With global Merger/Acquisition (M/A) activity topping $3 trillion, less than 50% of M/As meet expected performance. In today’s economy, the primary drivers for M/As are to:
- increase market share,
- access new markets and
- achieve competitive size.
From a dotcom perspective, Internet companies grow 12 times faster and they tend to acquire other companies earlier in their life cycles than traditional companies.
Based on surveys of over 700 CEOs worldwide who are actively involved in mergers, we have learned:
- 75% of acquiring companies incur unanticipated costs.
- Activities that receive the highest priority during merger integration:
- Strategic business development
- Finance and Customer service.
- People management and communication receive the lowest priorities during integration.
- Cultural compatibility is the area least likely to be researched during due diligence, but it is rated as the biggest barrier to a successful integration.
Since mergers generally trigger complex organizational issues, and are often unsuccessful, we have developed a simple Merger Integration Model. The model has 4 phases:
Each phase includes 3 steps that facilitate a smooth integration.
Here is a graphic of the complete Merger Integration Model:
Following are some highlights for each of the 4 phases.
- Manage change
PLAN Phase – Step 1: Strategize
Ensure that you incorporate your due diligence results into your strategy. A key strategic decision revolves around the degree of desired integration: complete, partial or none (an autonomous entity). This is your opportunity to design your approach to the integration:
- Determine timing
- Identify and assess synergies to be realized
- Create project teams
- Select key points of accountability.
Although the word “strategic” is used frequently, many companies spend little time ensuring that they have a clear strategy before they mobilize resources. Keep in mind that the faith in the merger deal is generally established within the first 100 days of the integration, so it is critical to create focused initiatives that support your strategy.
PLAN Phase – Step 2: Manage Change
A merger is considered to be “the mother of all change management initiatives”, because it typically contains:
- Aggressive financial targets
- Short timelines
- Intensive public scrutiny
- Culture clashes
- Politics and positioning
- Growth-related changes
- Retention problems.
Here are some steps you can take to effectively manage change:
- Address “me” issues quickly – employees will keep asking the “me” questions until they get answers.
- Apply clear leadership – avoid “two-headed monsters”. Take a “back to business” approach.
- Communicate lavishly and honestly – the most frightening message is silence.
- Focus on customers – directly support your strategy and can quickly realize benefits.
- Make tough decisions – this is like pulling off a bandage: it can be slow and painful or fast and painful.
- Create focused initiatives.
Manage employee resistance – identify one of the three major causes first. If employees are:
- Unwilling – use performance management (goals, measures feedback, rewards)
- Unable – use training
- Unknowing – use communication.
PLAN Phase – Step 3: Organize
Nothing much happens in a merger integration until the organization is set. Further, since structure dictates process, not defining your organization has serious implications on your business processes. Defining the organization helps to address the #1 fear during a merger: the fear of job loss.
ASSESS Phase – Step 1: Synergies
Synergies for target markets, operations, personnel, administrative functions, technology, etc. should have been identified during due diligence. Now, it is time to assess these synergies in more detail and translate them into tangible benefits for the new company. Look for those that can provide “quick hits” as they will help build momentum and “faith in the deal” (remember the first 100 days).
One note of caution – most companies forget about the cost of cutting costs (legal, severance, retraining). This is where 75% of companies incur unanticipated costs (from the survey results we presented earlier).
ASSESS Phase – Step 2: Skills
Use a structured and consistent process to assess your current and required employee skill levels. This will ensure:
- More effective selection decisions
- More legally defensible decisions
- Less politics/positioning
Here is an example of an assessment tool that was featured in our April report of The LETTER. This same tool can also be used for a Merger Integration skill assessment.
Application Evaluation Tool
The result of each individual skill assessment should be rolled up into a summary sheet (doesn’t have to be fancy – a simple Excel sheet will do). This summary helps match the new company’s personnel needs with existing capabilities.
ASSESS Phase – Step 3: Cultures
Remember, there is no such thing as an “equal merger”. Sixty (60) percent of acquiring companies try to create a new or combined culture, but less than 50% of them report that they were very successful. Culture is nothing more than the behavior your employees demonstrate. The trick is to design your organization’s systems to reinforce the behavior needed to achieve your business objectives.
Your culture is created and reinforced by:
- Rules and policies
- Goals and measures
- Rewards and recognition
- Staffing and selection
- Training and development
- Ceremonies and events
- Leadership behavior
- Physical environment
- Organization structure.
MOBILIZE Phase – Step 3: Re-recruit
The goals of re-recruitment are to retain key people and maintain their interest and commitment levels during a merger. We recommend re-recruitment as part of your integration process because of:
- Loss of key talent
- Increased openness to other opportunities
- Decreased productivity
- Decreased quality
- Increased recruitment and training costs
- Loss of organization knowledge
- Sullen survivors (poor morale).
- Here are 3 simple steps to start your re-recruitment:
- Identify your key people
- Understand what motivates them
- Develop and execute a plan to address what motivates them (should be personalized and beyond an across-the-board retention bonus).
MOBILIZE Phase – Step 2: Train
Your internal training initiatives should meet three primary objectives:
- Develop skills needed to support your business
- Reinforce your culture and values
- Serve as a communication vehicle for best practices.
- Your business objectives should dictate the priority you give to the various types of training:
- Organizational/product knowledge
MOBILIZE Phase – Step 3: Select
Link your selection strategy to your business strategy and your desired culture. Particularly during a merger integration, it is important to balance skills with values. Values-based decisions send a very strong message about the new company’s direction and expectations.
Tough selection decisions usually send a strong message to employees about change, specifically when termination decisions are made at the key management level. These tough decisions are usually “pay me now or pay me later”. Most senior executives we work with say, “I should have released him/her 2 years ago” once they actually make these occasional tough decisions.
- Quick Hits
IMPLEMENT Phase – Step 1: Quick Hits
These help the new company begin realizing its projected synergies. These are short-term projects with tangible benefits (also referred to as “low-lying fruit”). They are also key momentum and credibility builders.
Quickly communicate and celebrate these quick hits with your employees and other key stakeholders.
IMPLEMENT Phase – Step 2: Measure
Since measurement can be overwhelming, we use guiding principles:
- Measure only what really matters
- What gets measured gets done.
- There are 4 measures worth focusing on during a merger:
- Integration – Are the integration activities effectively supporting the change?
- Consider using high-tech and high-touch communication channels to keep your finger on the pulse of the organization.
- Operational – Are daily operational metrics (customers, sales, safety) being effected?
- Process and Cultural – Are the business and management processes being effectively redesigned and implemented?
- Financial – Are the deal synergies be achieved?
IMPLEMENT Phase – Step 3: Reward
There are many factors to consider when designing reward systems. In general, ensure that you are rewarding the desired behavior and understand whose performance you are rewarding (individual, team, company). Link rewards to short- and long-term integration results.
The glue that binds the 4 phases of the Merger Integration Model is COMMUNICATION.
Communication during your merger integration should be:
- A top priority throughout the integration
- Honest (not withstanding SEC/legal restrictions)
- Consistent from all sources
- Proactive – even if you have nothing much to say
- Before you start a communication campaign, ensure that you are telling employees what they want to know. Focus your effort on these 4 items that employees historically rate as the highest priority communication topics:
- Where are we going? (Strategy)
- What are we doing to get there? (Plans)
- What can I do to contribute? (Roles)
- What’s in it for me? (Rewards).
- In summary, the KEYS to SUCCESSFUL merger integrations are:
- Thorough due diligence – financial and human capital
- Apply best practices
- Replicable processes
- Single points of accountability
- Copyright © 1999 – 2003 by The L Group, Inc.