are more likely to create value than purely domestic ones.6 The upside of new market opportunities and the potential for knowledge transfer seems to outweigh the downside of any problems posed by a cross-border culture clash. What accounts for this counterintuitive finding that an organizational culture clash may be less problematic in cross-border deals? The researchers suggest that the executives in cross-border cases are especially attuned to cultural issues, put more into their communications, and therefore integrate functions very carefully. This combination of cultural awareness and extensive communication is essential to putting companies together in the case of a dual culture clash. Frankly, it would be nice to see it happen in more domestic combinations as well. That said, there are some organizational and national culture differences that are important to consider when putting companies together: • Preferences for order and control. Both organizational and national culture preferences for order and control have to be considered in joining organizational structures and establishing policies. This has been an issue in combinations in the EU where firms from Germany and France are more highly structured and “numbers driven” on average than firms in Italy and Spain. • Individualism versus collectivism. Companies from Asia are more apt to operate through a collective mind-set characteristic of their national culture. This can be a problem when Asian firms acquire or form joint ventures with American companies that tend toward greater individualism. Collectivism slows down decision making but, interestingly, can speed up execution. • Short-term versus longer-term horizon. Corporate and national differences in this dimension bear on budgeting, expected rates of return, investments in R&D, and so on. Chinese firms buying in the United States, for instance, have faced challenges in integrating businesses because of acquired management’s tendencies to go for short-term profits at the expense of market development in the longer term.

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These differences notwithstanding, organization and culture building on a global scale has to take account of local circumstances. The merger of the French firm Alcatel and the American firm Lucent is one example. Each brought their respective strengths to the deal: Alcatel with GSM technology for telecommunications and Lucent with CDMA. But they had their differences: at the time of the deal, Alcatel had a tall hierarchy and was more formal whereas Lucent was relatively flat and informal. Not surprisingly, in Europe the combined company looks and feels more like Alcatel and in the United States more like Lucent. But how about in India? There the combined firm adopted Alcatel’s comparatively tall hierarchy, akin to other Indian companies, but also embraced Lucent’s more informal style promoting lots of dialogue across levels and creating many forums for employee interaction and socialization. This, too, is characteristic of high-tech firms in India such as Infosys and Wipro. And in a war for talent, it is a requirement to do business successfully there.

Leverage for Culture Building If leadership has laid the foundation for culture change—by articulating a desired cultural end state, building on the strengths of current cultures, introducing new ways of doing things, and modeling desired behaviors and rewarding their adoption—then the forces for culture change have been set in motion. Now, as implementation proceeds, the requirement is to reinforce elements of the new culture. This is best achieved by using multiple leverage points.7 1. Leadership alignment. The extent to which the top executive, the senior team, and the upper management in the combined organization are aligned behind the desired end state and in sync with one another gives credibility and breathes life into messages about the new culture. 2. Reinforcing interactions. The day-to-day actions of managers can reinforce or conflict with the signals from above. In dealing with their direct reports, peers, and superiors, middle managers and supervisors either contribute to or weaken movement toward the desired culture through their behavior.

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3. Complementary organization changes. Changes in organization can be a bane or boon to culture change. The combined company’s organizational structure, business processes, measurement and appraisal systems, selection and staffing practices, and reward systems can help speed acculturation, slow it down, or run it off the tracks. 4. The power of influencers and peers. Finally, culture change comes about through the reactions of influential people such as opinion leaders or high-profile, highly marketable individual contributors as well as that of work peers. Their influence as mavens and connectors creates, as Malcolm Gladwell describes, a tipping point when the momentum for culture building becomes unstoppable.8

Culture at the Working Level One reason why it takes years and not months to change a corporate culture is that behavioral change at the top of the house cascades down to the bottom very slowly. Some firms use advanced tactics—electronic town hall meetings, social networking sites, online employee “jams,” and the like—to drill down culture change through the hierarchy. But changes in performance appraisals, promotion practices, reward systems, and the like—the changes that cement new behaviors—take time to implement and longer still to become part of the fabric of a combined company. As important as an overall culture-building exercise can be to the success of a combination, real acculturation occurs at the working level. It is when they are on the job, in project teams or work groups, interacting with colleagues and customers, at lunch or in a carpool, and at working meetings or on a break that people are constantly making sense of their new environment and, consciously or not, deciding how to behave. Senior managers have scarcely any idea of what goes on in the workaday world of frontline staff. At most, they influence it indirectly through symbols, myriad management systems, and their own interest and example. Middle managers, especially immediate supervisors, have a far better understanding of the workings of hourly, clerical, and sales personnel and exert more influence over them. Furthermore, they have the opportunity and responsibility to fashion a working

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culture that, although guided by corporate values and expectations, is fitted to the needs of their operation and people. What “levers” can managers and supervisors themselves use to build a winning work culture in a combination? Consider some examples: • Meetings. In the strategic alliance of two telecom firms, alliance managers instituted fishbowl-type meetings, where a work group would review its results with managers while being observed by other work groups. The intent was to build collective intelligence about products and customers and foster norms of open dialogue and team-on-team coaching. • Settings. In the combination of two high-technology companies, private offices were eliminated in regional facilities. Now salespeople work in an open space adjacent to work spaces filled by service personnel and technical support. Interactions between sales representatives have increased, as has their contact with other members of their newly formed “customer team.” • Interactions. In a high-technology acquisition, technologists from the acquired side were invited to join brown-bag seminars in the lead company on developments in the industry featuring well-known academics and respected innovators. After a short time, engineers from the acquired side were invited to present their work; later they hosted meetings, on a rotating basis, on their home turf. • Work processes. Nothing effects culture change more at the operating level than introducing a new way of working together. The merger of widely dispersed information technologists from two banks took an upward turn when all were interconnected via a shared database. Technologists from all over the globe could use this database to develop, after a fashion, a common (virtual) culture.

Culture Training A few companies are using advance training tactics to accelerate the process of acculturation at the working level. These programs give frontline employees the opportunity to think through and

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practice behaviors consistent with the desired postcombination culture. A financial services alliance was formed with much fanfare around the company’s “shared values.” To underscore their commitment to these values, senior leadership charged its training professionals to develop a program to reinforce the emerging culture. One course, “Living the Shared Values,” gave employees a chance to discuss and role play the espoused values of the alliance. In the workshop, employees heard from a member of the senior team about why these particular values were chosen. To model the value of open communications, the executive described the debate and controversy that consumed the senior team as they wrestled with options. Then, in experiential exercises, employees participated in simulated business situations. They were assigned a business circumstance and asked to act out how to handle it in line with a particular shared value. This brought the values to life, raised awareness of the intentions underlying the words, offered opportunities to practice new behaviors, and provided individuals with feedback on the degree to which they understood what was expected of them in the new organization.

Branding the Combination Let us conclude with a few words on branding the combination. This too is a critical subject in M&A, but it is one that is sometimes given short shrift.9 There are four main options for branding the combined entity: • One brand. This is most common in acquisitions or in mergers where one party has the more powerful brand identity. When Bank of America was acquired by NationsBank, for example, each brand had regional identity but B of A was the “stronger horse” in international and financial circles and became the combined company’s brand. • Joint brand. This branding occurs in mergers of equals where both companies bring strong brand identification to the deal. Molson Coors Brewing Company, for example, recognizes the strengths of both companies.

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• Flexible brand. This is a joint brand that has different meaning depending on its audience or application. Renault-Nissan, as an example, has a different meaning in Europe versus the United States and Asia, as did the aforementioned DaimlerChrysler brand. This category also includes space for making customer relevant sub-brands more visible, as in JPMorgan Chase. • New brand. This has been the choice in pharmaceutical mergers where Aventis was created when Rhône-Poulenc S.A. merged with Hoechst AG and Novartis from the merging of Ciba-Geigy and Sandoz Laboratories. Beneath decisions about corporate branding are complex choices about overall brand architecture, use of logos and symbols, messaging, and, of course, product branding.10 Upon merging, for example, Fisher-Price and Mattel reconfigured their product lines under a global brand strategy, where the Fisher-Price name went on toys for preschoolers and Mattel for products aimed at school-age children and adolescents. We stress the importance of giving careful attention to branding in conjunction with organization and culture building for three reasons. First, there is a lot of money at stake. In many cases, their corporate brands are worth far more than the tangible assets, physical and human, of two combining companies. Second, branding is closely connected to strategy, organization, and culture and these need to be aligned with the brand in the postcombination firm.11 Finally, make no mistake that customers and employees pay close attention to how a combination is branded or rebranded in the options listed above. In one of our early experiences in the merger of Burroughs and Sperry, someone had the bright idea of putting the initials “BS” on hats and passing them around. A quick look at the end product led to the choice of “SB”—even though Sperry was the target company. A nice gesture, to be sure, and one less apt to evoke guffaws. Eventually, employees and customers were involved in a “name the company” contest that resulted in the name Unisys. At risk in branding is the employee’s identity with the combined company, a subject we turn to in the next chapter on reenlisting employees and putting merged teams to work.

Chapter Ten

Joining People and Teams Together After months of waiting for something to happen, hearing rumors about what might be changing, hoping for the best and fearing the worst, employees now have to get down to work and make the combination’s potential come to life. They do this within the context of their work teams, which are in turn formed within the framework of the overall organization and its culture. Efforts to build combined teams are also influenced by the psychological readiness of individual members. Some may feel confident, ready to move forward, and prepared for the challenges and opportunities ahead. Others may hold on to baggage carried over from their prior situation or picked up during their experience of the combination thus far. And some will be stuck, bewildered about what is happening and uncertain what they are supposed to do now. In this chapter, we look at the dynamics of taking individuals from two companies, reenlisting them, and molding them into teams that operate in a combined company. We start with managing the mind-sets of people and the tensions of teaming. Then we describe how successful leaders move their combined teams through stages of team building to the point where they can deliver on the promised synergies and even find new ones.

Postcombination Teambuilding For new or reappointed team leaders, the upside of a combination includes the opportunity to build a new team from scratch

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or, alternatively, to revamp and revitalize an incumbent team. Similar to the CEO’s opportunity in leading the combination, the team leader can clarify a desired end state, focus people on CSFs, and engage them in formulating rules of the road for the emerging team. A mind-set of partnering is characterized by trust, commonality of purpose, and cooperative spirit. It goes a long way in building a team wherein goals are shared rather than pursued independently, the opposition is located outside the organization rather than within, and issues are addressed openly and fairly rather than swept under the rug or handled politically behind closed doors. It’s obviously easier to build a team of this caliber in a combination if the leader’s own boss models similar action. Even if a superior doesn’t do so, however, the opportunity remains for a team leader to exert some control and build a highperforming work group. As the organization moves into the postcombination phase, individual employees are confronted with a multitude of changes in structure, procedures, expectations, relations, and so on. This is a confusing time for many people, especially when they have not been directly involved in decisions about their new organization. As in the other phases, lower-level employees have less control over their situation in this period than do their superiors. Yet they do have some control, and probably much more than they imagine. To help its employees, an apparel company prepared and distributed a booklet titled “How to Manage Change Without It Managing You.” Informally referred to as an “employee survival guide,” the document offered specific ways in which employees could better understand and positively influence their situation: • Understand what you can and cannot control. Spend your energy on doing the former well, and do not waste it on trying to do the latter. • Learn about what is going on around you. Stop and think before you act, rather than do things in an uneducated or hasty manner. Talk with people, ask questions, get information and, in general, conduct a “diagnosis” of the situation in which you find yourself.

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• Learn about what is going on inside you. Stop and listen to yourself. What emotions are you feeling? What are you afraid of and what excites you? Determine whether you are in control of your emotions or they are in control of you. • Change your definition of success. The good old days are gone, and so are some rungs from the corporate ladder. Still, you can thrive—not just survive—in the new organization. Perhaps receiving a new job assignment or being invited to participate on a special task force is today’s recognition of a job well done. • Take personal responsibility for your situation. The company can’t plan everything for you—your career track, your training, your retirement. You have a greater-than-ever responsibility for managing your employment and career. Make your interests, needs, and abilities known to your supervisor. Volunteer for special assignments or task forces. • Do the right things. You are either contributing to or detracting from the company we are attempting to build. Align your priorities with those of the company. Reengineer your job so that what you do makes a positive contribution, eliminates waste, and is consistent with the objectives of your team, the mission of your department, and the vision of our company. • Let go of fear. If you are good, your company needs and wants you. If it doesn’t want you, someone else does. • Be tolerant of those around you. This is an intense time for all of us. There is no master plan and no one has all the answers— not the company, and certainly not your boss. And just when things seem to be going in one direction, they may shift to another. This may be an important and beneficial midcourse correction, given the uncertainty and competitiveness of our industry. • Be tolerant of yourself. You don’t have all the answers, either. You may need to learn some new ways of doing things, along with new ways of seeing and thinking about things. Embrace the learning opportunity inherent in all mistakes; but don’t continue to make the same mistakes over and over again. • Tell it like it is. Contribute to building the best possible new organization and to a culture in which openness and honesty

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prevail. Speak up, point out problems, and suggest improvements. You can be direct without being nasty. • Anticipate the next transition. Sooner or later, we are all going to go through another major transition. That’s just how the game is played these days. Don’t be like an ostrich with its head in the sand, or like a chicken running around aimlessly with its head cut off. Use your head to keep abreast of events in our company, our industry, and in the overall economy. • Have some fun. Times are tough, but life is short. Being here at the creation of our new company is a special event for all of us. Make every day important and productive. Enjoy what you do and have fun doing it. • Take care of yourself. Of course there will be disappointments and difficult times as we move forward together. Look out for yourself. Eat well, exercise, and talk things out with a friend, family member, or coworker. Go out dancing and let it all hang out. Or, lose yourself in a great movie or novel. Then, come back tomorrow and we’ll try it again, together.

The Timing of Adaptation We have discussed the role of psychological adaptation in ending the old, transitioning, and embracing the new. Adaptation is an internal process of coming to terms with an external event.1 That event can be personal or organizational, and it can be positive or negative—people adapt to getting married or the death of a loved one, to getting a big promotion or to being downsized after a corporate restructuring. Specific to M&A, adaptation is a process through which an employee moves from being preoccupied with the event to integrating it into his or her life. This has obvious implications for the individual—adapting in a manner that produces psychological growth versus deterioration, or that equips the individual with new attitudes and behaviors that are appropriate for operating in a new situation. It also has implications for the postcombination organization, as reflected in more or less productivity, engagement, and acculturation in the workforce. As Figure 10.1 shows, those at high levels begin to adapt to organizational changes well before employees at other levels. Thus, by the time executives at the top have accepted and dealt

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Level in Organization

Figure 10.1. Adaptation to Transition by Hierarchical Level. High

Middle

Low Adaptation over Time

Source: Marks, M. L. Charging Back Up the Hill: Workplace Recovery After Mergers, Acquisitions, and Downsizings. San Francisco: Jossey-Bass Publishers, 2003.

with their own feelings of loss, insecurity, and threat and are looking to the challenges ahead, people lower down may at best be in the midst of their adaptation process. In large firms, changes may not ripple down to the lowest levels for quite a while; by then, senior executives have put their personal pain behind them and as a result appear unsympathetic to others’ needs to work through the process. Either because they are impatient to move on or because they have repressed the pain of their own transition, senior executives often overlook and undermanage the normal and natural process of adapting to a combination. Forces for and against desired change compete with one another throughout the combination process, with the balance constantly shifting. As time moves forward in a well-managed combination, the forces for change tend to dominate and provide the necessary impetus for letting go of the old and adapting to the new. Yet, as implementation begins in earnest, a wave of resistance often swells up as people regress psychologically and behaviorally. Many employees report that they fall back into the Merger Syndrome. This frustrates and often angers executives who are farther along in their adaptation. Expecting to lead motivated troops to charge forward and capture the prize awaiting them, they instead encounter a mass of doubt and confusion. Advice from an employee survival guide, however sound, only goes so far. Managers have to reenlist the troops and motivate them to action.

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Building Postcombination Teams The work team is a focal point for realizing synergies in a combination. Even though success elsewhere in a company influences employees’ sentiments about the combination, evidence from their own work teams matters most. People see their coworkers either embracing new work methods or resisting them. In addition, they regard their team leaders as either enabling or inhibiting their personal adaptation. These early team experiences have a substantial influence on enduring impressions—including overall optimism or pessimism—about the combined organization.2 Well-functioning work teams help individuals adapt to change. Work teams provide social support by reducing the level of stress experienced by their members and by buffering them from the physical and psychological consequences.3 A work team with a high level of social support is not as susceptible to the interpersonal conflicts and drags on performance that otherwise plague work relationships during and after a combination. Moreover, the giving and receiving of support is one means whereby team members bond. This type of emotional support has been linked with lower levels of appraised stress and higher levels of self-efficacy which, in turn, are linked with the use of effective coping strategies and psychological well-being. Studies find that organizations can expect increased effort on the part of supported employees.4 Unlike teams that evolve in the normal course of business, groups of people thrown together in a merger or an alliance do not necessarily know the capabilities and inclinations of all members. The person selected to lead a postcombination team may not have chosen who is on it and may not know much about the individual contributors. Conversely, not all team members may have self-selected into this particular team or know much about their new leader. Thus, effective postcombination teams are built one person at a time. The mandate for team leaders is to step back, understand mind-sets, and assess the prevailing dynamics that influence performance. Four general requirements guide effective team leaders: (1) understand the emotional states of individual contributors in this phase, (2) anticipate sources of tension in

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building postcombination teams, (3) mold a group of individuals into a team, and (4) be proactive in formal team development.

Understanding Postcombination Mind-Sets When forming postcombination teams, leaders encounter diverse employee mind-sets (Exhibit 10.1). Employees who get the job they wanted or expected in the combined company are usually ready to enlist in the new team. With worries about their personal fate substantially behind them, they are charged up by the challenges and opportunities of adding real value. For example, after being acquired by an established manufacturer, employees from a firm with a strong product-development pipeline but inefficient manufacturing and limited distribution were excited by the potential of joining forces with a company possessing these competencies. These types often are the mainstay of a new team; their positive attitudes can be infectious. An overly gung-ho outlook, however, can alienate less-spirited employees who need more time to adapt. Other team members are found wanting. Perhaps they didn’t get their desired job title or responsibilities, or they’ve been separated from mentors or friends, or their budgets have been slashed. This is how some manufacturing and distribution team members who retained jobs felt. Preoccupied with their lower-than-expected status, they wondered if this was a harbinger of a dead-end career. Plainly, employees with this mind-set need more time to sort things out. Finally, there are employees who simply feel wrung out by the combination process. Members of the sales team pretty much retained similar jobs and responsibilities in the combined organization. Still, they were listless and weary from the ordeal they had survived. People like this often hold onto the glass-half-empty perspective, locking in on cues that the situation around them has changed for the worse. Misery loves company as team members complain that the combined organization adds layers between their group and the highest levels of management. For those charged with leading a new team, understanding a person’s current emotional state is more difficult than it seems. Team members who are not close to their new boss may put on

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Exhibit 10.1. Recognizing People’s Mind-Sets in the Postcombination Phase. The Ready Their situation:

What to hope for: What to watch for: The Wanting Their situation:

What to hope for: What to watch for: The Wrung Out Their situation:

What to hope for: What to watch for:

Have been promoted or retained the job they want See greater opportunity to produce and advance Energy and excitement; charged up Overly aggressive; acting superior

Did not receive the job they wanted or were demoted Miss former mentors, projects, and status Working through loss; adjusting to new realities Depression; anger and vindictiveness

Have the same job, but things have changed More distant from leadership More competition for advancement Feel jerked around by the process Working through frustration; regaining footing Demotivation; lack of direction and purpose

a poker face and hide their true feelings. Some simply cannot verbalize their reasons for persistent discontent. Others play up to the boss and hide their feelings in a veil of enthusiasm and self-serving flattery. Part of the leader’s responsibility in forming a new team is to ascertain the mind-sets of individual members,

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reenlist them, and help them rededicate themselves to their jobs. Straightforward one-on-one talks between leader and team member can uncover hidden emotional states. With hard-to-read employees, involving a human resources professional, trained counselor, or even a trusted peer can open up discussion with a superior.

Sources of Tension in Building New Teams Team building in a combination is complicated when there are changes in leadership and membership of a team. Any one of the following factors enhances the likelihood of tension in newly formed teams: • A new boss. The appointment of a new boss creates tension as subordinates naturally jockey for influence and visibility. Conflict is especially likely if a subordinate was expecting to have the new boss’s job, if former peers are placed in a superior-subordinate relationship, or if the new boss comes from one partner to take over a team from the other. • New peers. When combinations mix people from the partner companies, they naturally divide into coalitions and exchange confidences with former peers. This can continue the usthem feelings and force managers to take sides in resolving conflicts. • New methods. Members of combined teams not only have to adapt to job-related changes, but they also have to learn the politics and protocol of operating with another company. Predictably, there is a tendency to go with what (and who) you know. This means that people may have trouble gaining access to the informal social and communication networks of the new organization and are likely to encounter untold problems in simply getting the job done through normal channels. • New relationships. Diversity can enhance team creativity and performance, but it takes time to turn what initially appears to be a source of conflict into an improvement. The feel and flow of relatively homogeneous work teams are disrupted by people from different organizations, cultures, or countries.

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This raises tension levels, especially when the differences seem to interfere with work performance.

Molding Individuals into a Team Three common factors frame the team leader’s tasks in making individuals into team members:5 1. Psychological enlistment. People need to feel a part of the team and have an emotional stake in their team’s mission. 2. Role development. People need to clearly understand what is expected of them and what they can expect of others. 3. Trust and confidence. People need to develop trust and confidence in their colleagues and superiors. Although these needs are part of any employment situation, they become especially prominent in the context of postcombination mind-sets and dynamics (Exhibit 10.2).

Psychological Enlistment: Forming the Team Before signing up psychologically, employees who are reporting to new bosses, working with new peers, or contending with new procedures go through some self-examination. They ask themselves, “Do I really want to be part of this team?” Several factors influence their decision. First is their drive toward achievement: employees want to know the team’s purpose and how it contributes to the overall organizational scheme. Second are facets of power motivation: employees want to know whether they have to prove themselves, wonder if they’ll thrive under current leadership, and question if they have any voice in matters that affect them. Finally, there are needs for affiliation: they want to know if their teammates do their fair share, and if people work together well. How does a leader respond to these needs? • Re-recruit employees. Team leaders who want to enlist their members can take a lesson from college recruiters courting top athletes: give people a reason to want to be on this team. Recruiting begins by thoughtfully assessing people’s goals

252 Openness— Are we achieving? Holding on to ways of doing business Clash of cultures Foot dragging Performance management Incentives to perform Model desired behaviors Team building

Control— Who is in charge? Holding on to old allegiances; moves to gain advantage Internal conflict Gamesmanship Negotiate roles/responsibilities Develop role agreements Clarify reporting relationships Establish ground rules

Inclusion— Am I a member of this team or not?

Unclear sense of purpose, mission, role People on trial Personal distress

Rally people Personalize the sign-up Massage egos Lay it on line

Member’s Issues

Sources of Resistance

How to Counter Resistance

STAGES: Leader’s Role

III SETTLING DOWN Motivate performance Set objectives

II SORTING OUT Establish norms Set ground rules

I SIGNING UP Form the team Set expectations

Exhibit 10.2. Stages in Building a New Team.

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and aspirations, carefully considering what might motivate them or turn them off, and then formally signing them up. Reminding people that their importance and value to the team are recognized will address their need for inclusion and any insecurity they may have regarding their perceived merit. Of course, in the case of highly marketable talent, it may be necessary to follow the dictum of professional recruiters and “show them the money.” • Massage egos. Many employees need extra reassurance of their worth, especially when they have not gained what they hoped for in the postcombination organization or when they sense they are being tested at a point in their career where their accomplishments and capabilities should be recognized. The team leader can do some stroking and ego massaging, create opportunities for some quick wins and small successes, and acknowledge their efforts at contributing to the team. It helps also to acknowledge people’s past contributions—it matters to key performers that new leaders are aware of their track record. • Lay it on the line. Over time, individuals and teams have to get on with the work at hand. Employees who continue to mope around the office, bad-mouth the combination, or perform below expected levels may need a message from the boss to shape up or ship out.

Role Development: Team Organization After team members are in place, team leaders and members often test one another in an additional way: struggling to determine relative degrees of control. Group dynamics experts refer to this as the “storming” phase of group development. Leaders help their teams weather this storm by clarifying people’s roles and setting ground rules. It is here that the group’s modus operandi and pecking order are established and recognized. Some predictable sources of resistance interfere with team leaders’ efforts to manage these dynamics. First, managers taking over well-established groups often find people still holding on to their old allegiances and ways of doing things. Second, internal conflict can undermine team development. Some employees

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brownnose the boss and backstab their peers in an effort to gain power. Others gain command of their peers and orchestrate a revolt against the new boss (a classic dynamic as small groups develop). The storming phase can put team leaders in a no-win situation. If they assert their authority preemptively, conflict goes underground. But if they let conflict get out of control, the bad feelings developed may not be assuaged by later intervention. At stake in these situations is the extent to which the team leader is able to develop esprit de corps rather than mindless obedience: • Negotiate roles. Positions and players may be set, but postcombination job duties and responsibilities require clarification. In role negotiation, a technique developed by consultant Roger Harrison, a team leader and subordinates discuss expectations of roles, identify areas of conflict or ambiguity, and engage in the give-and-take of negotiating a realistic role definition acceptable to both parties.6 • Establish reporting relationships. Employees regularly complain about ambiguous reporting relationships in the postcombination organization. To counter this, team leaders should bring organizational charts to life and delineate who reports to whom and with what authority and responsibilities. This may seem foreign to organizations that are accustomed to fluid structures and hesitant to put on paper the extant chain of command. It is useful, however, to overstructure in the early stages of team building when areas of responsibility are contested. • Set group ground rules. Finally, there is a need to establish both formal procedures (regarding budgetary authority, communication formats, and so on), as well as informal norms (dress, timeliness, protocol, and so forth) in a team. Employees are more apt to understand and accept ground rules that are congruent with and support the desired cultural end state for the organization than those that send a contradictory message. The legitimacy of team ground rules also grows when employees have just witnessed operating principles guiding and enhancing the work of planning teams in the combination phase.

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Trust and Confidence: Getting Down to Work Teams make their fullest contribution to the combined organization when members have trust and confidence in each other. Until now, team members have had to make individual accommodations to change; now the group must accommodate as a whole. In a chicken-and-egg predicament, team members depend on trust and confidence to operate in a fully productive mode, yet they require some evidence of productivity and reciprocity from teammates before extending that trust and confidence. A number of factors prevent this from developing in a combined team. First, the team may need lead time to sort out new methods and procedures and a grace period to learn how to work with new systems. Second, performance expectations may differ among members of a combined team. Consider the case of a manager who insisted that his people arrive at work early and stay late. When his team was combined with another that had a more laidback style, trouble ensued. By all accounts, the easygoing group was every bit as successful as its hard-driving counterpart. But when the hard-driving manager secured the top post, he forced his ways onto the new subordinates, who thereupon left in droves. This speaks to a third problem in achieving high performance: how to handle diversity. Naturally, it is difficult to reconcile differences among team members who are used to certain ways of doing things. Can a team accommodate members who like to plan out their work in detail as well as those who take a more spontaneous approach? How about team members who yell and swear at meetings versus those who are accustomed to sober discussion and mannerly disagreement? Organizations and even units within them have different philosophies and approaches to dealing with diversity. It takes time for managers and employees to figure out the rules in each group, and more time to change them. Team leaders can speed the development of trust and confidence in various ways: • Model new behaviors. Modeling desired behavior is powerful even in relatively stable times, and it is especially potent during impressionable periods in team formation. Team

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leaders who do not abide by the rules of the road cannot expect their team members to do so. • Manage performance. Directly rewarding desired performance is the most effective technique that team leaders have for clarifying and reinforcing what they expect from members. Basic principles of effective incentive programs apply here: find out what rewards (financial and otherwise) people want, and clearly link them with desired behaviors. Set attainable goals. To the extent possible, recognize and reward people’s contributions to team building and to doing things the right way, not just bottom line results. • Manage diversity. For one plus one to equal three in a work team, differences between individuals have to be understood and mutually addressed. Depending on how it is managed by leadership, diversity in styles can bring a team to great achievements or tear it apart. Openly discussing the variety of approaches and contributions that can be offered by team members clears the way for them to accept differing perspectives and methods. Good dialogue, built around self-assessment of individuals and the team’s desired modus operandi, generates understanding. Some managers we have worked with convene monthly mini team-building programs to discuss diversity, learn what is and is not working in the team, and address performance issues and opportunities. In addition to diversity in working styles, combinations can produce diversity on another level. We have seen mergers that broaden the mix of ethnicity, gender, religion, and sexual orientation of work team members. The rising number of international deals creates cross-border diversity. Anticipating difficulties in managing a diverse workforce, one U.S.-based firm volunteered its own “valuing diversity” program to its Japanese owners in an acquisition. The training program focused on prejudice and stereotypes and had participants role-play situations that called for managing majority-minority relations in work teams.

Developing Effective Postcombination Teams Team building has about as many permutations as there are varieties of teams and team leaders. We’ve heard leaders of combined

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groups define team building as everything from taking the gang to a Chicago Cubs baseball game to participating in a weeklong outdoor survival experience. Here is a simple definition of team building: any planned intervention that enhances a team’s effectiveness. Team effectiveness, in turn, develops when members have clear identity, appropriate work processes, ample communication and feedback, and goals achieved that are concurrent with personal growth and development. Formal team building (as opposed to a social event at Wrigley Field) accelerates individuals’ melding into a team. It does so by helping a group identify and address inhibitors to team effectiveness as well as by raising and reinforcing enablers of team effectiveness. Team building provides structure and clarity to the team’s work early in its development and attends to the group dynamics and personal needs of members as the group matures.

A Prescription for Teamwork When we advise on combinations, we like to meet with functional leaders upon their appointment to review team-building responsibilities and intentions. To ensure that their team building is thorough, we review a comprehensive team effectiveness framework with them:7 1. Context and team charter. What is the role of the team in the combined organization? What are its key relations with other teams? What is required and expected of the team? 2. Goals. What is the core content of the team’s work? What are the measures of team success? 3. Roles. What is expected or required of team members, leaders, and subgroups? 4. Procedures. How are meetings structured and the team’s agenda created and managed? How are decisions made and output managed? 5. Interactions. What behavior is expected or required of team members? What ground rules and operating principles will predominate? 6. Team quality assurance. How are the team’s process and progress reviewed? How is feedback provided on team effectiveness?

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The framework helps leaders prepare for and act on team development, in both formal and informal ways. Several managers have used the framework to set the agenda for off-site meetings to launch their newly formed teams. Soon after their formation, teams come together to clarify their charters, goals, roles, and procedures, as well as to establish the operating principles and feedback mechanisms to position their interactions and ensure quality teamwork. We customize activities in these areas to fit the styles and needs of each team and its leader. Some team leaders also adopt the framework into their daily routine when working with new team members. This prompts leaders to discuss and clarify with direct reports the requirements and expectations regarding how work should be accomplished in the team. These informal exchanges build upon and reinforce the progress made at offsite meetings. Building a Business Team To illustrate the team-building process, consider top executives of a business unit offering back-office transaction processing and data-management services to financial institutions and firms. Members didn’t initially see themselves as a team running their merged unit. Their business unit had a mandate to grow and the resources to accomplish it. But everyone had their own view of goals, roles, and responsibilities and thought the leader’s job was to let them do their jobs and run interference for them. The structural challenge was to link divisions organized by products or services with a market-oriented sales force. Operating issues centered on bundling products and services, setting prices, and selling through a matrix organization that featured product lines on one axis and market segments on the other. The new matrix organization was identified by employees in the business unit as one obvious source of consternation. Another was the growing lack of trust between sales (dominated by one merger partner) and service (dominated by the other). Behind all this, senior sales and service executives still strongly identified with their prior companies’ approaches and were unable to agree on priorities, unwilling to make decisions, and, by their own admission, incapable of working together.

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A diagnosis showed gaps and problems in many of the team effectiveness criteria: • Goals. Although top executives in the unit agreed on a general strategy and business model, they had not worked out specific goals and priorities: “What’s our priority: margins or customer relationships?” • Roles. The respective roles of the executives were unclear and responsibilities somewhat confused: “Are (sales) executives supposed to be business managers or technical experts?” • Processes. Disagreement over common processes exacerbated tensions between sales and service: “With cost data, (sales) would give away the store! No checks and balances.” • Relationships. Finally, there was bad blood between sales and service: “(Product-Service) doesn’t trust us.” “It is the ‘immovable object’ versus the ‘irresistible force’.” The business unit leader acknowledged that in creating a matrix organization, he had intermixed an organization of product chimneys with one characterized by independent sales groups. Achieving synergies meant breaking down the walls between these two sides of the matrix. Step one was to carve out an assignment the team would work on as a whole. The group agreed to participate in a team-building program to address structural issues. The meeting began with work on charters and goals: a check of the fit between business strategy and unit charters, articulating and prioritizing unit goals and initiatives, and then the team’s rededication to its business plan. This was clarifying for all, and interactions were cordial. An analysis of the top team’s roles, however, generated considerable anger and disagreement. The heat centered on who would have what authority over decisions and what they would need in the way of information and support. There was back-and-forth discussion about the respective prerogatives of sales and service, and questions as to why so-and-so needed that information, who else would see it, and so forth. To sort through these issues, each member of the top team then completed a “responsibility matrix” that addressed (1) tasks requiring partnership, (2) each team member’s own responsibilities in the partnership, and (3) their

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partner’s responsibilities. Agreements were grudging and the team’s esprit de corps faded. To focus on interrelationships, the top team then participated in an outdoor adventure course. Through a series of initiatives, such as helping one another through a rope spider web, the senior leaders practiced setting goals, assigning roles, and developing teamwork processes. As often happens, relationships improved as the day went along; people who were sometimes adversaries at work began to work together in play. The culmination of the outdoor program was a raft-building exercise where service and sales each lashed inner tubes together to form a raft, decorated it, prepared a song about the unit, and raced each other across a lake. Once launched, the teams rowed feverishly and began to bump each other’s boat in an effort to win. The product-service side won the race, but the sales side countered that its craft was the more seaworthy. “C’mon aboard, we’ll show you,” one sales manager challenged. There was scarcely a sound, and no one moved at this challenge. Then one service manager climbed on, followed by another and another. Soon the losing raft, tottering under the weight, was holding both groups of managers. Together they sang each other’s songs. This event seemed to bond the senior team and reverberated down both sides of the matrix. With defined goals, clearer roles, and some measure of camaraderie, the senior team went on to engage one another’s subordinates and sort through many of the conflicts that slowed integration and provoked distrust.

Transforming an Asian Leadership Team We criticized Unilever for its handling of Ben & Jerry’s, but the company deserves praise for its combination with Best Foods, especially for the transformation of its Asian operations and creation of a combined leadership team. The merger joined Unilever’s food-and-beverage brands, including Lipton teas and Blue Bonnet margarine, with its partner’s Hellmann’s mayonnaise, Skippy peanut butter, Knorr soups, and Karo syrup, among others. This was a product extension acquisition as the combined companies had few overlapping products in complementary markets in the United States and Europe. In the Asia-Pacific

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region, however, the combined companies’ operations were spotty and its food portfolio not well tailored to Asian consumers. Louis W. “Tex” Gunning, who had a solid reputation for leading a successful internal merger of margarine-and-foods in Western Europe, was named to lead the integration and head UBF Asia.8 His starting point was to connect senior leaders of seventeen national companies in the Asia-Pacific region—which had operated independently—and to include the next layers of country marketers, supply chain managers, and corporate staff in reviews of product portfolios, market strategies, and operating performance for the whole of the regional business. The cultural challenge, less clear and more daunting, would be to break down barriers and to bridge the diversity in the region.

Unity-in-Diversity UBF Asia leaders debated whether or not building a corporate culture based on strong individual leadership was the right choice. Certainly this was the preference for leaders who had been trained in western business schools and groomed in what has been two historically top-down companies. At the same time, many were aware of new models of operating as a leadership team. This idea was appealing to many Asian leaders who were born of more communal rather than individualist cultures and believed in the value of group leadership. Just as important, Gunning’s emphasis on unity-in-diversity would mean that they could and indeed should bring their national style and identities strongly into their jobs. It is one thing to talk about teaming across national boundaries in the comfort of an office or conference center; quite another to do it “on the ground.” To build this sense of teamwork and to leverage diversity around the region, the leaders embarked on a series of journeys to educate themselves about their business, their markets, and the issues surrounding them.9 A first journey took them to Sarawak, Malaysia, to see a traditional culture and people’s eating habits. A second one took them to China. In both weeklong journeys, the leaders shared personal stories about their upbringing and interests. They talked, too, about the business and what it would take to lead it as a team.

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Learning to talk together was not easy. Said one, “In an Asian culture, it’s not easy to speak out. The risk is very high to stand up and say something. It must be the right thing.” “The initial step of sharing personal information was difficult,” another added, “but once you sense the value of truly connecting, building on it seemed relatively easy.” In time, conversation became more fluid. “I have understood myself and I have understood my team,” said a Filipino. “I also feel that the emotional bonding within the team has now developed even more. It’s great to hear everyone’s view and aspiration, and also to see our willingness to put the entire burden on the table to discuss, all to speak up and honestly share.” Becoming a Leadership Community Beyond personal sharing, there were also explorations of the different markets and cultures. In China, for instance, the leaders “got into the skin” of villagers by working alongside them as they swept streets, herded buffalo, formed cement building blocks, and led schoolchildren in play. The business leaders met villagers in rural China whose income was less than US$125 per annum. “Seventy percent of our 140 million people are similar to the family of the man I met today,” said a Pakistani, “while only 5 percent have a lifestyle similar to mine. I need to respect them and to value them for who they are and what they deliver to all of us.” An Indonesian added, “This is critical when we aim to improve their nutrition, their health, their happiness, life and future.” The third meeting was in India where the leaders studied differences in modern and traditional trade, visited diverse communities, and saw experiments to reach the poor at the “base of the pyramid” with branded products. The leadership team evolved to a stage where they could talk about sensitive and emotional subjects, such as “saving face,” and confront the assumptions and cultural values behind each other’s points of views. “Whilst there are differences in our appearance, speech, and food,” said an Indian manager, “sharing innermost feelings and fears so openly has bonded us emotionally.” A final journey took them to Sri Lanka to participate in community service among those ravaged by the tsunami. Over time,

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the impact on their teamwork was palpable. “This is really about connecting to a group of people,” said a leader from Taiwan, “so we really know the people, and have a feeling about who they are. That’s the only way we can really commit ourselves to build a great Unilever Asia together.” “In Chinese we always say it’s quite easy to break one chopstick,” added another. “But if you put the whole bunch of chopsticks together, it’s unbreakable.” From Teaming to Transformation Their consciousness raised by these journeys around the region, the management team set up regional recipe centers to develop new food brands relevant to Asian markets, engaged staff at every level in community service activities to get them closer to their markets and communities, and, with a commitment to social needs in the region, Unilever Asia had a distinctive contribution to make: in partnership with UNICEF, it helped to launch a “kid’s nutrition” campaign that included sponsoring research into the impact of saturated fats on children’s physical and mental performance, hosting conferences on improving youth eating patterns and preferences, and developing healthy breakfast foods aimed at fortifying the diet of poor kids. Based partly on Gunning’s leadership and the work of Unilever Asia, Unilever overall developed a new corporate brand identity that would integrate its home-and-personal-care and food-andbeverage businesses beneath a new mission: “To add vitality to life by meeting everyday needs for nutrition, hygiene, and personal care brands that help people feel good, look good, and get more out of life.” One of the first tasks was to be more proactive around nutrition: nearly twenty thousand recipes were put through a nutrition profile model and subsequently reformulated to reduce trans fats, saturated fats, sugar, and salt. Another was to develop a business model for sustainable sourcing of fish and the use of “fair trade” trees. In Asia, employees formed “green teams” to contribute to environmental clean-up and partnered with local communities on watershed improvement projects. This transformation has been a commercial success for Unilever and created a cultural breakthrough in Asia.10 “With the kind of community and mission driven approach that we have in Unilever Asia it is possible for us to make a difference to our

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society and still be in business,” said one leader, “and it is important for us to be in business because that that is the only way we will continue to make a difference to society.” Unilever Bestfoods and the other cases presented here succeeded because individual managers were proactive and seized on an opportunity to create a new and better organization one team at a time. In many other combinations, however, team leaders are weighed down by the loss of talent, disharmony among the remaining employees, an ongoing cultural clash, and a lack of progress in implementing combination plans. Thus we turn our attention in the next chapter to damage control and what steps successful managers take to recover and move forward.

Chapter Eleven

Damage Control and Recovery Organizations and their members can be incredibly resilient when a merger or acquisition has gotten off the rails and the combined company has a protracted postcombination slump. Frankly, it is not uncommon: lots of deals are either opportunistic or focus initially on cost cutting. The former doesn’t offer much lead time and the latter doesn’t provide much of a rallying call for employees to pull together. Moreover, internal politics and competitors’ moves can overpower even a thoughtful, collegial, and culturally sensitive integration of firms. The too-common result in the postcombination phase is that firms have to move into damage control. In this chapter, we show some ways that companies can recover from their missteps and reroute a combination toward achieving its financial and strategic objectives. Damage control results not only from a combination being mismanaged, but also from being undermanaged. The rigors and requirements of effective integration management can overwhelm executives who are not up to leading a transition. Plus, in a phenomenon we are seeing more frequently, firms can also suffer from “change fatigue” occasioned by multiple combinations and attendant waves of restructuring and downsizing. Rather than being charged up by a new acquisition or partner, managers and employers are instead afflicted by the lingering effects of previously incomplete transitions. Research shows that people become increasingly pessimistic when they experience one disruptive event after another and literally see no end in sight to all the instability.1

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Having to do damage control is especially frustrating to leaders who genuinely see enhanced business prospects on the horizon. Their spirits may be buoyed by new opportunities created by integrating—perhaps the transfer of a promising technology, the strengthening of product or service offerings, or even the elimination of a competitor. They see the prize within reach, but their merged organization won’t budge and their people are neither ready nor willing to move forward. Instead, they fixate on all the things that are going wrong, fret over fallen comrades who’ve been let go, and align themselves with the “walking wounded” whose careers have been set back by the combination.

Picking the “Wrong” Executive EurTel (a pseudonym) emerged from the rubble of a 2003 “merger of equals” between two staid European-based telecoms. The combined organization was envisioned to be a “dynamic worldwide force in telecommunications products and services.” Both sides had been stable places to work. The merger changed all that by abruptly bringing employees into the harsh realities of twenty-first-century working life—a workplace characterized by continuous discontinuous change. Those who survived the merger endured a diplomatic but conflict-averse CEO who couldn’t push integration through the company and attempted two languid restructurings before the board ousted him in 2004. A new CEO arrived with the intention to show the board that he was a man of action. He overhauled the company strategy, downsized the organization in each of the next three years and, in what he considered to be his crowning achievement, boldly acquired a major U.S.-based competitor in 2008. In announcing the deal, the CEO confidently noted that it was founded on a challenging growth strategy—EurTel had never fared well in the North American market and this was an opportunity to get a foothold in it. He acknowledged that a modest number of redundant positions would be eliminated but countered that the acquisition most likely meant that the company itself would not be taken over in an industry consolidation. Nonetheless, EurTel employees—who, within five years, had been through three downsizings, two restructurings, and a new CEO—reeled when they heard the announcement of the acquisition and the proposed elimination of jobs.

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While prepared for some criticism of what would be a fourth downsizing in as many years, the CEO was taken aback by the extent of employee upset. He asked that focus group interviews be conducted to more fully understand their viewpoints. The findings revealed barriers to a smooth combination. Some were forces within EurTel itself, such as “us-versus-them” dynamics still lingering from the merger of equals five years earlier, “burn out” from the serial downsizings, and the souring laments of opinion leaders who bemoaned the loss of “the good old days” of longevity and loyalty. Others were born of the acquisition, specifically, that counterparts in the U.S. firm were very aggressive and would compete for top jobs in the combined organization. Fears about their partner’s aggressiveness and political acumen seemed to be confirmed when the head of the acquired side’s sales force was appointed to run the combined sales organization. “Who bought whom here?” asked one EurTel sales director when the American announced his intention to downsize the lead company’s sales staff and integrate it into the acquired company’s structure. Next came a “take no prisoners” visit by the American to the European partner’s sales offices where, according to one Spanish sales director, “he laid down the law, said that he was in charge, that what he said goes, and that if anyone didn’t like it, he would be happy to show them the door.” Damage Control Hearing of such complaints, the CEO asked the American sales executive to work with a consultant to get some coaching on organization and team building. Instead, the sales head was “too busy.” Some time passed, and the sales executive was then told to get some help. Now the reply was “not interested, not needed.” At this point, the CEO faced up to the error he had made, put together a severance package, and sent the American executive out the door and back home. Differences in personality, corporate culture, and national culture were all part of the mix here. Moreover, with an eye to appearing evenhanded, the CEO may have made a mistake in picking an abrasive American to run an international sales force. Should he now appoint a European and risk a sense of betrayal in his American acquisition? Instead, the CEO asked the chief executive of the acquired U.S. company—who was planning to

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retire—to stay on as acting president of the combined sales organization for no more than twelve months. Employees from both sides applauded the move. The acquired Americans felt they had a well-placed executive looking out for them in the combined organization and the Europeans were happy to be led by someone viewed as a consensus builder with good diplomatic skills.

Stuck in Transition This was a relatively quick fix to a specific postcombination problem. It is much tougher to fix problems that seem to infect an entire workforce that can’t or won’t adapt to the changes wrought by a combination. As we have noted, one objective of joining forces successfully is to help people adapt by moving from a state of being preoccupied with changed circumstances to integrating new demands into their lives. The larger problem in EurTel, as in other combinations, is that people were “stuck” in transition—unable to return to the “old ways” before things changed but also unable to embrace the “new ways” needed to make the combination work. Organizations also get stuck in transition when they don’t move through the three stages of change and instead operate in a state of prolonged disequilibrium. We hear it in combinations when people use clichés to say that they are “spinning their wheels,” or that managers are “chasing their tails,” or that their company “goes this way, then that way . . . all over the map.” In the ideal world, managers could erase the hard feelings, bad blood, and loss of confidence that people experience at this point in the postcombination period and, in effect, start all over again. Instead, they have to deal with people in their here-andnow state and get them working on crucial tasks to move the business forward. This is more than simple “resistance to change.” What are called for are some focused interventions.

Getting Unstuck, Moving Forward The generic problem in cases like this is that organizations and people get “stuck” because (1) the old system was not sufficiently unfrozen to permit purposeful movement and (2) the new system does not have enough shape or critical mass to gel. Accordingly,

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Exhibit 11.1. The Four Elements of Damage Control. Level of Intervention Emotional Behavioral

Requirement Getting Unstuck Moving Forward Empathy Energy Engagement Enforcement

interventions have to be targeted both at getting things unfrozen and at firming up the new organization. Furthermore, the current disequilibrium has left its mark on people at an emotional and behavioral level. Thus, interventions need to be focused on (1) people’s current and desired emotional states and (2) behavior patterns that move them from wheel spinning to progress. Studies show that after a difficult transition, people who make healthy progress through the adaptation process return to their previous levels of happiness, contentment, and productivity.2 The trick is to help them make progress in adapting to new realities. The two tasks (getting people unstuck and moving forward) and two levels (emotional and behavioral) produce four sets of actions for intervening in a failed organizational transition (see Exhibit 11.1): 1. Empathy. Acknowledge that things have been difficult and that frustrations, anger, and disappointment are justified. 2. Engagement. Get people involved in “fixing” problems in their areas of responsibility and inform them about what is happening elsewhere. 3. Energy. Go for some “quick wins” and get people revved up about progress. 4. Enforcement. Solidify new behaviors with acknowledgment and incentives; eliminate bad behaviors.

Empathy • Objective: • Convey empathy and understanding of the difficulty of individual adaptation to organizational transition

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• Actions: • Acknowledge the emotional realties of transition • Raise awareness of transition dynamics and the adaptation process • Use symbols, ceremonies, and forums to end the old A first set of interventions addresses the emotional distress people experience from being in limbo. Empathy facilitates the natural process of adaptation by legitimizing the frustration and disappointment that people feel during a failed combination, raising their awareness of the adaptation process, and accelerating the pace at which they move through it. Studies show that relationships strengthened by empathy tend to enhance perceptions of a leader’s integrity and credibility and engender cooperation and trust, qualities which are sorely lacking in most damage-control situations.3 At EurTel, the CEO drew upon best practices that companies use to recover a customer’s confidence after a service failure—he accepted responsibility and admitted mistakes. His mea culpa surprised employees. Prior to this, as is common among so many executives, he had viewed an admission of error as a sign of weakness. Instead, employees appreciated his candor and opened up dialogue about the possibilities of getting the combination back on track. The effect was cathartic and contributed to a growing understanding that, in the words of one middle manager, “this train has left the station and now we have to decide if we are onboard or staying behind.” Second, the CEO leveled with people that they could expect more difficult times ahead as the U.S. acquisition continued to be integrated. He made a point of providing more balanced information about the combination and urged his executive team members to do the same. Again, this was distinct from previous transitions in the company in which employees heard mostly sugar-coated messages extolling the virtues of the event. He also commissioned workshops to educate employees on the adaptation process itself. Raising awareness helps employees acknowledge what they are personally holding on to and become aware of their reasons for doing so.

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Third, this set the stage for people to come together and come to grips with all the carping and naysaying. Talking about work stresses and strains is a socially acceptable way of expressing discomfort and regaining a sense of importance in the workplace.4 Workshops at EurTel were thus designed to be forums in which employees could vent built-up anger and other negative feelings. A member of EurTel’s senior team opened each session with a personal example of “letting go” of dysfunctional behaviors or attitudes. After the executive introduced the program and left, the workshop leader presented content on employee adaptation to organizational transitions and then facilitated an open discussion of employee feelings and views. Each session featured lively and emotional exchanges among employees. The senior executive who opened the meeting then returned for the last ten minutes to listen to a summary of employee comments— another sign that leadership was committed to overcoming earlier missteps.

Engagement • Objective: • Engage employees in understanding the business imperatives for ending old ways and eliminate roadblocks to the adaptation process • Actions: • Craft communications for the transition situation • Involve people in prioritizing work • Diagnose and weaken barriers to adaptation One way to reengage people is to communicate more fully and frankly with them. At EurTel, senior executives made personal commitments to strengthen communications and tasked all managers in the company to do the same. Staff offered communication skills training programs and rolled out a variety of communication vehicles including a new transition Web site. The CEO convened a communications task force to ensure candid and consistent communication across the organization. At monthly meetings, a designated member from each of the company’s

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global locations shared what was happening in their area and crafted messages to be brought back to their constituents. Another way to reengage employees is to involve them in addressing immediate matters directly related to their work situation. At EurTel, “work expectation meetings” brought together employees and their immediate superiors to set shared expectations and priorities for getting integration back on track. In these sessions, superiors described business opportunities and challenges to employees who, in turn, spoke of difficulties and opportunities in doing their jobs differently. It is important that discussions did not get bogged down with identifying long-term or “perfect” work redesigns but instead centered on gaining agreement on immediate work enhancements that were “roughly right.” With this type of engagement, employees are more empowered and have a heightened sense that desired change is possible.5 Finally, many employees participated in a study of what factors were inhibiting the adaptation process within EurTel. External consultants conducted focus group interviews with a sample of employees, drawing most heavily from those areas of the organization experiencing the most problems with integration. Then, internal HR staff conducted a company-wide employee survey with a focus on adaptation rather than a wide-ranging assessment of employee attitudes. The results of these studies, in turn, were shared with employees in small group meetings as a further means to get them “unstuck.”

Energy • Objective: • Get people excited about the desired post-transition organization and support them in realizing it • Actions: • Clarify a vision of a new and better organization • Create opportunities for public reflection and short-term wins • Provide people with emotional support

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Especially when stuck in transition, employees may be more ambivalent about change rather than outright resistant to it.6 Emotional energy facilitates adaptation by getting people excited about the prospects of the post-transition organization, confident in executives’ ability to lead the way, and secure in their own ability to attain new goals. Specific to the situation of damage control, the expression of a “better future” has an impact on employee perceptions that current conditions in the organization can indeed improve. The optimistic vision of the merger of equals that created EurTel in 2003 had been oversold to employees. After five years of restructuring and downsizing, employees hadn’t seen much progress toward that end. So, how could a new CEO give employees something sufficiently inspirational to raise their sights, especially since the destination of his vision sounded pretty much like the one at the creation of EurTel? The answer was to provide much more detail about the journey than employees had ever before received. In the sales area, the CEO outlined specific intentions for how a revamped and reinvigorated sales organization could give the company a prominent position in North America and other markets worldwide. He accelerated his review of the collective products and services of the combined companies and announced some bold decisions regarding which to retain and which to eliminate. He also put some cultural stakes in the ground, including his desire for a more “aggressive” sales organization. These tangible signs of a better future helped employees to see how current conditions could be improved and that the CEO and his team were capable of leading the way. The next step was to increase employee confidence that their efforts on the job were becoming aligned with that vision. The sales executives were committed to creating an environment in which employees could experiment with and be rewarded for new approaches to customers. Several sales teams, in turn, adopted more aggressive methods for customer contact and follow-up—a cultural practice acquired from the Americans! As in other organizations, recovering from the damagecontrol situation followed a nonlinear path at EurTel—people made progress toward understanding and embracing the new while on occasion yearning for the comfort of the old. Thus, a

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component of generating and sustaining energy was to set expectations with middle managers and supervisors to be sources of emotional and practical support for employees. To assist them in developing appropriate skills, managers and supervisors received coaching and attended role-playing workshops. Over time, employees came to view support from their superiors, and therefore the organization, as an indication that they were cared for, and began to replace their cynicism and anger toward the organization with new confidence and increased momentum in moving forward.

Enforcement • Objective: • Solidify perceptions, expectations, and behaviors that are congruent with the desired post-transition organization • Actions: • Involve people in bringing the post-transition vision to life • Align systems and operating standards with new organizational realities • Track the development of the desired post-transition organization The fourth element for moving out of damage control solidifies perceptions, expectations, and workplace behaviors that are congruent with the desired postcombination organization. Enforcement complements the emotional base of energy by helping people on a practical level by linking individual behavior with the vision and business strategy. Adaptation takes time, and risks losing momentum if there is no feedback to employees about their performance and contributions to the new desired state. Thus, rather than wait for the annual performance review, EurTel’s HR group initiated more immediate feedback—specifically threeand six-month performance reviews—and business unit leaders and department heads created opportunities for small wins. It is important to note that they used attainable targets and provided frequent feedback; stretch goals that went unmet would only have further demotivated employees. In addition to feedback on

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their own performance, employees learned about and took part in celebrating small wins elsewhere in the post-transition organization. Engagement was critical to getting people unstuck in this stalled combination. Enforcement, in turn, strengthened forces for change. Research shows that real change occurs when a critical mass of people can actually “live the vision” in their everyday organizational life.7 At EurTel, a formal program dubbed “Living the Vision” harnessed employee involvement to build upon senior leadership’s vision and strategic direction for the combined organization. Working from the organizational vision, managers and supervisors developed business unit or functional mission statements as well as guidelines for employee behavior. Then, in work groups, employees translated the vision, mission, and behavior guidelines into day-to-day operating procedures. This clarified how employees could align their work with the vision and provided an answer to the prominent question of how they could contribute to overall organizational success. Moving back up the hierarchy, supervisors and managers reviewed the proposed new ways of approaching work to ensure they supported the mission and vision and to provide coordination across work areas. When employees were able to look ahead and understand how their efforts contributed to the desired organization, this was “living the vision” at its fullest.

Redirecting a Combination A final look at damage control concerns the redirection of a combination: giving it a new strategy and redirecting its course. There is no better example than Hewlett-Packard’s 2002 combination with Compaq that was described, early on, as the “merger from hell” but ended up quite profitable and provided a platform for HP’s subsequent acquisitions of EDS in 2008 and 3Com in 2009.8 Anyone who follows companies and M&A is familiar with the basic contours and controversies of this deal, so we offer here only some barebones background before focusing on damage control. HP bought Compaq in 2002 for $24 billion in stock, the largest deal in the history of the computer industry. It would involve

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combining companies operating in more than 160 countries and employing nearly 150,000 people. In essence, this was a merger where synergies would come from consolidating functions and offices and integrating multiple product lines. In making the case, however, HP CEO Carly Fiorina touted how it could transform the combined firm into a “solutions” provider, à la IBM, with a full range of hardware and software offerings and technical and business support. Clearly there would be cultural conflicts: HP was noted for its engineering while Compaq was dominated by sales. HP was also very collegial whereas Compaq was more prone to “slugging it out.” Moreover, the track record of M&A in the computer industry was not encouraging and both HP and Compaq had had some failed acquisitions. When Fiorina proposed merging with Compaq, she set off what pundits called a “firestorm.” Walter Hewlett, the son of one of the company’s founders, mounted an aggressive proxy fight to prevent the combination. Stockholders were fiercely divided as to the wisdom of the move. A chief competitor, Michael Dell, CEO of Dell Computer, called it “the dumbest deal of the decade.” What were the concerns? Apart from the culture clash, the combination would gain market share but not market leadership. Moreover, no significant technology would be gained by HP. And, while wrestling through a complex integration, HP risked keeping up with Dell in the PC marketplace.

Fast Start: Adopt and Go To minimize time lost to integration, Fiorina appointed HP executive Webb McKinney and Compaq finance chief Jeff Clarke to set up a “clean room” some eight months before the deal would close to establish a master plan for integration and conduct a thorough analysis of the two companies’ products, capabilities, and cultures. The clean room started small but ultimately involved over two thousand employees by the time of the close. Activities followed Compaq’s “adopt and go” methodology to hurry their decision making. Subteams looked into each company’s premerger practices and then, rather then blend them, chose which side’s best suited future needs. They developed an operational

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plan to integrate the companies so that the combination could begin the day the deal closed. In addition, HP and Compaq established a “fast start” cultural integration led by Susan Bowick, head of HR and a veteran of prior HP deals. Once the deal closed, Bowick’s team rolled out a program of workshops to address, among other subjects, the Merger Syndrome and clash of cultures. Sessions also explained the new business model and got employees on both side involved in conversations about their prior cultures and the new one. Over 150,000 people participated in fast-track workshops over the first months. Initial results for the combination were impressive. The integration planning process was so successful that on the day the merger was approved, the new company’s hp.com online store was open for business, the internal employee portal was ready to go (and had more than two million hits a day), almost twelve hundred networks were functioning, and e-mail connecting 229,000 mailboxes was up and running. In the first twelve months, the merger produced $3.7 billion in synergies and 95 percent of integration milestones were achieved in areas including headcount reduction, procurement and supply chain, facilities closures, and IT integration. Revenue results easily exceeded Wall Street expectations of $1.4 billion.9 We might add that, from our vantage, the precombination activities and integration planning process used to merge HP and Compaq were best in class.

Operational Versus Strategic Integration Despite this fast start, the merger began to experience serious problems. First, Dell quickly responded to the “new HP” and regained leadership in personal computers within a year. HP missed its second-year targets and estimates of growth in the business and PC markets were too optimistic. Walter Hewitt made an “I told you so” comment that reverberated within HP and in the marketplace, “I don’t see a pretty picture. … The new HP is steadily declining while their opponents are now on growth paths.” In his analysis of this case, Professor Robert Burgelman argues that though the logic for the integration and the performance

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goals were on target, short-term financial goals led executives to fixate on operational integration at the expense of the strategic integration process. Also, the battle fatigue that unavoidably accompanied working through the operational integration process made simultaneous strategic learning exceedingly difficult. Consistent with our research that senior executives tend to turn their attention away too quickly in the postcombination phase, Burgelman reports how the progress of early actions came to be supplanted by insufficient oversight later on: “This, in turn, resulted in insufficient top management attention to executing the multi-year strategic activities necessary to meet the longerterm goals. Victory was claimed too soon, and the opportunity costs of the operational integration part of the overall process were not fully appreciated. Viewing the execution of the acquisition integration process primarily in terms of the operational integration process prevented top management from clearly seeing the need to augment its own bandwidth.”10 During this period, the former Compaq CEO left her team and Fiorina assumed the titles of chairman and CEO. Layoffs increased and profits declined. Fiorina was asked by the board to appoint a COO. She refused. After several contentious meetings, and the highly publicized “bugging of the boardroom,” the board fired Fiorina in February 2005. Damage control time.

Hurd to the Rescue Mark Hurd, former head of NCR, took the helm shortly thereafter. Two big issues faced HP: spending and growth. The former he addressed via aggressive layoffs and cost cutting. The latter was trickier. It required educating HP managers and employees on how to realize the cost and operational efficiencies and translate those into higher margins for each business. By getting HP’s leaders to do a better job of exploiting the possibilities of the merger and thus the capabilities of the combined company, Hurd accomplished what Fiorina couldn’t: he reduced the cost structure, increased the speed of decision making, and enhanced accountability. Instead of controlling only 33 percent of a P&L, executives now controlled 75 percent of their P&L. The company also removed $1.92 billion in costs.

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With a hands-on focus on the details, Hurd moved integration faster and farther toward growth. He also reached out to longtime friends of HP from the David & Lucile Packard Foundation and the William & Flora Hewlett Foundation, who had opposed the merger, and to William Hewitt. And he met with former HP CEOs John Young and Lew Platt, as well as former chief operating officer Dean Morton. This was his attempt to “hold on” to HP’s storied past and rebuild aspects of its traditional culture. Burgelman notes that Hurd encountered a common M&A dilemma—not knowing in advance the true opportunities in an integration to exploit because executives from the partners only know so much about each other. Unlike most others in this situation, however, Hurd drilled down deeply to get the heads of various business units to actually push to the frontier of what was possible.

Listening and Learning The leaders at EurTel and at HP inherited postcombination damage-control situations when they took on new CEO assignments. Clearly, the two situations were complex and multiple factors played into overcoming damage and getting their combinations moving forward. The CEO at EurTel commissioned focus groups when “noise” erupted about what he saw as a promising acquisition. Timely feedback about the depth of employee resistance and burn-out—and about impressions of the sales president’s dominating behavior—prompted informed and, ultimately, well-received actions. He commissioned research studies both to understand the employees’ adaptation process and to help his employees contend with another round of continuous discontinuous change. This learning orientation is, in our view, integral to dealing with damage and essential to recovery. At HP, Hurd encountered an all-too-common scenario: top and senior managers consumed with having to simultaneously manage challenging integration tasks and deliver the expected quarterly financial results. His predecessor, by many accounts, was not a great listener and did not create a “feedback-rich” environment around her. Hurd is a no-nonsense executive but had the

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good sense to learn his way through the HP culture and listen to feedback from HPers at every level and in the market. It is not, of course, only the CEO of the lead company who can profit from listening and learning. Walt Freese at Ben & Jerry’s led its turnaround by gathering data and building a compelling case for repositioning B&J in its parent company. He, too, listened and learned, sponsored a study of his company’s acquisition, and used the insights to execute a turnaround. We’ve found many benefits that arise from assessing the combination in each of the three phases, a subject taken up in the next chapter.

Postcombination Checklist

Implementation begins in earnest as the combined organization’s structure, policies, and practices roll out. Executive oversight maintains that the deal’s strategic drivers are realized and sets a standard for helping people adapt to new realities and for developing teamwork throughout the organization. The best acquirers embrace flexibility in implementation, but also monitor the impact of the combination on people, culture, and operations and raise up learning opportunities to better manage both this combination and future ones.

Postcombination Phase Action Checklist Strategy Maintain executive oversight 䊐 Oversee implementation to ensure that strategic synergies are realized 䊐 Coordinate issues across units 䊐 Take hold of issues and opportunities as they arise Organization Implement operational practices and procedures 䊐 Implement task force recommendations in a manner that enables employees to feel more like architects of change than victims of change 䊐 Clarify roles and responsibilities

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Align organizations, policies, and practices 䊐 Address relations and interactions across functions and units 䊐 Mesh policies and practices 䊐 Determine extent of consistency from employee perspective People Help people adapt to transition 䊐 Continue employee stress management and address “survivor syndrome” 䊐 Offer venting opportunities 䊐 Help people let go of the old Provide teambuilding 䊐 Get staff on side and build commitment 䊐 Help leaders establish position and revitalize a sense of all on one team 䊐 Clarify business objectives and short- and long-term goals Culture Build the desired culture through leadership actions 䊐 Monitor the intended and unintended cultural messages being sent 䊐 Walk the talk Reinforce desired culture through the ranks 䊐 Engage employees in “translating” vision, critical success factors, and operating principles into on-the-job actions 䊐 Provide short-term bonus opportunities to reinforce desired behaviors and align long-term reward programs with desired culture Transition Management Track the impact of the combination to date 䊐 Conduct employee attitude surveys or focus groups 䊐 Identify the impact of the combination on productivity, organizational effectiveness, and interpersonal relations

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䊐 Identify the extent to which the business goals of the combination are being achieved or hindered by employee reactions 䊐 Highlight potential “hot spots” before they flare out of control 䊐 Signal that a regard for two-way communication is part of the new culture Build a competency in combination management 䊐 Learn from this combination to better manage future ones

Part Five

Building M&A Competence Soon after we began to study and advise merger, acquisition, and alliance partners, we observed a common factor in the ones that succeeded: managers made one or more significant midcourse corrections when implementing combination plans. A delay in technology convergence, for example, necessitated overhauls to the new product launch schedule in an information technology acquisition. Lingering animosity between two sales teams in an industrial products merger prompted a CEO to rethink and radically redesign the sales and marketing function. Culture clash in an alliance between a staid university research center and a nimble biotech start-up, that intended to draw from the “best-of-both,” instead led the partners to borrow best practices from other ventures and to devise a wholly different R&D work plan. Why aren’t companies more adept at correcting missteps and, indeed, preventing them? • Bad news doesn’t rise easily to the top. During mergers and acquisitions, anxious employees don’t know what happens to the bearers of bad news in the new organization and don’t want to risk being a test case. In each of the above cases, the combination leaders created a feedback-rich environment where the emphasis was on finding problems and fixing them, rather than on fault finding and CYA (covering your ass).

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• No systematic M&A tracking. In these cases, too, managers learned about integration impediments relatively early and certainly before they mushroomed out of control. The first hints of a technology delay in the acquisition came from a series of employee focus group interviews scheduled as part of the combination program. The friction between merged sales teams was reported in a survey of customers. And the persistence of culture clash came to light from an employee attitude survey. • No commitment to building M&A know-how. We’ve talked about how companies err by adopting a one-size-fits-all approach to combinations. The bigger error is not investing in developing an organizational competence in M&A—not only in the corporate development and M&A function but more broadly among corporate and business managers, as well as staff. To close this volume, Chapter Twelve describes how leading companies track a combination’s impact on their organizations and employees, as well as on customers and other stakeholders. Chapter Thirteen, in turn, shows how the lessons learned from one combination can benefit the management of future ones and how top companies are building internal core competences in various facets of M&A management.

Chapter Twelve

Tracking and Learning from the Combination To make a merger or acquisition work means learning how to translate theoretical synergies into real gains, how to recognize and deal with unintended consequences, and how to adapt to events as they unfold. Some of this learning comes from trial and error. But effective learning requires a front-end “theory of the case” about how a combination is expected to unfold, then ongoing examination of progress and problems, all within a context that supports reflection and continuous improvement. This is aided by the use of valid data and studied attention to it at each of the combination phases. In some cases, the political climate prompts people to ignore issues that arise or cover up problems out of fear that they will be on the receiving end of criticism and scapegoating. By comparison, in successful combinations missteps are treated as inevitable and as opportunities for correction. This learning orientation starts at the top when leaders acknowledge personal errors and model the practice of “attacking the problem, not the person.” It also takes a commitment of financial and human resources. This chapter describes why and how companies track their combinations and how they use the information at every phase to improve the process.

Knowing What Is Going On Joining forces effectively benefits not just from skilled management but also from informed management. Successful navigation

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through a complex organizational transition requires a constant flow of operational and behavioral information about how the business is performing and how people are acting and feeling. This information helps managers monitor the impact of the combination and the effectiveness of the process. It also directs attention and resources to the issues that matter most for eventual success. Of course, leaders frequently think they know what is going well and what isn’t working.1 But when they consult mainly with peers and direct reports, what executives hear is often censored and self-serving. This can give them a distorted picture of progress and false assurances that problems will pass so long as they stay the present course. Even in firms that have a good communications climate, a combination upsets regular methods of intelligence gathering and two-way information exchange.2 People put on poker faces and keep their cards close to the vest. Trust has yet to develop and people do not know the consequences of speaking up. Is the “messenger” shot? Will a critical comment come back to haunt you? Will a new boss or peers feel betrayed by an employee’s candid reports about problems in a work team?

Benefits of Combination Tracking Executives from several organizations we’ve worked with have reaped assorted benefits from tracking the progress of a combination: • Determine if the integration is proceeding according to plan or veering off course. A formal tracking program provides decision makers with feedback on how the combination is affecting people and the business. In one high-tech case, interviews revealed that unclear work charters, timetables, and financial targets were preventing transition teams from coming to decisions about the design of the combined organization. When briefed on the findings, the CEO met with each task force to clarify the situation. • Identify hot spots before they flare out of control. In an acquired manufacturing firm, the secrecy of deal making created an

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air of distrust between employees and management. An employee survey conducted a few months following the acquisition showed morale eroding among production workers. Attributing this to “post-merger stress,” management initially downplayed the data. However, when follow-up interviews showed that employees felt neglected by management, senior management moved swiftly to open communication channels and respond to aggrieved employees. • Ensure a good flow of upward communication. Bad news does not easily rise to the top of the organization in a merger or acquisition. A formal tracking program gives employees the chance to communicate to upper management and provides a mechanism for top echelons to hear from those closest to the action. In one case, senior sales managers ballyhooed the benefits of cross-selling each other’s products. But salespeople had no updated sales literature or demos, and scant direction on pricing and delivery dates. Busy with all the personnel paperwork, sales managers downplayed these complaints. Once senior executives learned of these problems through focus group interviews, however, sales aids soon flowed to the branches. • Highlight needs for midcourse corrections. Tracking lets executives assess the impact of change and make important midcourse corrections. An East Coast professional services firm had hoped to consolidate within one year the operations of two fiercely competitive Midwestern firms that it recently acquired. Tracking showed that bad blood between the two acquirees could not be overcome without a “bloodletting.” Needing talent from both companies, the responsible parent company executive decided to keep the two subsidiaries separate for a time. Revised plans called for gradual integration over a three-year period. • Involve more people in the combination process. A tracking program is a cost-efficient way to involve large numbers of employees in the combination process. Entire workforces or select samples can participate in surveys and interviews. In a major financial services merger, a survey process was commissioned that lasted throughout combination planning

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and implementation. Each quarter, a sample of employees received questionnaires focusing on key issues at that point in the combination process. Results were tabulated for the overall organization and key business units and had a spot on top management’s agenda. • Send a message about the postcombination culture. How the merger or acquisition is managed starts to define the new organizational culture. A formal survey process signals the importance of two-way communication and conveys management’s genuine interest in people’s problems and perspectives. By comparison, the absence of any formal feedback channels can imply that leadership doesn’t care about what people think or feel during the transition or later in the combined organization. • Demonstrate interest in the human side of change. A tracking program also has tremendous symbolic value: it is a tangible reminder to employees that their leaders care about them and their opinions. Asking people how the combination has affected them, their coworkers, and their ability to perform demonstrates that management is interested in the human side of change.3

Resistance to Tracking the Combination Despite the many benefits of tracking a combination’s impact and progress, there always will be some resistance. Early on, managers fret that nothing positive has happened yet and predict that employees will only cite the downside if asked their views. Then, as combination planning begins in earnest, managers object on the grounds that the time taken to collect, analyze, give feedback on, and work with data detracts from attending to business opportunities. Next, as planning gives way to implementation, some argue that it is “too late” to assess employees’ views since the combination is almost “over,” while others assert it is still “too soon” because their organization and people have not yet settled into a normal routine. These arguments have some validity— there is no “ideal time” to measure employees’ views during a merger or acquisition. However, none of them is an excuse for putting off tracking.

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Managers’ resistance typically is motivated by their fear of being assessed. It is important, then, to set a developmental tone for tracking and to engage managers and their teams in shaping the data gathering and using the results. Messages from the top clarify that data is being collected to understand and focus on key issues, not as a performance appraisal for managers. Moreover, many managers wrongly assume that employees expect changes to be made reflecting their input and use this as an excuse to thwart tracking. The only obligation when conducting employee research is to convey that the findings were heard and considered. A straightforward explanation of why an issue cannot be addressed or a change cannot be made at this time is one way to act responsibly on the data.

How to Track a Combination’s Progress and Impact A variety of methods can be used to collect data about a combination’s process and progress. Certainly there are distinct advantages to, say, interviews versus employee surveys (depth versus breadth of opinion) and focus groups versus informal conversations (more structure versus spontaneity). Good tracking programs rely on multiple methods of data gathering: • Employee surveys. An entire workforce or a cross-section of the organization can be surveyed. Alternatively, particular groups most affected by a combination can be targeted. Employee participation should be voluntary and individual results kept anonymous. • Interviews. Confidential interviews allow employees to expand on their views, offer detailed explanations, and provide examples. Interviews should be relatively unstructured when general information is desired or guided by a set of questions when specific data are needed. When collecting companywide data, it is useful to sample a mix of employees who are both supporters and critics of the combination; who come from multiple levels; and who represent various departments, divisions, and demographics. • Focus groups. These are interviews conducted with groups of employees. They let participants build upon one

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another’s responses—but in a climate of low trust, people may clam up. A skilled facilitator can elicit true feelings, and also prevent focus groups from degenerating into bitch sessions. Exit interviews. Interviews conducted with people leaving (during or soon after a combination) can be used to find out what, if any, aspects of the transition influenced decisions to seek employment elsewhere. If a repetitive pattern is found, the company can take action to address the causes of voluntary turnover. Performance records. Many corporate reports contain combinationrelevant data. Records of turnover, absenteeism, grievances, and the like are good metrics of morale in the combination. Tracking customer orders, productivity levels, quality control, waste, accidents, and the like before, during, and after a combination can be useful in evaluating progress and spotting problems. Web sites and media. Smart companies also monitor Web site traffic, social networks, and blogs to see who is looking into their combination and what is being said. Of course, they also check customer comments and press coverage. Industry benchmarks. Sometimes a good measure of a combination’s progress comes from comparing it to others in the same industry. Observation and informal conversation. Managers can also assess the state of their combination by observing and informally chatting with supervisors and employees. Management by walking around, conversations in hallways, and after-work bull sessions all provide occasions for gathering data about a combination.

What to Monitor and How to Do It Naturally, a formal tracking system assesses the progress of the combination with respect to schedules, budgets, and targets. It can and should also address the human side of M&A. The best tracking efforts focus on the specific dynamics at each phase of a combination (see Exhibit 12.1).

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Exhibit 12.1. What to Look for in Combination Tracking. Precombination Phase Early in the combination process, tracking tests for the extent to which people understand the purpose and promise of the combination and how they are affected by it: • • • • • • • • • • • • • •

Is the rationale underlying the deal understood? Is the end-vision clear? Credible? Energizing? Do the CSFs make sense to people? What business benefits do people anticipate in the combination? What personal benefits are anticipated? What signs of the Merger Syndrome are people experiencing? How are morale and productivity being affected? What messages are leaders sending? Do management’s actions align with their words? Do people feel well informed about the combination plans and process? Does the full management team seem in sync regarding the combination? Are managers at all levels taking steps to minimize negative reactions and build positive feelings? What early impressions are being formed of the partners’ ways of doing things? Are cultures clashing?

Combination Phase Next, in the combination phase, tracking focuses on the quality of planning and decision making: • • • •

Are the CSFs being adhered to? Are operating principles being followed? Are participants being pushed for the best possible solutions? Are new and better ways of doing things being considered, or are the old ways being carried forward? • Are task force members getting the information and other resources they need? • Are politics and favoritism influencing the decision-making process? (Continued)

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• Are task forces coordinating well with one another? • Do people outside the process feel well informed? • Do managers have sufficient information to give their people a clear picture of where, when, why, and how changes will be occurring? • Are staffing decisions based on valid criteria? • Is a truly better organization emerging? Postcombination Phase Finally, as implementation proceeds in the postcombination phase, tracking assesses the extent to which people are prepared to make their contribution to the postcombination organization: • Do people understand their new roles and responsibilities? • Are reporting relationships clear? • Do people have the information they need or know where to go to get it? • Do people understand new policies and procedures? • To what extent are new systems running efficiently and effectively? • Do people have the equipment and resources they need? • What is valued and rewarded in the new organization? • Have the CSFs truly been followed in implementation? • Are schedules on target, and are changes being effectively implemented? • What are the business benefits of the postcombination organization? • What are the personal benefits of the postcombination organization? • Are managers being given the resources and support needed to reorganize their departments and rebuild capability? • Is a one-company mind-set being developed, or are cultures clashing? • Is teamwork being developed in work groups? • Is teamwork emerging across work groups? • Has a new and better organization been built, or are the precombination ways being carried forward? • What new or unanticipated issues are emerging?

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The Tracking Process—Gathering Action-Oriented Data For information to be helpful in managing a combination, it has to be valid, timely, and focused on the critical issues that relate to eventual success. Leaders have to honestly assess the extent to which they can collect valid data from managers and employees. Information gathering that generates fallacious data is a waste of time that can misdirect focus from critical areas requiring attention. The extent to which people are candid in completing questionnaires or answering interview questions depends very much on prevailing levels of trust within and between the combining organizations. Therefore, many executives rely on outside professionals to conduct surveys or interviews, particularly in the early months of a merger. Once employees see that there are no personal repercussions for speaking up and that their input is listened to by those managing the combination, then responsibility for conducting the tracking can be turned over to internal staff.

Guidelines for Tracking the Impact and Progress of a Combination Some special conditions of mergers and acquisitions should be considered when designing a tracking process: • Understand the history of employee research efforts in the partner organizations. Although the tracking effort should signal an interest in the “human side” of a transition, there are instances when people in either firm might have suspicions about the intent because of bad experiences with prior employee surveys and studies. Explain up front what tracking is all about and why—and how—you are doing it. • Specify that the tracking has nothing to do with personnel selection. Make clear that tracking is not related to the selection process for jobs in the combined organization. • Maintain confidentiality throughout the process. Especially when using write-in comments in surveys or in notes from focus group interviews, take care to ensure that anonymity is always protected and confidentiality is never compromised.

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• Be aware of language differences between the partner organizations. Words and phrases may be used differently in the partner organization. Does an “associate” refer to a coworker or subordinate? Does “leadership” refer to everyone with supervisory responsibility or just to the most senior levels of the hierarchy? Take care to check that terms mean the same things across both employee populations. Avoid using acronyms and, for global companies, make some provisions, where feasible, to have interviews and surveys conducted in the employees’ first language. • Separate people from the partner organizations for focus group interviews and questionnaires. Some consultants urge executives to “model” a combined organization as soon as possible and act in ways that unify the partners. That advice is a big mistake when it comes to measurement. People are more likely to be on good behavior and less likely to speak up when sitting in a room with counterparts from the partner organization. These self-imposed pressures are not going to yield high-quality, useful data.

Tracking a Financial Services Combination The combination of two major financial services firms provides insight into the rigors and results of the tracking process.4 The purpose of the acquisition was to expand the lead firm’s scope of products, customer base, and global reach. The combining units were large, with over ten thousand employees each. Integration occurred at all levels, with people competing for jobs from the most senior to the most junior ranks. The buying company (Bank A) had a long history of growing by acquisition. Shortly after the announcement of its intent to acquire Bank B, leadership convened a “tracking team” made up of line executives and HR professionals to develop a plan for measuring employee views of the integration process. To determine what to measure, the tracking team built upon five “building blocks” for a successful merger identified by senior leadership: • Define and execute the business strategy. How well do employees understand and believe in the business strategy, and do employees know how to execute it?

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• Build the culture. What type of culture does the firm need to be successful, and how great a shift does this require? • Retain key talent. What factors will make the new company an attractive place to be, and how can leaders respond to the retention risk? • Integrate the businesses. What impact is the integration process having on the business, and is it helping the execution of the strategy? • Create the new organization and new teams. How is the new organization being built, and what does this tell people about the future of the firm?

Measurement and Corrective Actions Over Time A comprehensive understanding of employee opinions required a multimethod, multisource approach featuring a combination of executive interviews, employee focus groups, and employee surveys conducted at three time periods. The combination of quantitative and qualitative data assisted leadership in gaining breadth in covering a wide range of issues and employee constituencies as well as depth in understanding the “why” behind the “what.” Precombination Measurement To begin, in the weeks preceding Day 1, external consultants conducted one-on-one interviews with senior executives from both merger partners to understand their intentions and the critical success factors in the combination. The consultants also used the interviews to elicit any expected roadblocks or resistance to the survey process. This was especially critical to solidifying support for the process in Bank B, which did not have a history of successful integrations. Next, external consultants conducted focus group interviews with a sample of employees from all departments, regions, and demographic groups from both companies. Separate sessions were conducted for officers and nonofficers. The focus groups began with a discussion of initial perceptions of the two heritage organizations. These sessions revealed that Bank A was seen as younger, more aggressive, and faster acting, but also as somewhat arrogant relative to Bank B. Bank B was viewed as older, more traditional,

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strong, and stable, but also far too bureaucratic. Employees made it clear in the focus groups that friction across cultures would be substantial unless these differences were explicitly addressed. Participants from both sides also cited their aspirations for the combined company culture. Themes such as integrity, meritocracy, customer focus, innovation, adaptability, cross-business cooperation, and high involvement rose to the top of the list. Another set of questions in the focus groups explored key concerns about the integration process and the combined company. Employees were generally skeptical about the fairness of the integration process (especially about the transparency of the process for filling positions and selecting systems, practices, and policies). They also expressed confusion about the combined organization’s strategy, worried about having to get more work done with fewer people, and feared that a large bureaucracy would slow down decision making. Many employees from the acquired firm cited fears about being “swallowed up” by the buyer and losing valued aspects of their corporate culture. Combination Phase Measurement In addition to providing some immediate feedback to senior leadership, the tracking team used concerns expressed in the focus groups to design a questionnaire for the overall employee population. Exhibit 12.2 displays the core questionnaire items. Staff from both partners worked together on survey administration and analysis and all employees were invited to participate in the survey conducted on an external Web site. Shortly after the combination received legal approval, employees were invited to participate in an online survey. About 30 percent of employees from both partner organizations completed usable questionnaires. In several areas, follow-up focus groups were conducted to understand issues in depth and identify underlying causes and possible solutions. The tracking team summarized the findings according to each of the five building blocks for a successful integration: • Business strategy. Nearly two-thirds of employees understood why the merger occurred, but fewer than half found the value proposition to be compelling. Most respondents did

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Exhibit 12.2. Roster of Questionnaire Items. This list shows core items that were included in the Merger Survey described in the bank combination case and how they relate to the five major themes (some related to more than one theme). Selected questions for the new company

Defining and Executing Building Retaining Integrating Business the Key the Strategy Culture Talent Organization

Creating the New Organization and Teams

X 1. The merger will result in a stronger company in the financial services industry. 2. The merger will result in better products and services for customers of the merging companies.

X

3. For the most part, my clients/ customers view the merger as a positive event for them.

X

4. I understand the strategy for my business unit.

X

5. Measures exist X to help us assess how well we are executing the business strategy. 6. Employees have been treated with fairness and respect during the merger.

X

X

X

(Continued)

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Selected questions for the new company

Defining and Executing Building Retaining Integrating Business the Key the Strategy Culture Talent Organization

7. So far, staffing decisions for the merged company have resulted in equally fair treatment of people from all the merging companies.

X

8. The policies and procedures in my business/ function make it easy to deliver excellent service to my customers.

X

9. The amount of bureaucracy I encounter on my job is reasonable given the nature of my work.

X

10. How do you rate your area’s productivity at the present time?

X

11. My work group has a climate in which diverse perspectives are valued.

X

X

Creating the New Organization and Teams X

Tracking and Learning from the Combination

Selected questions for the new company

Defining and Executing Building Retaining Integrating Business the Key the Strategy Culture Talent Organization

12. Employees in my work unit feel comfortable working with people from different backgrounds.

X

13. Senior management shows by its actions that it has a strong commitment to diversity.

X

14. I am encouraged to speak up when I disagree with a decision.

X

15. I feel encouraged to come up with new and better ways of doing things.

X

16. How satisfied are you with your involvement in decisions that affect your work?

X

17. People have the freedom to take the actions necessary to achieve results.

X

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(Continued)

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Selected questions for the new company

Defining and Executing Building Retaining Integrating Business the Key the Strategy Culture Talent Organization

Creating the New Organization and Teams

18. Relative to the competition, my business is an innovator.

X

19. My business/ function is oriented to promoting change.

X

20. My manager is sensitive to the relationship between my work life and my personal life.

X

21. Management in my area has communicated openly and honestly about the merger and merger-related issues.

X

X

22. People from the merging companies are cooperating with each other.

X

X

23. How would you rate teamwork in your area at the present time?

X

X

24. We get a quick response to our needs from other work groups.

X

X

X

X

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Selected questions for the new company

Defining and Executing Building Retaining Integrating Business the Key the Strategy Culture Talent Organization

25. The merged company will offer more opportunities to develop my career.

X

26. Considering everything, how would you rate your overall satisfaction with your company at the present time?

X

27. Do you plan to be working for the merged company one year from now? (excluding those who will retire)

X

28. In the long run, I feel the overall impact of the merger for me will be (very positive to very negative)

X

29. I have been provided with the tools and resources to effectively deal with change.

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X

(Continued)

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Selected questions for the new company

Defining and Executing Building Retaining Integrating Business the Key the Strategy Culture Talent Organization

30. So far, we’ve done a good job of keeping our customers informed about any changes in products or services resulting from the merger.

X

31. How would you evaluate the pace of the integration efforts?

X

32. How do you rate the communications you receive from your supervisor at the present time?

X

33. From what I can tell, the new company will make the best use of the best practices, procedures, and systems regardless of which heritage company they come from.

X

Creating the New Organization and Teams

X

Tracking and Learning from the Combination

•

•

•

•

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not understand what they need to do to deliver on the strategy for clients. Accordingly, managers began to talk with each employee to discuss his or her specific connection to the strategy and new value proposition. Culture. Similar to the findings in the focus group interviews, survey respondents described their legacy companies quite differently. However, there was a clear alignment of views about the type of organization the new company must become to be successful. And employees from both partners agreed that culture change was needed for business success in the combined bank. Talent. The survey findings highlighted what, from the employee perspective, would make the combined company a desirable place to work. Besides fair compensation, employees cited the importance of a compelling vision and credible strategy, as well as career opportunities, involvement in decision making, encouragement to innovate, and increased direct contact with senior leaders. Integrating the businesses. The initial measurement provided an immediate “heads-up” to leadership regarding the impact of the integration process. Three-quarters of respondents from both firms said that the integration was diminishing productivity in key areas including technology support. Most employees commented favorably about communication efforts, but were anxious to learn specifically how their own work areas would be affected by the integration. They also reported confusion over the timing and sequencing of integration activities. New organization and new teams. Just one-half of respondents reported that employees were being treated with fairness and respect during the merger. While this exceeded Bank A’s previous merger benchmark (39 percent), it still was a source of concern for the tracking team and executives. In particular, many employees saw staffing decisions being based on politics rather than merit, and that poor communication regarding the staffing process and potential layoffs increased anxiety. About half of the respondents felt that decisions for selecting systems and procedures for the combined company reflected compromise rather than working for an optimal solution.

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These survey findings were first delivered to the combined company’s executive committee, which discussed their implications and committed to a feedback plan. The chief operating officer took responsibility for communicating overall company results through multiple channels, and he made the tracking team’s reports available to all employees. Business unit leaders followed up with town hall and small group meetings to present and discuss findings specific to their parts of the company. In this way, the value of employee input was acknowledged. Action planning based on the findings occurred at the company, business unit, department, and work group levels. One major initiative was a strong push to help the entire staff to better understand the new company’s strategy, and to encourage employees to take personal responsibility for bringing it to life in their jobs. Another response created opportunities for individuals to meet colleagues from other business units in the bank and initiate conversations about how to reach across businesses to bring better service to clients. Postcombination Measurement A follow-up survey was conducted nine months after the initial measurement. Analyses identified significant trends across the administrations, and the results were disseminated in a manner similar to the first measurement. As Exhibit 12.3 reports, the

Exhibit 12.3. Selected Survey Results Across Administrations. Measure Keeping customers informed People in merging companies cooperate Management communicates openly and honestly See business as flexible Level of bureaucracy is reasonable Providing customer service

% Favorable January June 50 57 48 52 67 70 59 46 69

54 40 60

CHG +7 +4 +3 −5 −6 −9

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follow-up survey showed that the merger was playing to mixed reviews. Employees continued to notice some good aspects of integration management, such as leaders continuing to communicate openly and honestly, and increased cooperation between the partner companies. Leadership’s efforts to create a desired postcombination culture, however, had taken a step back in most areas. Fewer employees regarded the business as flexible or felt that the level of bureaucracy was reasonable at the nine-month mark than had initially indicated so. The multiple waves of data also provided information on customer reactions to the merger, from an employee perspective. For example, although ratings of customer communications increased from the start of the merge to the nine-month mark, ratings of customer service declined. These data signaled a need for attention from management. The tracking data were used in some creative ways in the combined company. For a presentation to the board of directors, for instance, results from this combination were compared with those from one of Bank A’s previous acquisitions. In many respects, the data showed improvements in this case versus prior ones (for example, 70 percent of employees in the current merger gave their leadership good marks for communicating openly and honestly, compared to just 50 percent in the previous merger). In the combined bank, the CEO articulated a vision and set of supporting values much like those of most other global corporations. But he then used tracking data to see the extent to which vision and values were coming to life in the combination. The survey showed, for example, that nearly two-thirds of employees regarded the emerging company as being flexible in doing its business but fewer than half saw open discussions of differences across the two sides. As time moved forward, the tracking team disbanded but not before handing off responsibility for tracking employee views to the HR team in the combined organization.

After-Action Review: A High-Tech Acquisition The executives leading the financial services industry case above were M&A veterans. So, they knew the benefits of conducting a

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formal tracking program and launching it early on in the precombination phase so that it could guide action and keep the combination on track. For a CEO making his first acquisition, as the following case shows, tracking only began late in the process but provided some learning to help redirect an acquisition which got off to a bad start.

Good Intentions Gone Awry A computer software development firm fared much better than most of its competitors in a down economy, but the CEO was concerned that one business unit accounted for nearly threefourths of the company’s revenues. An opportunistic acquisition presented itself and the software firm bought a company whose products complemented those of one of its smaller business lines. Nearly a year to the date that the acquisition closed, one of us received a call from the CEO. “Productivity has plummeted since we made the acquisition,” he lamented. “The cultures are still clashing and key talent from both sides have jumped ship. Is there anything you can do to help us?” In the ensuing discussion, we agreed that the first step was to conduct an “after action” review to learn what went wrong with the integration and try and fix things. Focus group interviews with employees and one-on-one interviews with several senior executives and middle managers identified three key problems in the combination process: 1. No shared view of desired end state. Executives from the two companies did not have a shared view of the desired end state for the integration. People from the buying company used language like “acquisition” and “integration” to describe the deal. Counterparts from the selling company, in contrast, spoke of “merger” and “autonomy.” When this was shared with the lead CEO, he confessed that he and his counterpart from the target “were not on the same page when we initially discussed the combination, but I assumed that he would come around during the integration process.” The lesson learned: straight talk from the buyer up front controls wishful thinking on the part of the seller that may delay integration.

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2. Unproductive integration teams. Soon after the acquisition became legal, six task forces set out to identify integration opportunities. As is common, these teams were supposed to recommend ways to achieve the objectives of the integration. Based on interview reports, the output from these teams was abysmal. Interviewees cited three specific complaints—the teams suffered from unclear charters, poor leadership, and dysfunctional group dynamics. Three “takeaways” were cited to reformulate and revitalize the planning process: (1) link transition team charters to the desired “end state,” (2) appoint transition team heads who are committed to making the combination work and draw new team talent from every level; and (3) provide professional facilitation for transition teams. 3. Ignoring human and cultural issues. Interviewees reported that symptoms of the Merger Syndrome were still strong a full year after the deal was completed. Employees spoke of feeling upset with being kept in the dark on integration activity, worried that the integration could adversely affect company performance, and cited examples of an ongoing culture clash ranging from big issues like different compensation philosophies to minor matters like meeting starting times. The CEO owned the findings and acted to “win back” employee support by acknowledging, rather than denying, the human and cultural dimensions of the combination. He asked the consultant to conduct venting meetings to help employees work through their residual anger and upset from the integration. He also requested culture clarification activities to take a step toward building a “one company, one team” mind-set, articulated his “cultural nonnegotiables,” and engaged employees from both sides in discussing how to build a shared culture within that context. In this case, tracking breathed new life into the combined organization. Managers who had been bickering about whether this was a “merger” or an “acquisition” now directed their energies toward offering combined products and services to customers. Transition team members, some new to the process and others who stayed on after the initial trials, reported productive meetings yielding consensus and real problem solving. And rank-and-file employees described the work of building a new corporate culture

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as “fun” and “energizing.” The feeling among all involved is that this patient is making an excellent recovery and is well on the road to success.

Tracking Customers Customers are another source of helpful data in a combination. Productive gains in a combination can be thwarted when customers do not understand the rationale or benefits of the combination and leave. Competitors take advantage of any perceptions of uncertainty, instability, or problems in quality or delivery in order to woo customers. As testimony to the disappointing results of typical combinations, many manufacturing customers routinely line up alternate sources when they learn that a supplier is engaged in a combination. Consultant Mark Feldman tells the story of a combination between two large high-technology companies whose customers were among the biggest names in the business.5 Three months into the integration, one of their largest customers, IBM, sent notice that it was cutting its orders in half and going to secondary sources of supply. Why? IBM said that in the three months that had passed since the deal became legal, not one person had thought to call and talk about what would happen to the account in the postcombination organization. The account was worth millions and IBM shut down half of it, not because of any problem in supply or quality but because of a lack of attention. Contrast this experience with that of an industrial products firm that carefully managed customers throughout the combination process. Executives expected that customers, just like employees, would weigh first impressions of the combined operation heavily and be apt to draw hasty conclusions regarding what it would be like to deal with the postcombination organization. Immediately upon the combination announcement, sales representatives in the combining companies received communication guidelines and instructions to contact all of their customers. Senior executives telephoned or visited key accounts to review the rationale for the combination and to provide assurance that the customers’ needs would be considered every step of the way. With a positive story to tell (featuring the ways customers could benefit

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from new technology, a broader product mix, and reduced costs in the combined organization), executives got their message across to customers. The firm also used the combination planning phase to solicit and utilize feedback from customers. Key contacts were invited to join a “preferred customer council.” In monthly conference calls, senior sales executives presented updates on combination planning and solicited input on matters pertaining to products and customer service. Other customers received a toll-free telephone number to offer their views or ask questions. It proved especially valuable when several customers called to question false reports being spread by a competitor about the elimination of some key product lines in the combined company. Having timely information from customers allowed sales executives to respond quickly and stave off any major damage. A senior marketing executive from the industrial products firm put a positive spin on the merger’s impact on customers: “This is great—it gives us a reason to contact our customers and an opportunity to sell them on why we are the ones to keep their business with.” The two cases here illustrate the value of tracking a combination. Although one effort was proactive and initiated early on and the other reactive and late in the game, success in both cases required the collection of valid data and the commitment of senior executives to use it. As we will see in the next chapter, lessons learned from tracking the combination can benefit future combinations and, in some companies, contribute to making effective combination management a core competency and a distinct source of competitive advantage.

Chapter Thirteen

Joining Forces—Building M&A Competency When we wrote our first articles on the M&A process in the 1980s and our first books on the topic in the 1990s, we noted the high failure rate of combinations and hypothesized that, stupid deals aside, what matters most in eventual M&A success is the process through which deal occurs. Now, nearly thirty years since we introduced the Merger Syndrome and highlighted the role of human, cultural, and organizational dynamics of M&A, our hypothesis has been validated in countless studies: the process, from the preto postcombination phase, remains the primary determinant of whether or not a deal achieves its financial and strategic objectives. So, have managers learned nothing about combination management the past thirty years? Hardly. The “human side” of M&A is more widely recognized and attended to in merger planning and execution. “Culture clash” is much less of an afterthought. In addition, the operational processes of combining two previously independent firms into one are more carefully planned and, in many cases, better managed than when we began our work in this area. But the success rate still remains disappointingly low. To some degree, this is because it simply is damnably difficult to combine companies. In addition, many deals don’t pay long term because they are but a first step in a broader industry consolidation or purely financial plays without a compelling value-creating strategy. Here we add another consideration and hypothesize that the dismal M&A track record traces to the fact that most

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companies do not develop core competencies in this area and underinvest in what it really takes to make their mergers or acquisitions work.1 As the use of M&A activity to achieve business strategy has grown, so has the commitment of some leading firms to develop competency in combination management. In this final chapter, we show how some have enhanced the mind-sets and skill-sets of senior executives, middle managers, staff professionals and employees at every level to develop a core competency in M&A management.

Levels of M&A Competency How much do experience and know-how count in M&A? One study of large combinations found that nearly 60 percent reduced shareholder value; however, 74 percent of those that succeeded were run by managers with deep M&A expertise.2 Certainly tracking prior combinations and learning from them is a part of developing this expertise. But the real winners in this game recognize that in addition to the specialized skills they need to “do a deal,” it is crucial to develop the necessary internal competencies, methodologies, tools, and sensitivities to excel in each phase of a combination. We have observed a variety of ways in which organizations have enhanced their awareness of what it takes to make a deal work, and their readiness to do what is needed. The investment can range from periodic learning events to building an internal “M&A shop” on par with other corporate functions. Typically, the level of resource commitment rises with the number of deals the organization hopes to do each year.

Level 1: Learning … for Now and for the Future A merger, acquisition, or alliance provides a rich opportunity for organizational learning—the ability to gain insight from past experience and apply it to a new situation. When learningefficient organizations engage in a combination, they can better gauge what is working, what is not, and formulate thoughtful views on the reasons why. This can enhance learning at both

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the strategic and operational levels and be applied to a current combination as well as future ones.3 In real time, for example, this means harvesting and diffusing insights gained during the combination period. One of us, for example, worked with two computer companies to create a “merger monitoring team.” Members of both companies monitored integration activities and results in each area of the combined business. The members met monthly to pull together their findings and then briefed the corporate integration management team and the combined company CEO. This real-time learning effort highlighted hitches in integration and also a range of customer and supplier issues that needed more strategic attention. Such real-time information, analyses, and interpretation can provide timely feedback to integration teams as they move through the combination process and to executives and managers as they implement changes. Moreover, the lessons learned in one area can be disseminated to other areas that are a step behind in integration. Companies with the most effective combination programs learn from past mistakes as well as successes. A health care system made thirteen acquisitions of small and mid-size organizations in just four years. After each acquisition, the executive team members asked themselves, “What have we learned, and what would we do differently?” Later on, effecting the acquisition of a major competitor, one of their first actions was to pull out their list of M&A lessons learned and review them. It is important to note that the health care executives did not follow the lessons from past experience blindly. Rather, recognizing that this $9 billion, four-million member acquisition was in a different league from their previous ones, they carefully considered which learnings should and should not be applied to a more complex integration. How does this learning process work? Anticipating a wave of acquisitions and alliances in their industry, leaders of a consumer products company met to candidly assess what had worked and had not in a recently completed combination (see Exhibit 13.1). That deal had succeeded in meeting financial and strategic targets. But there had been obvious errors. Rather than rehash past mistakes, however, the executives took care to highlight strengths to

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Exhibit 13.1. Lessons Learned from a Successful Combination. Things we did right: Appointed a dedicated transition manager Formed an integration team Speedy decisions (thus shorter disruption period) Appointment of management team by deal closing date Decision to expand management team during transition Aggressive employee communications program External consultant working with management team and key staff Management team driving structural integration (enhanced accountability and commitment) People selection and outplacement process Attention to details of major announcements, like headquarters location Launch of postcombination vision and mission statement on one year anniversary of deal closing Things we could have done better: The integration team was underresourced (not enough people) Speedy decisions led to less analysis and some bad decisions Committee approach to politically charged decisions like headquarters location Better manage employee expectations (winners acting in a dominating way, losers acting in a passive way) Not enough hands-on leadership presence Underestimated the impact of cultural differences Defining our expectations of staff groups and business regions to fully integrate business Had no plan for educating ourselves on each other’s products Senior managers from lead company did not do as well as expected in overcoming culture clash Pay more attention to field sales force Pay more attention to undisturbed sites (although they were not directly changed, they resisted cooperating with changes in other areas) (Continued)

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Not be so naive to believe what the investment bankers told us about sales synergies in the first year; underestimated disruption to business Therefore, we would do the following differently: Establish a larger integration team Manage expectations from Day 1 and give clearer directions to senior management from lead company Make site decisions by management and not by committee Push more aggressively for some balance between the partners in all functions Select the best people while achieving the best balance Provide cultural integration training to broader organization, not just to management team

build on in future deals as well as weaknesses to address. Their roster included “things we’d do differently.” One major learning was that well-intentioned actions can backfire and result in caustic consequences. For example, the principle of choosing the best person for the job regardless of company affiliation had guided the staff-selection process in the prior deal. Each side had distinct organizational strengths, so managers from one side or the other tended to predominate in particular areas of the business. The resulting imbalance created problems in running the business. Acquired managers, surrounded by “their people,” had no internal guides to help them navigate the maze of procedures in the lead company, nor were they prepared to respond to the relatively high involvement style of their new president. Lead company managers, in turn, didn’t have any access to the social and communication networks of the acquired organization. The lesson learned for the next combination: Select the best people while achieving the best balance. Other learnings from this case underscore the value of proactively addressing the upset generated by a combination. Some of the operational areas in the lead company were untouched by the combination. Leadership assumed they did not need to attend to people in these functions; instead, they concentrated on those in

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areas being integrated. This proved to be a problem, however, as managers from the unaffected areas acted in a domineering manner when dealing with acquired executives and strongly resisted cooperating with implemented changes made in other parts of the organization. In the next combination, senior executives vowed to have all managers attend transition management sensitization seminars whether or not their functions would be directly affected by combination changes.

Level 2: Building a Core Competency in Combination Management As the prominence of M&A as a tool for growth has gained credence, so has the commitment in some firms to develop a core competency in combination management. These “serial acquirers” know that each deal has its idiosyncrasies, but also recognize the value that insight and experience bring to achieving its financial and strategic objectives. They also know what it takes to be prepared for each phase of a combination. Mastering the Art and Science of M&A One firm widely recognized as an innovator in developing combination management competence is GE Capital Services. Working with consultant Ronald Ashkenas, the company has built a replicable process around a framework which sees acquisition integration not as a discrete phase of a deal but, rather, as a process that begins with due diligence and runs through the ongoing management of the combination.4 The process features four “action stages”: • Preacquisition (due diligence, negotiation and announcement, close) • Foundation building (strategy formulation, acquisition integration workout, launch) • Rapid integration (assessment and adjustment, implementation) • Assimilation (long-term plan evaluation and adjustment, capitalizing on success)

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Most of the practices in the GE Capital process are congruent with our counsel. For example, in what they label the “preacquisition” stage, actions include beginning cultural assessment, diagnosing the barriers to integration success, selecting an integration manager, and developing the communication strategy. There is a clear discipline inherent in the process to take action early on and not wait until the deal closes. It also reflects the flexibility required for successful combination—the “rapid integration” stage uses feedback and learning to continually adapt integration planning. To appreciate the lessons its people have learned about combination management, it is important to understand that GE Capital itself is the product of dozens of acquisitions that have been blended to form one of the world’s largest financial services organizations. Having lived through so many integrations themselves, executives there are well versed in the intangibles of M&A and recognize that combination management is as much art as science. And, no matter how many insights previous transactions generate, executives at GE Capital remember that the next deal is always different. Gaining Experience Through M&A Many companies from developing countries such as China, India, Malaysia, Russia, and South Africa are using M&A as their main globalization strategy today. However, they are taking a more studied approach to doing deals and seem to be benefiting from the mistakes made in typical M&A programs in developed countries. For one thing, they focus on generating long-term value rather than short-term cost savings. Rather than use M&A to economize, buyers from developing countries acquire firms to obtain the competencies, technology, and knowledge essential to globalizing their strategies. And, they usually have a clear longterm vision guiding their actions. India’s Hindalco is an example of a company which acquires only to meet strategic goals. It used acquisitions to become one of the world’s largest manufacturers of aluminum and boost revenues from $500 million to $15 billion in just seven years. But it also used each deal to learn new industry-related skills and develop M&A know-how. Prior to its acquisition spree, Hindalco

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was a commodity manufacturer predominantly focused on the Indian market. Senior executives set a vision to become a global leader by expanding the aluminum business, manufacturing more value-added products, and selling both aluminum and aluminum products globally. They pursued a two-pronged strategy: generate economies of scale in aluminum manufacturing by setting up projects in India, and use cross-border acquisitions to break into the product market. However, Hindalco had never before acquired a company. So, its leadership developed—and stuck to—a plan for making acquisitions and absorbing new capabilities. Following the plan, Hindalco patiently executed small takeovers, first in India and then abroad, before doing a big global deal. In what Nirmalya Kumar of the London Business School calls “climbing the M&A competency stairway,” each of the initial acquisitions taught the company something new and served as a stepping stone toward another acquisition.5 The process began in 2000, when Hindalco acquired a domestic rival and began to gain experience in bidding for, negotiating with, and integrating a company. It also became acquainted with addressing touchy postcombination issues. For example, executives from this first acquisition prided themselves on their values and practices and worried that Hindalco’s “family business” would drive out their “professional management.” To reassure them, Hindalco decided to retain all of the target’s top management and communicated that it “acquires talent, not just assets.” Three years later, Hindalco felt it could take on a cross-border acquisition and acquired two Australian companies. The targets were small, but provided an opportunity to learn how to take over, turn around, and operate companies in a developed market where, among other challenges, labor costs were high and regulations were strict. Acquisitions of two Canadian companies in 2005 helped Hindalco learn how to manage a global supply chain and understand the intricacies of hedging foreign exchange and price risks in different countries. A year later, it picked up another Canadian firm and gained experience in acculturation and managing a complex multinational operation. After six acquisitions in six years, Hindalco leadership felt ready to go after a large target. In 2006, it made a bid for Novelis, a company twice its size and one of the world’s largest producers

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of flat-rolled aluminum and aluminum products. In May 2007, Hindalco acquired Novelis for $6 billion—the second-largest takeover of a U.S. company by an Indian concern. While the Novelis board embraced the acquisition, the company’s top executives and rank-and-file employees had mixed feelings. Novelis had itself been spun off from Canadian giant Alcan in 2005 and one of us was working with its leadership in managing that transition. Many employees missed the security of being part of a stable, paternalistic organization and yearned for the good old days. Managers complained that the new organization was not modifying its practices quickly enough to successfully compete as a stand-alone organization. So, the acquisition by Hindalco had some supporters when announced but also generated substantial anxiety about the Indians’ motivations and intentions. Initial concerns centered on job insecurity and the potential for culture clash. There were also worries that key decisions would be made in India instead of Atlanta. However, interactions with the new owners rapidly produced some positive reviews. Of particular importance were efforts by the buyers to learn about Novelis, its business and its people; rather than smother the acquisition with rigid thirty- to hundred-day integration plans. Tracking of early perceptions of the acquisition revealed a high regard for Hindalco people, the complementary nature of the two partners’ businesses, and the immediate sense that Hindalco was committed to long-term value creation. Hindalco’s preparedness for the combination demonstrated to anxious acquirees that their new owners had integrity and clarity of intentions and generated confidence about the firm’s—and their own—future.

Level 3: Building an Internal M&A Shop Companies that do deals only occasionally may be able to tap functional and business experts on a part-time basis. But a more ambitious M&A program entails a volume of work—to source and screen candidates, conduct due diligence, close deals, and drive integration—that demands capabilities and processes on the scale of any other corporate function. The number of resources required for an in-house “M&A shop” can be quite large. One

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consulting firm estimates that to do ten deals a year, a company must identify a hundred candidates, conduct due diligence on around forty, and ultimately integrate the final ten.6 This kind of effort requires the capacity to sift through many deals while simultaneously engaging in several parallel integration efforts. Staffing the M&A Group We’ve described Cisco’s prowess as a regular acquirer. With acquisitions at the core of its growth strategy and multiple deals involving start-ups and other small entities occurring each year, Cisco needed an integration approach that would be consistent across the company, repeatable for each new acquisition, and adaptable as the company began to acquire large companies with different operational parameters. It also needed people—both full-timers committed to staffing an internal M&A shop and part-timers from various functions to offer their specific expertise—to make the approach work.7 Cisco’s approach encompasses three elements: 1. Formalized and centralized integration management through a designated team in the Cisco Business Development group. 2. Cross-functional teams for each acquisition that plan, manage, and monitor integration activities across Cisco. 3. Standard principles, metrics, tools, methods, and processes— defined both at the corporate level and within the many Cisco departments involved in acquisition integration—that can be repeatedly applied to new integration efforts, yet are adaptable to the unique issues and parameters of each deal. Reflecting both the importance of acquisitions to its strategy and the intelligence it has generated about how to do a deal right, Cisco has made a solid commitment to staffing. The hub is a forty-person business development (BD) group at its San Jose headquarters with a diverse staff, including PhDs in engineering and MBAs with investment banking knowledge, which provides deep expertise in the acquisition methodology. BD employees are divided into three divisions: deal making, integration, and technology management. However, they work closely with human

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resources, finance, manufacturing, and most every other function in the organization to execute the process. Cisco also identifies an executive sponsor to help with each deal. In most cases, the executive sponsor is usually the person who identified the need for the acquisition or who will be in charge of the business unit into which it will be assimilated. This assures clear ownership for the deal from core business leaders. The central and cross-functional teams work together for a company-wide approach to integration. The central acquisition integration team broadly defines methods, tools, and processes that can be standardized across Cisco departments and business units. For each acquisition, the central team also manages the overall integration activity and provides a leader for the deal’s cross-functional integration team. The cross-functional team then manages the planning, execution, and monitoring of specific integration activities in each phase as they are carried out by the appropriate Cisco departments. By Cisco’s own assessment, somewhere between 70 and 80 percent of integration activities and decisions are standardized for each functional area. The remaining integration and business issues are specific to each deal and cannot be anticipated in advance. For these issues, people on the integration teams with appropriate experience and knowledge develop the right solutions for the business. Each major Cisco department assigns an employee team for integration activities: • Human Resources. The Cisco HR acquisition team has designed an integration approach around employee concerns to help facilitate and expedite new employees’ acceptance of change. The scope of activity ranges from overcoming resistance to integrating salary structures and payrolls. The HR team works with executives from the acquired firm to map employees to Cisco’s structure for salary, stock options, and benefits. and with acquired counterparts to handle routine transition tasks such as employee setup in HR and payroll systems. • Sales. As we have noted, combining sales processes and teams can be a lengthy and complex endeavor. The Cisco sales

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team addresses this challenge by initially focusing on alignment of sales efforts, with full integration developed gradually over time. The acquired sales team focuses on selling the acquired products, while the Cisco account manager continues to maintain the overall relationship with individual customers. A separate Cisco channel integration team resolves issues such as overlap of territories and customers among individual channel partners, partner compensation, and which partners are authorized to sell specific products. • Manufacturing. A product’s time-to-market and availability are vital aspects of customer satisfaction and value drivers for Cisco. For the Cisco manufacturing department, specific challenges include integrating enterprise resource planning systems as well as manufacturing and supply-chain processes. The Cisco manufacturing integration team has developed a phased approach to speed the integration of acquired products. For example, the team uses a defined framework of predictable, scalable, and repeatable processes for introducing new products into the supply chain. • Customer service. The Cisco Customer Advocacy group develops, sells, and delivers service and support offerings for Cisco products. When Cisco acquires a company, a primary challenge for this group is migrating new customers to Cisco’s standard service programs. In some cases, the group develops a new service and support program for the acquired product. At the same time, Cisco must continue to meet the obligations of existing service contracts and offer new services to acquired customers. The consistency and repeatability of the integration processes helps the Customer Advocacy group clarify the requirements of new service programs and contribute to customer satisfaction. • Finance. The three primary requirements for the Cisco finance department when integrating an acquired company are alignment of fiscal calendars, integration of financial policies, and compliance with Sarbanes-Oxley requirements. Aligning acquired companies with its standard processes helps Cisco avoid lost productivity by not having to reinvent the procedures with each new company.

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Building an In-House M&A Shop Exhibit 13.2 shows what it takes to build an internal “M&A shop.” World class acquirers bring together the right intentions, skills, and relationships in building their “M&A shops”: • The right strategy and discipline to stick to it. Just as a single deal starts with strategy, so does developing the capacity to do multiple and overlapping deals. Frequent acquirers do not get bogged down by trying to make non-strategic deals fit into their corporate direction or by looking the other way when potential targets are flagged by their screening process. Instead, they set and stick to strategic partner search-andselection criteria.

Exhibit 13.2. Building an Internal M&A Shop. • Have an M&A strategy and the discipline to stick to it • Ensure that every deal supports the overall organizational strategy • Have an explicit strategy for the combination itself • Staff from experience • Accept that there is no substitute for M&A experience • Have sufficient breadth on the team to represent business units and functions, but fill experience gaps with consultants, recent retirees, or temporary employees • Collaborate with the rest of the organization • Generate commitment and buy-in from business units and functions • Document procedures to clarify roles and responsibilities • Maintain flexibility • Know that different types of deals require different approaches • Develop a process, but know when to leave it on the shelf and when to use it

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• The right experience base. Having sufficient people is not enough; having people with sufficient M&A experience is what matters. A McKinsey study found that committing internal financial and legal staff to M&A duties is not a differentiator of performance. Instead, the tenure of the team members did distinguish acquirers whose total returns to shareholders exceeded the returns of their peer group from those that did not.8 Companies with longer-tenured executives are more likely to be successful because their deeper knowledge of the culture, people, procedures, and capabilities of the company helps them navigate corporate politics and identify targets that truly address a company’s needs. • The right amount of collaboration. Successful acquirers with in-house M&A shops foster collaboration much earlier in the process than do typical acquirers. They enhance collaboration and coordination between M&A teams and business unit executives—as well as core business functions—by using documented procedures that make all involved aware of their own and others’ responsibilities, as well as tools to track the progress of the integration effort. • The right degree of flexibility. Certain deals, particularly those focused on raising revenues or building new capabilities, require fundamentally different approaches to sourcing, valuation, due diligence, and integration than, say, those aimed at finding cost synergies. It is therefore critical for buyers not only to understand what types of deals they seek, but also to assess candidly which types of deals they really know how to execute and whether a particular transaction goes against a company’s patterns or experience. And, as we have noted, companies with successful M&A programs adapt their approach to the type of deal at hand.

Building a Competence in Combination Management Although companies like GE Capital, Hindalco, and Cisco each have taken strikingly different approaches to building their combination competence, they share some commonalities:

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• Make combination management a priority. Building combination management expertise is given high status and high priority. Sufficient monies, time, and other resources are provided to develop true competency. Managers, supervisors, and employees through the ranks come to regard combination management as being an integral part of business success rather than a distraction from it. • Commit to in-house development. Corporations have experienced waves of downsizings in the past decades. As a result, many do not have the bench strength to successfully manage combinations while keeping the business running. In particular, they have lost staff experts in HR, OD, communications, and other functions critical to combination management. Some firms outsource merger planning and even management, often to a big consulting firm. This is no way to develop a competency in something so essential to business success. • Develop an approach that fits your company culture, leadership style, and current processes. Though winning acquirers learn from the successes and failures of other acquirers, they do not fixate on “best practices” from outside their organizations. Rather, they develop methods that fit well with their values, abilities, and ways of doing things. GE Capital blazed a trail in process because its culture nurtured learning, selfassessment, and continual improvement. • Balance discipline and flexibility throughout the process. Combination managers know that shortcuts in the combination process tend to impede rather than accelerate success. But they also recognize that each deal is different and may require a modification to standard practice. And they are constantly reviewing and enhancing their approach to combination management. What about firms that are not serial acquirers or not of a size to support a substantial corporate staff? Investment bankers and business brokers continue to shop opportunistic and other nonstrategic deals to executives, whose egos and appetites for growth seem not to have been downsized along with their workforces. Financial tunnel vision guides most combinations toward failure.

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As Harvard Business Professor Joseph Bower says about the risks of M&A, “if the strategy is unclear, there is no reason for a company to go down one of the more difficult paths it can follow.”9 Our advice for relative newcomers is to start early and don’t wait until a deal is done to think about how to manage a combination. Having a well-conceived approach ready from the start will do much to guide sensible and timely actions. An acquisition should not be dumped on the leaders running the integrated business in the aftermath; rather, they should be involved in formulating the M&A strategy, selecting the partner, planning the integration, and managing the transition. Concurrently, educate all employees on the realities of combination management, including the Merger Syndrome. Not everyone contributes directly to a combination, but all employees will be affected by it in one way or another. Set a tone by being proactive and anticipating employee issues; then keep them informed and engage them through the combination process. Finally, consider not doing the deal. To Professor Bower’s counsel we have to add: why take the risk with M&A if your organization and its people are not prepared to make it work?

Ensuring That People Matter Make no mistake: people matter in combinations and can make or break a deal. Certainly success depends on sensible strategies and financial acumen. But it also depends on people-minded management of the transition process and on winning over employees’ hearts and minds to a new way of doing business. Contrary to the promises of stress-management pamphlets and change-management programs, not everybody survives and thrives in corporate upheaval; many feel like victims and do not let go of insecurity and anger once they learn of their status in a combination. Even for people whose postcombination assignment remains the same or similar to their precombination role, their work situation may change substantially. Ultimately, they ask themselves whether anything new and better has come of combination; has the pain resulted in any true gain? The human dynamics we have described occur in even the most successful and value-creating combinations. A combination

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founded on sound strategy and financials still depends on people to conceive, plan, and implement actions to produce synergies. Combining in a manner that creates value can be a peak experience in the careers of executives, managers, and employees. Moreover, value-creating combinations not only leave the combined organization in a better competitive position; they can also help rebuild employee spirit, trust, and motivation. The organizations that are successful and creative in today’s mergers, acquisitions, and alliances know this and are the ones that will excel in tomorrow’s combinations. Indeed, given the rate at which organizations are joining forces all around the globe, it is our belief that having M&A competence will separate the winners from the losers in business in the years ahead.

Endnotes Preface 1. CNBC. “Marriage from Hell: The Breakup of AOL Time Warner.” January 6, 2010. 2. Arango, T. “How the AOL-Time Warner Merger Went So Wrong.” New York Times, January 11, 2010. 3. Mirvis, P. H., and Marks, M. L. Managing the Merger. Englewood Cliffs, NJ: Prentice-Hall, 1991 (republished by Beard Books, Frederick, MD, 2003); Marks, M. L. and Mirvis, P. H. Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances. San Francisco: Jossey-Bass, 1998. 4. Bower, J. L. “Not All M&As Are Alike—And That Matters.” Harvard Business Review, 2001, 79(3), 93–101. 5. Buono, A. “SEAM-less Post-Merger Integration Strategies: A Cause for Concern.” Journal of Organizational Change Management, 2003, 16(1), 90–98. 6. Mirvis, P. H., and Marks, M. L. “Culture in Corporate Combinations.” In C. Cooper and R. Burke (eds.) Leading in Turbulent Times. London: Blackwell, 2003. 7. Capaldo, A., Cogman, D., and Suonio, H. “What’s Different About M&A in This Downturn?” McKinsey on Finance, 2009, 30, 31–36.

Chapter One 1. There is no consensus on how to measure M&A outcomes. Some researchers study the share price of merger participants versus nonmerger active firms in the same industry. Others look at the extent to which premerger financial goals are achieved. Still others examine rates of employee turnover, production output, or revenues. Nor is there consistency in the timeframe used to study M&A results— some economists look at immediate impact on share prices while organizational scientists tend to wait several months or even years for their “postmerger” measures. Contributing to the difficulty of measuring M&A results is a lack of agreement on when a merger

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begins (for example, when it is announced or when it receives legal approval?) and when it ends (for example, when merger planning teams are disbanded or when implementation is completed? what about when implementation is staggered across various units in an organization?). Still, studies consistently report a failure rate between 70 and 80 percent for all mergers, acquisitions, and alliance. Thus, we join other researchers and practitioners in concluding that 75 percent of combinations fail to achieve their strategic or financial goals. What is clear in M&A metrics is that there has been little change in acquisition failure rates over the thirty years that serious research has been conducted on the factors influencing M&A performance. An examination of the returns to acquiring firm shareholders reveals that acquisitions continue to produce negative average returns similar to those seen historically—while target-firm shareholders generally enjoy positive short-term returns, investors in bidding firms frequently experience share price underperformance in the months following acquisition, with negligible long-term gains (Agrawal, A., and Jaffe, J., “The Post Merger Performance Puzzle.” In C. Cooper and A. Gregory (eds.), Advances in Mergers and Acquisitions Vol. 1, New York: Elsevier Science Inc., 2000). And matters may be getting worse: the most recent research shows that 83 percent of all deals fail to deliver shareholder value and 53 percent actually destroyed value (Carwright, S., and McCarthy, S., “Developing a Framework for Cultural Due Diligence in Mergers and Acquisitions.” in G. K. Stahl and M. E. Mendenhall (eds.) Mergers and Acquisitions: Managing Culture and Human Resources. Stanford: Stanford Business Books, 2005). Lodorfos, G., and Boateng, A. “The Role of Culture in the Merger and Acquisition Process.” Management Decision, 2006, 44(10), 1405– 1421; Zweig, P. L. “The Case Against Mergers.” Business Week, Oct. 30, 1995, 122–130. Adolph, G., and Pettit, J. Merge Ahead: Mastering the Five Enduring Trends of Artful M&A. New York: McGraw-Hill, 2009. Harding, D., and Rouse, T. “Human Due Diligence.” Harvard Business Review, 2007, 85(4), 124–131. In studies of the outcomes of European M&A, for example, recent analyses using similar methodology (e.g., Schoenberg, R. “Measuring the Performance of Corporate Acquisitions: An Empirical Comparison of Alternative Metrics.” British Journal of Management, 2006, 17(4), 361–370) indicate failure rates similar to studies conducted ten years ago (for example, Rostand, A. “Optimizing Managerial

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10. 11.

12.

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14. 15. 16. 17.

18. 19.

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Decisions During the Acquisition Integration Process.” Paper presented to the 14th Annual Strategic Management Society International Conference, Paris 1994) and thirty years ago (for example, Kitching, J. “Winning and Losing with European Acquisitions, Harvard Business Review, 1974, 52, 124–136). Feldman, M. L. “Disaster Prevention After a Merger.” Mergers & Acquisitions, 1995, 30(1), 31–36. Moeller, S. Surviving M&A. London: Wiley, 2009. Haspeslagh, P., and Jamison, D. B. Managing Acquisitions: Creating Value Through Corporate Renewal. New York: Free Press, 1991. Ranft, A. L., and Lord, M. D., “Acquiring New Knowledge: The Role of Retaining Human Capital in Acquisitions of High-Tech Firms.” Journal of High Technology Management Research, 2000, 11(2), 295–319; Ranft, A. L., and Lord, M. D. “Acquiring New Technologies and Capabilities: A Grounded Model of Acquisition Implementation.” Organization Science, 2002, 13(4), 420–441. Swerdlow, D., and others. Managing Procurement Through a Merger. New York: Booz Allen Hamilton, 2001. Cartwright, S., and Cooper, C. L. “Of Mergers, Marriage, and Divorce: The Issues of Staff Retention.” Journal of Managerial Psychology, 1993, 8(6), 7–10. Marks, M. L., and DeMeuse, K. “Resizing the Organization: Maximizing the Gain While Minimizing the Pain of Layoffs, Divestitures, and Closings,” Organizational Dynamics, 2005, 34(4), 19–35. Marks, M. L., and Mirvis, P. H. “Rebuilding After the Merger: Dealing with Survivor Sickness.” Organizational Dynamics, 1992, 21(2), 18–33. Lewin, K. “Frontiers in Group Dynamics.” Human Relations, 1947, 1(1), 5–41. Bridges, W. Managing Transitions. Reading, MA: Addison-Wesley, 1991. Levinson, H. “Easing the Pain of Personal Loss.” Harvard Business Review, 1972, 50, 80–88. Lager, F. Ben & Jerry’s: The Inside Scoop. New York: Crown, 1994; Mirvis, P. H. “Environmentalism in Progressive Businesses.” Journal of Organizational Change Management, 1994, 7(4), 82–100. Vogel, D. The Market for Virtue: The Potential and Limits of Corporate Responsibility. Washington, DC: Brookings, 2005. Bhattacharya, C. B., and Sen, S. “Doing Better at Doing Good: When, Why, and How Consumers Respond to Corporate Social Initiatives.” California Management Review, 2004, 47(1), 79–24.

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20. Austin, J. E., and Leonard, D. “Can the Virtuous Mouse and the Wealthy Elephant Live Happily Ever After?” California Management Review, 2008, 51(1), 77–102. 21. For more, see Jones, G. Renewing Unilever: Transformation and Tradition. Oxford: Oxford University Press, 2005. 22. For more, see Mirvis, P. H. “Can You Buy CSR?” California Management Review, 2008, 51(1), 109–116.

Chapter Two 1. Hirsch, P. M., and Andrews, J. A. Y. “Ambushes, Shootouts, and Knights of the Roundtable: The Language of Corporate Takeovers.” In L. Pondy (ed.), Organizational Symbolism. Greenwich, CT: JAI Press, 1983. 2. Bower, J. L. “Not All M&As Are Alike—And That Matters.” Harvard Business Review, 2001, 79(3), 93–101; Uhlaner, R. T. and West, A. S. “Running a Winning M&A Shop.” McKinsey Quarterly, March, 2008 (2), 106–113. 3. Ghosn C., INSEAD Tokyo Forum, November 2001. 4. Marks, M. L., and Mirvis, P. H. “Revisiting the Merger Syndrome: Dealing with Stress.” Mergers & Acquisitions, 1997, 31(4), 21–27; Marks, M. L., and Mirvis, P. H. “Revisiting the Merger Syndrome: Crisis Management.” Mergers & Acquisitions, 1997, 32(1), 34–40. 5. Janis, I. L. Victims of Groupthink. Boston: Houghton Mifflin, 1972.

Chapter Three 1. Our discussion of Cisco here and in subsequent chapters benefits from Eslao, E. B., Cisco’s Innovation Through Acquisition Strategy. Unpublished master’s thesis, Department of Management, San Francisco State University, 2009. 2. Borgese, P., and Borghese, R. J. M&A from Planning to Integration: Executing Acquisitions and Increasing Shareholder Value. New York: McGraw-Hill, 2002; Paulson, E. Inside Cisco: The Real Story of Sustained M&A Growth. New York: Wiley, 2001. 3. Perry, L. The Art of Acquisition Integration: Knowing When to Break the Mold. San Jose, CA: Cisco Systems, 2009. 4. See www.lohas.com for statistics. 5. Boucher, W. I. The Process of Conglomerate Merger. Washington, DC: Bureau of Competition, Federal Trade Commission, 1980. 6. Sirower, M. L. The Synergy Trap. New York: Free Press, 1997. 7. Harrison, J. P., and McDowell, G. M. “A Profile of U.S. Hospital Mergers.” Journal of Health Care Finance, 2005, 31(3), 15–24.

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8. McCreight and Co. Ensuring Success with Mergers and Acquisitions. New Caanan, CT: McCreight and Co., 1996. 9. Diversification: A Survey of European Chief Executives. New York: Booz Allen Hamilton, 1985. 10. Anslinger, P. L., and Copeland, T. E. “Growth Through Acquisitions: A Fresh Look,” Harvard Business Review, 1996, 74(1), 126–135. 11. Kelly, J. The Morning After. London: KPMG, 2006. 12. For more on the board role in combinations, see Marks, M. L., and Guthridge, L., “When Corporate Cultures Clash: A Guide for Directors.” Directors’ Monthly, 2003, 27(11), 20–21. 13. Jemison, D. B., and Haspeslagh, P. C. Managing Acquisitions. New York: Free Press, 1991. 14. Adolph, G., Gillies, S., and Krings, J. “Strategic Due Diligence: A Foundation for M&A Success.” Strategy & Business, 2006, 57(9), 1–6. 15. Vermeulen, F. “How Acquisitions Can Revitalize Companies.” Sloan Management Review, 2005, 46(4), 44–51. 16. For a fuller discussion of the folly of confusing “merger” and “acquisition” in precombination courtship, see Marks, M. L. “Mixed Signals: Don’t Say Merger When You Mean Acquisition,” Across the Board, 2000, 37(5), 21–27. 17. Organizational Issues in Mergers and Acquisitions. New York: Delta Consulting Group, 1995. 18. Fritzson, A., Lukefahr, R., Asin, A., Bhatia, S., and Doshi, V. “Making Mergers E-merge: Using the Internet to Jump-Start Integration.” Strategy & Business, 2000, 51(10), 2–10.

Chapter Four 1. Wiley, J. E., and Moechnig, S. A. “The Effects of Mergers and Acquisitions on Organizational Climate.” Paper presented at the annual meeting of the Society of Industrial/Organizational Psychology, Los Angeles, April 2005. 2. Handy, J. “How to Face Being Taken Over.” Harvard Business Review, 1969, 47(6), 109–111. 3. Kübler-Ross, E. On Death and Dying. New York: Macmillan, 1969. 4. Kale, P., and Singh, H. “Managing Strategic Alliances: What Do We Know Now, and Where Do We Go from Here?” Academy of Management Perspective, 2009, 23(3), 45–62. 5. Lazarus, R. S., and Folkman, S. Stress, Appraisal, and Coping. New York: Springer-Verlag, 1985. 6. Seo, M., and Hill, N. S. “Understanding the Human Side of Merger and Acquisition: An Integrative Framework.” The Journal of Applied Behavioral Science, 2005, 41(4) 422–443.

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7. Astrachan, J. H. “Organizational Departures: The Impact of Separation Anxiety as Studied in a Mergers and Acquisitions Simulation.” Journal of Applied Behavioral Science, 1995, 31, 31–50. 8. Van Dick, R., Ulrich, J., and Tissington, P. A. “Working Under a Black Cloud: How to Sustain Organizational Identification After a Merger.” British Journal of Management, 2006, 17(1), 69–79. 9. Amiot, C. E., Terry, D. J., Jimmieson, N. L., and Callan, V. J. “A Longitudinal Investigation of Coping Processes During a Merger.” Journal of Management, 2006, 32(4), 552–574. 10. Gupta, A., Stephenson, T., and West, A. “Mastering Sales Force Integration in a Merger.” McKinsey Quarterly, October, 2009. 11. The Seagrams Spirits and Wines Group story is presented more fully in Marks, M. L. and Vansteenkiste, R., “Preparing for Organizational Death: Proactive HR Engagement in an Organizational Transition.” Human Resource Management, 2008, 47(4), 809–827.

Chapter Five 1. Boucher, W. I. The Process of Conglomerate Merger. Washington, DC: Bureau of Competition, Federal Trade Commission, 1980. 2. Mirvis, P. H. “Merging of Executive Hearts and Minds in Crisis Management.” In S. Srivastva and Cooperrider, D. (eds.) Appreciative Management and Leadership. San Francisco: Jossey-Bass, 1990. 3. Paulson, E. Inside Cisco: The Real Story of Sustained M&A Growth. New York: Wiley, 2001. 4. See, for example, Collins, J. C., and Porras, J. I. Built to Last: Successful Habits of Visionary Companies. New York: Harper, 2002. 5. Fubini, D., Price, C., and Zollo, M. “Successful Mergers Start at the Top.” McKinsey on Finance, 2006, 11(4), 12–16. 6. Marks, M. L. “Workplace Recovery After Mergers, Acquisitions, and Downsizings: Facilitating Individual Adaptation to Major Organizational Transitions.” Organizational Dynamics, 2006, 35(4), 384–399. 7. Recent and classic discussions of the pace of integration can be found in Harrison, J. “Can Speed Kill? Experts Have Differing Views on How Companies Should Pace Merger Integration.” Mergers & Acquisitions, 2007, 32(10); and Jemison, D. B., and Sitkin, S. B. “Corporate Acquisitions: A Process Perspective,” Academy of Management Review, 1986, 11(1), 145–163.

Chapter Six 1. For more, see Jemison, D. B. Process Constraints on Strategic Capability Transfer During Acquisition Integration. Stanford, CA: Graduate School of Business, Stanford University, 1986.

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2. Marks, M. L., and Mirvis, P. H. “Managing Mergers, Acquisitions, and Alliances: Creating an Effective Transition Structure.” Organizational Dynamics, 2000, 28(3), 35–47. 3. Mirvis, P. H. “Negotiations After the Sale: The Roots and Ramifications of Conflict in an Acquisition.” Journal of Occupational Behavior, 1985, 6, 65–84.

Chapter Seven 1. Reichers, A. E., Wanous, J. P., and Austin, J. T. “Understanding and Managing Cynicism About Organizational Change.” Academy of Management Executive, 1997, 11(1), 48–59. 2. Bommer, W. H., Rich, G. A., and Rubin, R. S. “Changing Attitudes About Change: Longitudinal Effects of Transformational Leader Behavior on Employee Cynicism About Organizational Change.” Journal of Organizational Behavior, 2005, 26, 733–753. 3. Lane, K., and McGurk, M., “Leaders in the Crisis,” McKinsey Global Survey, 2009. 4. Ranft, A. L., and Lord, M. D. “Acquiring New Knowledge: The Role of Retaining Human Capital in the Acquisitions of High-Tech Firms.” The Journal of High Technology Management Research, 2002, 11(3), 295–319. 5. For more on how to manage the downsizing process and its aftereffects, see Zatzick, C. D., Marks, M. L., and Iverson, R. D. “Which Way Should You Downsize in a Crisis?” MIT Sloan Management Review, 2009, 51(1), 79–85; and DeMeuse, K., and Marks, M. L. Resizing the Organization—Managing Layoffs, Divestitures, and Closings: Maximizing Gain While Minimizing Pain. San Francisco: Jossey-Bass, 2003. 6. Brockner, J. “Managing the Effects of Layoffs on Survivors,” California Management Review, 1992, 34(2), 9–28; Marks, M. L., and DeMeuse, K., “Resizing the Organization: Maximizing the Gain While Minimizing the Pain of Layoffs, Divestitures, and Closings,” Organizational Dynamics, 2005, 34(4), 19–35. 7. Bridges, W. Managing Transitions. Reading, MA: Addison-Wesley, 1991; Levinson, Psychological Man. Cambridge, MA: The Levinson Institute, 1976.

Chapter Eight 1. Bolman, L. G., and Deal, T. E. “What Makes a Team Work?” Organizational Dynamics, 1992, 21(2): 34–44. 2. Tajfel, H. Human Groups and Social Categories, Cambridge: Cambridge University Press, 1981; Turner, J. C. “Toward a Cognitive Redefinition of the Social Group.” In H. Tajfel (ed.) Social Identity and Intergroup Relations. Cambridge: Cambridge University Press, 1982.

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3. For more on the Apollo/HP case, see Mirvis, P. H., and Marks, M. L. “The Human Side of Merger Planning: Assessing and Analyzing ‘Fit’.” Human Resource Planning, 1992, 15(3), 64–92. 4. Berry, J. W. “Acculturation as Varieties of Adaptation.” In A. M. Padilla (ed.), Acculturation: Theories, Models, and Some Findings. Boulder, CO: Westview Press, 1980. 5. Nahvandi, A., and Malekzadeh, A. R. “Acculturation in Mergers and Acquisitions.” Academy of Management Review, 1988, 13(1), 79–90. 6. Weick, K. E. Sensemaking in Organizations. Thousand Oaks, CA: Sage, 1995. 7. For more on vision and culture, see Chatman, J. A., and Cha, S. E. “Leading by Leveraging Culture.” California Management Review, 2003, 45(4), 20–34. 8. Schweiger, D. M., and Goutet, P. K. “Facilitating Acquisition Integration Through Deep-Level Cultural Learning Interventions.” Organizational Studies, 2005, 26(10), 1477–1499. 9. Making Mergers Work in the Financial Services Industry. Cambridge, MA: Management Analysis Center, 1984. 10. Kanter, R. M. SuperCorp. New York: Crown Publishing, 2009. 11. GE’s approach is described in Ashkenas, R. N., DeMonaco, L. J., and Francis, S. C. “Making the Deal Real: How GE Capital Integrates Acquisitions.” Harvard Business Review, 1998, 76(1), 165–178. 12. Mikulincer, P. R., and Shaver, P. P. Attachment in Adulthood: Structure, Dynamics, and Change. New York: Guilford Press, 2007. 13. For more on this case, see Badrtalei, J., and D. L. Bates, “Effect of Organizational Cultures on Mergers and Acquisitions: The Case of DaimlerChrysler.” International Journal of Management, June, 2007, 24(2), 303–317. 14. The Right Management study is described in F. M. Horwitz, K. Anderssen, A. Bezuidenhout, S. Cohen, F. Kirsten, K. Mosoeunyane, N. Smith, K. Thole, and A. van Heerden, “Due Diligence Neglected: Managing Human Resources and Organizational Culture in Mergers and Acquisitions.” South African Journal of Business, 2002, 33(1), 1–10. 15. Haper, J., and Cormeraie, S. “Mergers, Marriages, and After: How Can Training Help?” Journal of European Industrial Training, 1995, 19(1), 24–29.

Chapter Nine 1. Van de Ven, A., Bechara, J., and Sun, K. “Cyclical Processes of Organization Integration: The Case of a Managed Health Care Company.” Working paper, University of Minnesota, 2009.

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2. Schein, E. Organizational Culture and Leadership. San Francisco: Jossey Bass, 1985. 3. Senge, P. The Fifth Discipline. New York: Doubleday, 1990. 4. Marks, M. L., and Mirvis, P. H. “Situational and Personal Factors Influencing Employee Response to Corporate Merger.” Paper presented at the ninety-first annual convention of the American Psychological Association, Anaheim, CA, 1983. 5. Sales, A. L., and Mirvis, P. H. “When Cultures Collide: Issues in Acquisition.” In J. R. Kimberly and R. E. Quinn (eds.) Managing Organizational Transitions. Homewood, IL: Irwin, 1984. 6. See, for example, Larsson, R., and Finkelstein, S. “Integrating Strategic, Organizational, and Human Resource Perspectives on Mergers and Acquisitions: A Case Survey of Synergy Realization.” Organization Science, 1999, 10(1), 1–26; and Weber, Y., Shenkar, O., and Raveh, A. “National and Corporate Culture Fit in Mergers/ Acquisitions: An Exploratory Study.” Management Science, 1996, 42(8), 1215–1227. 7. Changing Organizational Culture. New York: Delta Consulting Group, 1996. 8. Gladwell, M. The Tipping Point. New York: Little, Brown, 2000. 9. Ettenson, R., and Knowles, J. “Merging the Brands and Branding the Merger.” Sloan Management Review, 2006, 47(4), 39–49. 10. Basu, K. “Merging Brands After Mergers.” California Management Review, 2006, 48(4), 28–40. 11. Hatch, M. J., and Schultz, M. Taking Brand Initiative: How Corporations Can Align Strategy, Culture and Identity Through Corporate Branding. San Francisco: Jossey-Bass, 2008.

Chapter Ten 1. Marks, M. L. “A Framework for Facilitating Adaptation to Organizational Transition.” Journal of Organizational Change Management, 2007, 20(5), 721–739. 2. Huy, Q. N. “Emotional Balancing of Organizational Continuity and Radical Change: The Contribution of Middle Managers.” Administrative Science Quarterly, 2002, 47(1), 31–69; Larkin, T. J., and Larkin, S. “Reaching and Changing Frontline Employees.” Harvard Business Review, 1996, 74(3), 95–104. 3. House, J. S. Work Stress and Social Support. Reading, MA: AddisonWesley, 1981. 4. See, for example, Eisenberger, R., Stinglhamber, F., Vandenberghe, C., Sucharski, I. L., and Rhoades, L. “Perceived Survivor Support: Contributions to Perceived Organizational Support and Employee

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6.

7. 8.

9. 10.

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Retention.” Journal of Applied Psychology, 2002, 87(3), 565–573; Terry, D. J., Callan, V. J., and Sartori, G. “Employees’ Adjustment to an Organizational Merger: Stress, Coping and Intergroup Differences.” Stress Medicine, 1996, 12(2), 105–122. The concepts in this section are discussed in more depth in Marks, M. L., and Mirvis, P. H. “Rebuilding After the Merger: Dealing with Survivor Sickness.” Organizational Dynamics, 1992, 21(2), 18–33. Harrison, R. “Role Negotiation: A Tough-Minded Approach to Team Development,” in W. W. Burke and H. H. Hornstein (eds.), The Social Technology of Organization Development. La Jolla, CA: University Associates, 1972. Team Building Framework. New York: Delta Consulting Group, 1991. Mirvis, P. H., Ayas, K., and Roth, G. To the Desert and Back: The Story of One of the Most Dramatic Business Transformations on Record. San Francisco: Jossey-Bass, 2003. Mirvis, P. H., and Gunning, W. L. “Creating a Community of Leaders.” Organizational Dynamics. 2006, 35(1), 69–82. Googins, B., Mirvis, P. H., and Rochlin, S. Beyond “Good Company”: Next Generation Corporate Citizenship. New York: Palgrave, 2007.

Chapter Eleven 1. Kiefer, T. “Feeling Bad: Antecedents and Consequences of Negative Emotions in Ongoing Change.” Journal of Organizational Behavior, 2005, 26, 875–897. 2. Diener, E. “Positive Psychology: Past, Present, and Future.” In C. R. Snyder and S. J. Lopez (eds.), Oxford Handbook of Positive Psychology. Oxford: Oxford University Press, 2009. 3. For more on the role of emotions in leadership and, in particular, the role of empathy, see George, J. M. “Emotions and Leadership: The Role of Emotional Intelligence.” Human Relations, 2000, 53, 1027–1055; Humphrey, R. H. “The Many Faces of Emotional Leadership.” Leadership Quarterly, 2002, 13, 493–504; Kellett, J. B., Humphrey, R. H., and Sleeth, R. G., “Empathy and the Emergence of Task and Relations Leaders.” Leadership Quarterly, 2006, 17, 146–162. 4. Harkness, A. M. B., Long, B. C., Bermbach, N., Patterson, K., Jordan, S., and Kahn, H. “Talking About Work Stress: Discourse Analysis and Implications for Stress Interventions.” Work & Stress, 2005, 19(2), 121–136. 5. Bommer, W. H., Rich, G. A., and Rubin, R. S. “Changing Attitudes About Change: Longitudinal Effects of Transformational Leader

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7.

8. 9. 10.

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Behavior on Employee Cynicism About Organizational Change.” Journal of Organizational Behavior, 2005, 26, 733–753. Pederit, S. K. “Rethinking Resistance and Recognizing Ambivalence: A Multidimensional View of Attitudes Toward an Organizational Change.” Academy of Management Review, 2000, 25, 783–795. Pursar, R. E., and Petranker, J. “Unfreezing the Future: Exploring the Dynamic of Time in Organizational Change.” Journal of Applied Behavioral Science, 2005, 41(2), 182–203. Bruner, R. F. Deals from Hell: M&A Lessons That Rise Above the Ashes. New York: Wiley, 2005. Kind, L., and Perlow, L. A. The New HP: The Clean Room and Beyond. Harvard Business School Case Study, 2004. Burgelman, R., and McKinney, R. N. “Managing the Strategic Dynamics of Acquisition Integration: Lessons from HP and Compaq.” California Management Review, 2006, 48(3), 6–27.

Chapter Twelve 1. Argyris, C. Knowledge for Action. San Francisco: Jossey-Bass, 1993. 2. Marks, M. L., and Mirvis, P. H., “Track the Impact of Mergers and Acquisitions.” Personnel Journal, 1992, 71(4), 70–79. 3. Amiot, C. E., Terry, D. J., Jimmieson, N. L., and Callan, V. J. “A Longitudinal Investigation of Coping Processes During a Merger,” Journal of Management, 2006, 32(4), 552–574. 4. This case is described more fully in Marks, M. L., and Baitch, D. “Measuring Employee Opinions During Mergers and Acquisitions.” in Allen I. Kraut (ed.) Getting Action from Organizational Surveys: New Concepts, Methods, and Applications. San Francisco: Jossey-Bass, 2006. 5. Feldman, M. “Disaster Prevention Plans After a Merger.” Mergers & Acquisitions, 1995, 30(1), 31–36.

Chapter Thirteen 1. A study on the benefits of learning from M&A by Bain & Company shows that companies that do more than one acquisition per year generate higher average returns on them than those that do one a year: Hardy, D., and Rovit, S. Mastering the Merger. Boston: Harvard Business School Press, 2004. 2. Paulter, P. A. The Effects of Mergers and Post-Merger Integration: A Review of Business Consulting Literature. Washington, DC: Federal Trade Commission, 2003. 3. Marks, M. L., and Shaw, R. B. “Sustaining Change: Creating the Resilient Organization.” In D. A. Nadler, R. B. Shaw, A. E. Walton,

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and Associates (eds.), Discontinuous Change. San Francisco: JosseyBass, 1995. Ashkenans, R. N., De Monaco, L. J., and Francis S. C. “Making the Deal Real: How GE Capital Integrates Acquisitions.” Harvard Business Review, 1998, 76(1),165–178. Kumar, N. India’s Global Powerhouses: How They Are Taking on the World. Cambridege, MA: Harvard Business School Press, 2009. Uhlaner, R. T., and West, A. S. “Running a Winning M&A Shop.” McKinsey Quarterly, March, 2008 (2), 106–113. Eslao, E. B. Cisco’s Innovation Through Acquisition Strategy. Unpublished master’s thesis, Department of Management, San Francisco State University, 2009. Palter, R. N., and Srinivasan, D. “Habits of the Busiest Acquirers.” McKinsey Quarterly, 2006 (4), 18–27. Bower, J. L. “Not All M&As Are Alike—And That Matters.” Harvard Business Review, 2001, 79(3), 93–101.

Index 80-20 Rule, 162 A Abitibi-Consolidated, 143–144, 150, 151 Absorption, 16 Acceptance, 86 Acculturation. See culture Acculturative conflict and stress, 94. See also culture Acquired CEOs: dealing with, 96–97 Acquired mind-set, 85–86 Acquisitions, 12; Cisco’s five rules for, 59–61. See also M&A Adaptation: to changing circumstances, 60–61; psychology of, 22–23; timing of, 245–246 AdMob, 10 AHG. See Pfizer Alcatel, 237 Amoco, 81–82 Anger, 86 Anxiety, 94 Apollo, 194–195 Ashkenas, Ronald, 317 AT&T, 12 B Bargaining, 86 Behavior: modeling new behaviors, 255–256 Ben & Jerry’s, 23–27, 61 Best Foods, 260–264 Best of both, 16–17 Best practices, 44–51

Blumenthal, W. Michael, 112–113, 122, 126–127 Boeing, 149–150, 193 BOHICA, 22 Bolman, Lee, 190 Bossidy, Larry, 22 Boston Scientific, 11–12 Bower, Joseph, 327 Bowick, Susan, 185, 277 BP. See British Petroleum Branding the combination, 240–241 Braun, Harald, 211 British Petroleum, 81–82 Buffet, Warren, 9 Building an internal M&A shop, 320–325 Burgelman, Robert, 277–278, 279 Burroughs, 112–113, 126–127, 241 Buyer mind-set, 84–85 C Capabilities transfer, 10 Cartwright, Sue, 13–14 Cary, Jim, 144, 145 CEOs: CEO address, 130–131; dealing with acquired CEOs, 96–97; ego, 63; picking the wrong executive, 266–268; Ten Commandments of Combination Leadership, 119–121 Challenge sessions and reviews, 160–161 Chambers, John, 59–61, 115 Change: change fatigue, 20; stages of, 21–22

341

342

Index

Changing, 21–22 Chase Manhattan Bank, 182 Chemical Bank, 182 Chen, Steve, 116 Cisco: building an internal M&A shop, 321–323; five rules for acquisitions, 59–61 Clarke, Jeff, 276 Clarkson, William M.E., 110–112, 128 Combination checklist, 215–217 Combination forms, 12–19 Combination management: building a competence in, 325–327; culture, 48–49; four truths about, 51–52; organization, 48; people, 48; strategy, 47; transition management, 49 Combination phase, 38–39; CEO’s Ten Commandments of Combination Leadership, 119–121; complications, 107–108; leadership tasks during, 114–115; phases the combination process, 138–139; principles for the transition, 121–123; prioritizing combination issues, 136; tracking, 298–306. See also culture clash; leading the combination; transition management; transition structures Combinations. See corporate combinations Commitment: vs. stress, 165 Common interests, 87 Communication campaign, 171–172; content, 172–174; processes, 174–175; regular updates, 175–176; upward communication, 187 Compaq, 8, 185–187, 275–279 Complementary organization changes, 238 Complementary skills, 87 Confidence: developing in a new team, 255–256

Conglomerate mergers, 31 Cooper, Cary, 13–14 Cooperative competitiveness, 87 Coordination group, 139 CoreBrand, 12 Corporate combinations: current wave of, 32–34; forms, 12–19; and globalization, 32; history of, 30–32; phases of, 35–40; rate of failure, 3; reasons for failure, 3–4; vertical combinations, 30–31 Corporate social responsibility, 27 Corporate staff hegemony, 38 Cost synergies, 7–8 Counseling, 177–179 Critical success factors, 118 Cross-cultural surveys, 70–72 Cross-functional relations, 228–232 Cross-national culture clashes, 211–214 Cross-unit needs, 229–230 CSFs. See critical success factors CSR. See corporate social responsibility Cultural end state, 78 Culture: addressing identity and acculturation, 187–188; combination management, 48–49; in combinations, 189–191; combining cultures, 14–17; cross-cultural surveys, 70–72; cultural assimilation, 209–210; cultural clash, 25–26; cultural differences and combination outcomes, 18; cultural fit, 17–19; cultural integration, 207–209; cultural pluralism, 205–207; cultural transformation, 210–211; Denison culture model, 70, 71; postcombination management, 50–51; precombination management, 46–47; reculturation, 23; at the working level, 238–239. See also culture clash

Index Culture building, 232–233; acculturation by default, 234–235; acculturation by design, 235; in cross-national combinations, 235–237; culture training, 239–240; keeping the old ways, 233–234; leverage for, 237–240 Culture clash, 191; cross-national culture clashes, 211–214; culture clarification exercises, 200–202; deepening cross-cultural learning, 199–202; defining a desired cultural end state, 197–199; driving the combination toward the desired end, 205–211; losing and winning, 193; managing culture change, 196; multiple modes of acculturation, 198–199; pacing the combination with cultural sensitivity, 202–205; stages of, 191–192; “The Stepford Wives” vs. the “Hell’s Angels”, 194–195. See also culture Customers: tracking, 310–311 D Daimler-Chrysler, 8, 38–39 Damage control and recovery, 265–266; four elements of damage control, 269; picking the wrong executive, 266–268; redirecting a combination, 275–279; stuck in transition, 268–275 Davé, Hemang, 158 Deal, Terrence, 190 Deep cross-cultural learning, 199–202 Dell, Michael, 276 Delta Airlines, 29 Denial, 86 Denison, Dan, 70 Denison culture model, 70, 71 Depression, 86

343

Disney, 13 Disposal of idle assets, 7 Diversity: managing, 256 Divestiture: preparing people for, 100–103 Dow, 62 Downsizing, 7, 183–184. See also workforce reductions Dozen don’ts for doing a deal, 64–65 Due diligence, 3, 66–68; behavioral and cultural, 69–70; diligent due diligence, 68–69 E Ego: of CEOs, 63 Electronic Art, 10 Eli Lilly, 62 Emotional reactions, 93–94; managing emotions, 176–180 Empathy, 130, 269–271 Employees: connecting to, 99; downsizing, 7, 183–184; the human side of M&A, 19–27; maintaining morale, 184–185; retention, 94–96; speaking to, 129–134; staffing and redundancies, 180–185; surveys of, 291; workforce reductions, 186–187 End states, 15–17, 72, 77–78; defining a desired cultural end state, 197–199; driving the combination toward the desired end, 205–211; no shared view of desired end state, 308 Energy, 269, 272–274 Enforcement, 269, 274–275 Engagement, 269, 271–272 Equity, 94 Exit interviews, 292 F Fatigue, 223–224; change fatigue, 20 Feedback, 279–280 Feldman, Mark, 310

344

Index

Financial services combinations: tracking, 296–307 Fiorina, Carly, 276, 278 Fisher-Price, 241 Focus, 224 Focus groups, 291–292 Freese, Walt, 26, 280 Funds, 224–225 G GE Capital, 69–70, 318. See also General Electric General Electric, 22, 209–210. See also GE Capital Gerstner, Lou, 206 Ghosn, Carlos, 39 Gillette, 9, 207–209 Gladwell, Malcolm, 238 Global cross-currents, 33 Globalization: and corporate combinations, 32 Google, 10, 116 Goulet, Philip, 199–200 Graphic Controls, 110–112, 128 Groupthink, 42 Growth bets, 35 Guidant, 11–12 Gunning, Louis W. “Tex”, 261 Gut check, 62–63 H Handy, John, 85 Harris Microwave, 210–211 Haspeslagh, Philippe, 7–8 Health care: search criteria for health care deals, 66 Hewlett, Walter, 276 Hewlett-Packard, 8, 185–187, 194–195, 275–279 Hexcel, 117–118 Hierarchy, 139 Hill, N. Sharon, 93 Hindalco, 318–320 Human costs, 4 Human reactions to combinations, 90–94

Human resources: merger response plan, 100, 101; merging HR departments, 185–188 Hurd, Mark, 278–280 Hurley, Chad, 116 I IBM, 147, 158–159, 205–207 Identity, 187–188 Implementation planning, 162–163 Independent planning, 138 Industry benchmarks, 292 Industry overcapacity, 34 Industry roll-up, 34–35 Industry transformation, 35 Influencers, 238 Informal conversation, 292 Information, 167, 170 Informed management, 287–288 Insecurity, 94 Insight, 167–169 Inspiration, 167, 169–170 Integration: accelerating, 186–187; degree of between combining companies, 73–75; operational vs. strategic, 277–278; speed of, 134–136; for synergies, 75–77 Integration manager, 139–140 Integration planning, 138 Integration steering committee (ISC), 141, 143–144, 160–161 Integration team sponsors, 142 Integration teams, 142; unproductive, 309. See also transition teams Interactions, 239; reinforcing, 237 International combinations: cross-national culture clashes, 211–214; culture building in, 235–237; transforming an Asian leadership team, 260–264 Interviews, 291 Involvement, 167, 170–171 ISC. See integration steering committee (ISC)

Index J Janis, Irving, 42 Jemison, David, 7–8 Joint ventures, 12 Justice, 94 JV. See joint ventures K Kitchen cabinet, 139 Knowing what is going on, 287–288 Knowledge building, 140, 156–157 Knowledge transfer, 10 Kovacevich, Richard (Dick), 64–65 Kübler-Ross, Elisabeth, 86 Kumar, Nirmalya, 319 L Leadership alignment, 237 Leadership team, 123–129 Leading the combination, 109–110; CEO’s Ten Commandments of Combination Leadership, 119–121; exemplary leadership, 110–114; leadership tasks in combination phase, 114–115; principles for the transition, 121–123; selecting and developing the leadership team, 123–129; speaking to employees, 129–134; speed of integration, 134–136; vision for the combination, 115–118 Learning from M&A, 313–317 Leaver, William Hesketh, 25 Lessons learned from a successful combination, 315–316 Levinson, Harry, 23 Lewin, Kurt, 21–22 Licensing, 12 Linksys, 60 Lockheed Martin, 117 LOHAS (Lifestyles of Health and Sustainability) market, 61 Loss of attachments, 94 Loss of identity or membership, 94

345

Lotus, 147, 158–159, 205–207 Lucent, 237 M M&A: action stages, 317–318; building a core competency in combination management, 317–320; building an internal M&A shop, 320–325; building competency, 285–286, 312–313; emotional reactions, 93–94; gaining experience through, 318–320; human side of, 19–27; learning, 313–317; levels of competency, 313–325; scale and scope, 5–6; strategic intent for, 61–63; synergies, 6–12 Malekzadeh, Ali, 197 Managed subsidiary, 74 Managers: focusing and prioritizing executive attention, 135–136; getting managers ready for their speech, 131–132; rallying the ranks, 132–134; when to make appointments, 125–128 Manufacturer’s Hanover, 182 Manzy, Jim, 206 Marriage: comparing corporate combinations to, 13–14 Mattel, 241 McKinnel, Hank, 182 Media, 292 Meetings, 239 Megamergers, 31 “Merganic” strategy, 4 Merged and consolidated, 74–75 Merger Survey, 299–304 Merger Syndrome, 40, 309; cultural signs of, 43–44; organizational signs of, 42–43; personal signs of, 41–42; renewed, 219 Mergers, 12; conglomerate mergers, 31; megamergers, 31; principles for merging, 122–123. See also M&A Mergers and acquisitions. See M&A

346

Index

Meritocracy, 122 Merrifield, Tim, 60 Middle managers: role of, 97–98 Mind-sets: of the acquired, 85–86; of the buyer, 84–85; combination mind-sets, 84; engaging minds, 87–90; partnering mind-sets, 86–87; postcombination, 248–251 Montero, Sylvia, 144, 145 Morale: maintaining, 184–185 Morton, Dean, 279 N Nadler, David, 80 Nahavandi, Afsaneh, 197 Nissan, 8, 39 North American Rockwell, 149–150, 193 Northwest Airlines, 29–30 Novelis, 319–320 O Observation, 292 Operating relationship, 73–77 Operational control, 74 Organization: combination management, 48; postcombination management, 50; precombination management, 46 Organizational end state, 78 P Papows, Jeffrey, 206 Parameters, 58, 72–78 Parenting abilities, 76 Partner, 3, 58, 66–72 Partnering mind-sets, 86–87 Partnership, 122 Peers: power of, 238 People, 58, 78–79; combination management, 48; ensuring that people matter, 327–328; postcombination management, 50; precombination management, 46

Performance: managing, 256 Performance records, 292 Pfizer, 8, 144–147, 154, 182–183, 198–199, 226–228, 229–230 Pixar, 13 Planning, 4 Platt, Lew, 279 Play: using to surface merger issues, 176–177 Playfish, 10 Policies: integrating, 230–232 Postcombination checklist, 281–283 Postcombination management: culture, 50–51; organization, 50; people, 50; strategy, 49–50; transition management, 51 Postcombination phase, 39–40, 223–225; branding the combination, 240–241; building cross-functional relations, 228–232; building the postcombination organization, 225–228; clarifying cross-unit needs, 229–230; common problems, 219–221; culture building, 232–240; developing effective postcombination teams, 256–260; meshing policies and practices, 230–232; postcombination mind-sets, 248–251; teambuilding, 242–248; tracking, 306–307. See also damage control and recovery Precombination checklist, 104–106 Precombination management: culture, 46–47; organization, 46; people, 46; strategy, 44–46; transition management, 47 Precombination phase, 36–37; challenges, 94–99; common problems, 53–54; planning during, 81–82; tracking, 297–298. See also psychological preparation; strategic and operational preparation

Index Preparation: preparing people for divestiture, 100–103; preparing to be acquired, 100; on the seller’s side, 99–103. See also psychological preparation; strategic and operational preparation; strategic and psychological preparation Preservation, 16 Price, 3 Private equity, 33 Process improvement, 158–159 Proctor & Gamble, 9, 207–209 Product/market consolidation, 35 Product/market extension, 35 Psychological preparation, 83; combination mind-sets, 84–87 Psychology of adaptation, 22–23 Purpose, 58, 61–66 Put-downs, 192 R Raiders, 31–32 Randall, Lyman, 111 Reculturation, 23 Redirecting a combination, 275–279 Redundancies, 180–185 Refreezing, 22 Relationship building, 141, 157–158 Renault, 8, 39 Repurposing a business unit, 227–228 Resource combinations, 8–9 Revenue enhancement, 9 Reverse takeover, 16 Reviews of change implementation, 227 Reward systems, 187 Role development, 253–254 Role reversal, 89–90 Rules of engagement, 123

347

S Sales staff: managing, 98–99 SBC Global, 12 Schmidt, Eric, 116 Schweiger, David, 199–200 Screening. See due diligence Seagrams Spirits and Wine Group, 100–103 Search criteria, 63; dozen don’ts for doing a deal, 64–65; for health care deals, 66 Sensitization, 176–180; workshops, 88–90 Seo, Myeong-Gu, 93 Separate holding company, 74 Settings, 239 Showers, Marilyn, 80 Showstoppers, 80–81 SmithKline Beecham, 144–147, 226–228 Social entrepreneurs, 24 Sovereign states, 33 Sperry, 112, 126–127, 241 Staffing and redundancies, 180–185 Stages of reaction to death and loss, 86 Stereotypes, 192 Stern, Paul, 127 Storyline: for the combination, 116–118 Strategic alliances, 12 Strategic and operational preparation, 57–58; Four P’s of preparation, 58; parameters, 58, 72–78; partner, 58, 66–72; people, 58, 78–79; purpose, 58, 61–66 Strategic and psychological preparation, 21. See also psychological preparation Strategic control, 74 Strategic end state, 77–78 Strategy: combination management, 47; postcombination management, 49–50; precombination management, 44–46

348

Index

Stratex Networks, 210–211 Stress: vs. commitment, 165; factors adding to stress, 92–93; reasons for stress due to combinations, 91–92 Stuck in transition, 268–275 Support, 177–179 Surfacing merger issues, 176–177 Surveys: of employees, 291; Merger Survey, 299–304 Survivor guilt, 20. See also employees Synergies: cost, 7–8; integrating for, 75–77; new knowledge and capabilities, 10; resource combinations, 8–9; revenue enhancement, 9; searching for, 10–12; seeking, 33–34 T Talent: retaining, 94–95 Team advisors, 142 Team development, 128–129 Team facilitators, 142 Team leaders, 142 Teambuilding: developing effective postcombination teams, 256–260; developing trust and confidence, 255–256; molding individuals into a team, 251–256; postcombination, 242–248; role development, 253–254; sources of tension in building new teams, 250–251; stages in building a new team, 252; team effectiveness framework, 257–258; transforming an Asian leadership team, 260–264 Ten Commandments of Combination Leadership, 119–121 Thompson, John, 206 Times-Mirror, 110–112 Tipping point, 238

Top-level oversight, 226–227 Tracking the combination: after-action review, 307–310; benefits of combination tracking, 288–290; combination phase measurement, 298–306; gathering action-oriented data, 295; guidelines, 295–296; knowing what is going on, 287–288; methods, 291–292; postcombination measurement, 306–307; precombination measurement, 297–298; resistance to tracking, 290–291; tracking customers, 310–311; tracking financial services combinations, 296–307; what to monitor and how, 292–294 Transformation, 17. See also industry transformation Transition management, 20–23, 57–58, 141, 164; activities, 138–139; combination management, 49; communication campaign, 171–176; managing emotions, 176–180; managing front-end fears, 166–171; postcombination management, 51; precombination management, 47; principles for the transition, 121–123; stress vs. commitment, 165; stuck in transition, 268–275 Transition managers, 142, 144–147 Transition organization, 140; components of, 141–148; sample, 142 Transition planning, 138–139, 162–163 Transition structures, 137, 139–141; benefits, 148–149; components of a transition organization, 141–148

Index Transition teams, 147–148; accelerating the work of, 156–159; challenge sessions and reviews, 160–161; clarifying team charters and guidelines, 152–153; cross-team coordination, 159–160; deliverables and timetables, 153–155; enhancing the effectiveness of, 149–161; internal processes, 150; issue-identification and decision-making process, 150; looking outside the box, 161–162; minding relations with the rest of the organization, 151; organizing around value creation, 149–150; resistance to the process, 154–155; selecting skilled members and leaders, 151–152. See also integration teams Trust, 86; developing in a new team, 255–256 U UBF Asia, 261–264 Unfreezing, 21

349

Unilever, 23–27, 61, 260–264 Unity, 122 Upward communication, 187 V Value capture, 7–8 Values: buying, 24–25; creating, 6 Vermeulen, Freek, 77 Vertical combinations, 30–31 Vision for the combination, 115–118 W Walking the talk, 179–180 Warner-Lambert, 8–9, 182–183, 198–199 Web sites, 292 Wells Fargo, 64 Work processes, 239 Workforce reductions, 186–187. See also downsizing Y Young, John, 279 YouTube, 116 Z Zisman, Michael, 206

If 75 percent of all mergers fail, what makes the other 25 percent succeed?

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Praise for Joining Forces

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“This book will help both M&A veterans and those new to the game. The authors provide great insights into the human, cultural, organizational, and strategic factors that matter in M&A success.” —RICHARD KOVACEVICH, chairman and CEO emeritus, Wells Fargo & Co.

is an internationally recognized expert on corporate transitions (including mergers, acquisitions, alliances, downsizings, and restructurings), corporate culture, leadership development, and executive teambuilding. He is a member of the faculty of the College of Business at San Francisco State University and leads JoiningForces.org, a change management consulting firm. MITCHELL LEE MARKS

PHILIP H. MIRVIS is an organizational psychologist whose research and practice concerns large-scale organizational change, global corporate responsibility, and the changing character of the workforce and workplace. He has been an advisor to companies on five continents and has authored ten books and over 100 scholarly and practitioner articles.

“Don’t commit to the merger or acquisition without them! I have personally witnessed how hard it is on everyone—employees, shareholders, communities, and especially executives—to work through an improperly managed merger. I have known Marks and Mirvis for almost twenty-five years and the only mistake our organization made was that we did not consult them soon enough. Their new book reflects unequalled experience and intellect. Don’t merge, acquire, or be acquired without it!” —MICHAEL R. LOSEY, CEO (emeritus), Society for Human Resources Management (SHRM) “Joining Forces is a terrific resource for managers who want to understand the human dynamics of mergers and acquisitions, and a must-read for those who have to lead their companies through one. It is based on the latest research and provides practical insights and advice from authors who know M&A inside out.” —EDWARD E. LAWLER III, Distinguished Professor of Business, Marshall School of Business, University of Southern California

BUSINESS/MANAGEMENT

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MARKS MIRVIS

JOINING FORCES

MERGERS, ACQUISITIONS, AND ALLIANCES are more vital today than ever before in driving business success. This indispensible guide offers proven strategies and sound solutions to the multitude of integration issues that inevitably arise, and shows how to create a combined business that meets its strategic and financial objectives, competes better, and offers personal and organizational enhancements. Dubbed “merger mavens” by Fortune magazine, the authors report lessons learned from their experience in over 100 combinations. Executives, managers, and employees alike— in all industries and sectors—will find useful examples, strategies, and tools here.

REVISED AND UPDATED SECOND EDITION

Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances

JOINING Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances

THIS THOROUGHLY REVISED AND UPDATED edition of Joining Forces offers a proven framework designed to help organizations, managers, and employees confidently navigate a merger or acquisition in today’s rapidly changing global climate. In addition to the standard M&A scenarios like industry consolidations, big companies absorbing small firms, and United States, European, or cross-Atlantic combinations, this revised volume addresses the strategic, human, organizational, and cultural challenges brought on by new types of mergers and acquisitions. It shows how forward-thinking firms like Cisco and Google use alliances and partial ownership as a research and development strategy and take a phased approach to mergers and acquisitions; how companies like Proctor & Gamble, Hewlett Packard, and Unilever do deals to expand their customer base and talent pools; and how Chinese and Indian firms, like Lenovo and Tata, are globalizing by acquiring U.S. and European assets. M&A experts Mitchell Lee Marks and Philip H. Mirvis share their tested techniques for managing a single combination (how to select a partner, set integra-

FORCES Mitchell Lee Marks Philip H. Mirvis

tion goals, put the companies together, manage cultural clash, and bring people along), and also tools for developing ongoing M&A capability within an organization. This capacity—to conceive, organize, and implement multiple combinations—is a new source of competitive advantage for companies. This proven resource will help seasoned M&A managers accelerate the process of putting companies together as well as show how to build longer-term resilience in a merged workforce. With hands-on experience in more than 100 deals over the past 30 years—including some of the most prominent and complex combinations—the authors’ observations and practical advice provide executives, managers, and employees with what they need to join forces—successfully.