Joining Forces E-Book

Mitchell Lee Marks

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 523

Veröffentlichungsjahr: 2010

Beschreibung

If 75 percent of all mergers fail, what makes the other 25 percent succeed? 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. Praise for Joining Forces "This book will help both M&A veterans and those new to the game. The authorsprovide 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. "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 thehuman 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 providespractical insights and advice from authors who know M&A inside out." --Edward E. Lawler III, Distinguished Professor of Business, Marshall School ofBusiness, University of Southern California

Leseprobe

Table of Contents

Title Page

Copyright Page

Preface

What This Book Is About

What’s New in This Edition?

The Authors

Dedication

Part One - Creating Value in Mergers, Acquisitions, and Alliances

Chapter One - The Elusive Equation

M&A Scale and Scope

Creating Value

Strategy and Synergies

Combination Forms

The Human Side of M&A

Making One Plus One Equal Three

Chapter Two - What Goes Wrong and How to Make It Right

Combinations Historically and Today

Phases of a Combination

The Merger Syndrome

Joining Forces—Best Practices

Four Truths About Combination Management

Part Two - The Precombination Phase

Chapter Three - Strategic and Operational Preparation

The Four P’s of Preparation

A Disciplined Approach to M&A

Purpose: Putting Strategy to Work in M&A

Partner: Search and Selection

Parameters: Defining the Relationship

People: Managing the Human Dealings

Chapter Four - Psychological Preparation

Combination Mind-Sets

Engaging Minds

Human Reactions to a Combination

Challenges in the Precombination Phase

Preparation on the Seller’s Side

Part Three - The Combination Phase

Chapter Five - Leading the Combination

Exemplary Leadership from Both Sides of the Deal

Leadership Tasks in the Combination Phase

Vision for the Combination

Principles for the Transition

Selecting and Developing the Leadership Team

Speaking to Employees

Speed of Integration

Chapter Six - Putting Companies Together: The Transition Structure

Transition Management Activities

Transition Structures

Enhancing the Effectiveness of Transition Teams

Looking Outside the Box

Transition Planning and Implementation

Chapter Seven - Managing People Through the Transition

Combination Stress Versus Commitment

Managing Front-End Fears—The Four I’s

A Comprehensive Communication Campaign

Managing Emotions as Companies Combine

Dealing with Staffing and Redundancies

Putting HR Together

Chapter Eight - Easing the Clash of Cultures

Culture in Combinations

Managing Culture Change in a Combination

Cross-National Culture Clashes

Part Four - The Postcombination Phase

Chapter Nine - Building the New Organization and Culture

Building the Postcombination Organization

Building Cross-Functional Relations

Culture Building

Leverage for Culture Building

Branding the Combination

Chapter Ten - Joining People and Teams Together

Postcombination Teambuilding

Understanding Postcombination Mind-Sets

Molding Individuals into a Team

Developing Effective Postcombination Teams

Transforming an Asian Leadership Team

Chapter Eleven - Damage Control and Recovery

Picking the “Wrong” Executive

Stuck in Transition

Redirecting a Combination

Listening and Learning

Part Five - Building M&A Competence

Chapter Twelve - Tracking and Learning from the Combination

Knowing What Is Going On

How to Track a Combination’s Progress and Impact

What to Monitor and How to Do It

Tracking a Financial Services Combination

After-Action Review: A High-Tech Acquisition

Tracking Customers

Chapter Thirteen - Joining Forces—Building M&A Competency

Levels of M&A Competency

Building a Competence in Combination Management

Ensuring That People Matter

Endnotes

Index

Copyright © 2010 by Mitchell Lee Marks and Philip H. Mirvis. All rights reserved.

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Library of Congress Cataloging-in-Publication Data

Marks, Mitchell Lee.

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

HB Printing

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.

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 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 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.

• 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.

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 well-designed 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 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.

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.

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. 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 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.

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” 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 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” 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 Hewlett-Packard 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 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

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.

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 high-margin, high-end range of the market but growth was in the low-margin, 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 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 “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.

Figure 1.1. Searching for Synergies in M&A.

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.

Figure 1.2. Types of Strategic Combinations.

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 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 high-tech, health care, and oil industry examples above. Occasionally, 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. Where the lead or parent company’s culture will prevail

2. Where the partner’s cultural autonomy will be honored

3. Where the two sides’ cultures will be blended

4. 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 organizational and cultural end states that can help executives to think through their options and clarify their intentions for the combined organization.

Figure 1.3. Define the End State.

• 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. 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 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 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.

Figure 1.4. Cultural Differences and Combination Outcomes.

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 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 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.