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Culturally Integrating
an Acquisition

by Herb Stevenson

Over the several last decades, mergers and acquisitions have become very common. Studies during this period indicate that up to 70% of M&As fail to meet expectations.1 Frequently, a major contributing cause is the failure to fully address the cultural differences as occurred when Quaker Oats bought Snapple for $1.7 billion to add to the Gatorade success, only to sell it later for $300 million at a loss of $1.4 billion due in great part to massive cultural clashes.

There are many disappointing stories about failed integrations of acquired companies and the inability of the merger to produce the expected results; e.g. Daimler-Benz and Chrysler. After an acquisition, the acquired company may cause the buyer's financial performance deteriorates; e.g. Compact and HP. Or, the executives of each company are distracted by their efforts to make the integration work and lose focus on maintaining effective day-to-day management operations for each business; e.g. Quaker Oats and Snapple. Key executives frequently lose their jobs or simply leave for another company when the acquired company fails to merge successfully; e.g. Carly Fiorina at HP. Employees of both companies may become ungrounded and territorial, as political maneuvering sets in as standard practice for the limited number of employee seats that will remain after the two companies are integrated; Wells Fargo and Wachovia.


Successful integration of an acquired company is a major undertaking, and the level of intellectual capital and employee effort should not be underestimated. If the acquired company is to be integrated with the buying company, then it's safe to say that the larger the size of the acquired company, the greater the integration effort and resource requirements will be needed.

In a study by Paul Pautler (2003, 35) from the FTC, he notes there are several factors that can improve the deal implementation and cultural integration. “These factors include: early planning for the integration process, setting and communicating clear goals, identifying the responsible managers and providing them with appropriate incentives, moving quickly to define those areas where gains can be achieved, keeping everyone informed with tailored messages including employees and customers, integrating systems quickly, being sensitive to cultural issues, retaining key employees, and retaining sales force activism to avoid loss of customers to rivals.”


Integration Capability (or not)

Most firms have not made enough acquisitions to have been able to develop expertise with the integration process. Nonetheless, management teams of both companies owe it to their stakeholders to efficiently complete the acquisition or merger cultural integration. 


There are a variety of reasons for making an acquisition, but all relate in some way to benefitting the acquiring organization. With this in mind, the longer it takes to integrate the newly acquired company, the longer it will take to reap the benefits of the transaction. The process of integrating the new organization needs to be planned and executed with at least as much care as the due diligence process, and quickly enough to prevent the acquisition from becoming a distraction to the business.


Critical Success Factors for Culture Change

Christopher Dawson (2010, 21-31) has found for any culture change to be successful, it must clearly define five critical success factors.

  1. Define the Level of Urgency and the Reason for the Culture Change. For acquisitions, the urgency of the culture change should be assumed unless it is strictly for a buy and sell investment; however, the culture and its impact on the successful integration of the organizations is frequently ignored. As further described below, the business driver for the acquisition will dictate the level of cultural integration that will be required.
  2. Define the “New” and the “Legacy” Cultures. Typically, there will be some blend between cultures, however the acquiring organizations will set the tone and tenor in terms of leadership style. To assume that the acquiree will have no impact is naive at best. Hence, time should be applied towards understanding the cultures of both organizations and how the new culture will be moving forward. For example, spending some time on the values of the organizations, then digging down to uncover the “unwritten rules of successfully surviving or thriving” will reveal more insights into (a) “what we are”, (b) “what we would like to be”, (c) “what the external environment requires us to be to create stakeholder value”, and (d) “what we have committed to become”. This is further developed below under vision.
  3. Define and Build a Culture Change Roadmap. It is interest how frequently the details of the culture change is totally ignored until it effects the bottom-line or market value. Suddenly, all the best laid plans through budgets, forecasts, projected cost savings, etc. lose some luster because the one things that drives all of these financial tools has been ignored— the people. This shows up much quicker during acquisitions as the culture clashes can be immediate causing dissatisfied customers, lost accounts, earnings declines, etc.
  4. Define and Translate the Vision Culture into Behavioral Competencies and Measurable Events. The implementation of the roadmap is the most critical aspect of the culture change. It is taking the breadth of the envisioned new culture, adding the details of how to create the envisioned future, and indicating the specific steps and behaviors that must occur. Hence, milestones and measurable indicators of success and progress must be created and tracked.

    In an acquisition, the roadmap should include that which the acquiring organization wants to keep from its culture and what it wants to integrate from the acquiring culture.
  5. Define and Model Executive Authenticity under the Desired Culture. Chris Argyris indicated that most organizations have two sets of operating rules: (1) the espoused or public rules of how we will behave and (2) the actual rules of what is expected. The larger the gap, the less credibility of management and the greater the risk that the culture change will fail.

Success Factors for Cultural Integration
of an Acquisition

Successful cultural integration of acquisitions or mergers are characterized by three fundamental factors: 



  1. The vision is established that identifies what the two merged companies will look like after the integration is completed. 

  2. An integration team (with members from both companies) and full-time commitments are identified and put in place.
  3. The execution of the integration does not waiver and stays on course until completed as defined in the vision.

Too many integrations fail or are sub-optimized because there is no clearly defined vision of what the two companies should look like after the integration is completed. The ultimate outcome is the clash of two companies without freeing up the economies of scale through greater efficiency and synergy of the merged companies. In addition, many integration teams consist of only part-time members and lack an executive-level leader who is held responsible (with the team members) for the success of the integration. In too many cases, the execution of an integration loses momentum as team members are pulled away to do the “real” work, and true integration never occurs.

Integration Objectives

The objective of the acquisition, business driver, if you will, determines the integration strategy and methodology. Therefore, successful cultural integration is impacted by the objectives established for the acquisition. For example: 


  1. Investment (Turnaound) Objective—the acquisition is for the purpose of investment and later will be sold as the value of the investment appreciates. The integration may not require anything beyond cost cutting, profit maximization and monthly financial performance reporting. 

  2. Economies of Scale, typically, coinciding with a Market Penetration objective— the acquisition provides the two companies greater economies of scale, efficiency, and market penetration than could be achieved from each company alone. The integration will require defining the vision and integration points across both entities.
  3. Growth objective—the acquisition offers greater market share, a larger customer base and revenue growth that would not be possible without the acquisition. Often there is a similarity as in an acquisition within the same industry, same geographic region, or similar customers and distribution channels. The integration will require defining the vision and integration points to optimize the economic value and growth requirements.
  4. Management objective—the acquisition offers the opportunity to purchase a solid management team that ensures succession for the acquiring company or a management team that brings news skills such as an entrepreneurial culture to a fossilized organization. The integration will require collaboratively defining the vision and integration points across both management teams and organizations.

Integration Outcomes

For an integration to be successful, whether it is a merger or acquisition, three questions need to be answered in detail: 



  1. When the integration is completed, how will the integrated company appear to the public and customers?
  2. What are the business and economic benefits to be achieved from the acquisition and the integration?
  3. What integration strategy and work plan need to be executed?

Defining what the integrated company will look like when the integration is completed requires end-to-end thinking across both the acquired company and the firm doing the acquisition. The points of integration are defined in terms of consolidation or leveraging business functions, including sales and marketing, product development and engineering, manufacturing operations, distribution operations, customer service, procurement, administration and executive management. The integration process may require several phases. With great caution, the customer base and service level must be maintained to keep competitors from using the acquisition to their advantage by taking away customers while the integration is in process.

The Integration of People (Stocker, 2010)

Integrating an acquisition requires focus on the technical (processes, systems, etc.) and human elements. Although the technical element often gets most of the attention, it is the human/cultural issues that cause most of the problems. In fact, the majority of technical issues could be handled much more easily if enough focus is given to the human element of the integration process.

A critical aspect often forgotten or underdeveloped is the human aspects of acquisition integration, in particular, how fear and alignment prevent or support the integration. With serious and proper focus on these areas, integration can be done quickly and with surprisingly few problems.


Fear

Fear is an obvious by-product of any acquisition. Mergers almost always lead to job losses, and it is most often the acquired company that loses the most jobs. With this in mind, the integration plan needs to include honest and open communication about potential job cuts, as well as some type of bonus for those who stay until the end of the process. Ignoring this subject will serve to demotivate employees, break down teamwork, and increase the length of time it takes for full integration.

Alignment

Alignment refers to indoctrinating those in the newly acquired organization with the purpose, values, and focus of the parent company. Indoctrinating the new team members with this focus clarifies expectations quickly by communicating to the employees of the acquired company that they are now part of a new, larger, and different organization.

The Integration Plan

Just like any change initiative, integrating the acquisition needs to follow a carefully developed plan with a responsible person leading the effort. The process must include frequent reviews with senior leaders to assure that problems are addressed quickly and effectively.

Specifics of the plan will differ depending on the size, type and culture of the company, but need to include the following components (Stocker, 2010):

  1. Alignment with Purpose & Values 

    Time must be spent discussing the fundamental purpose of the company (mission and vision) and how they will operate (values). Every organization is different and integration will most likely involve some type of shift in purpose and values. This is best accomplished in two phases. First in a general message from a senior leader (preferably a C-level executive), and followed up by smaller group discussions led by a function leader and HR representative.
  2. Leadership Alignment
    Each organization has a leadership style. Some commonly used categories are (a) command and control (coercive), (b) authoritative/visionary, (c) pacesetter, (d) affilliative, (e) democratic, (f) coaching (Goleman, 2000, 82-83; Cherniss & Goleman, 2001, 42). Determining the leadership style of the two organizations and beginning to bridge the gaps or to transition the acquired to the new style takes time. At a minimum, it is important to work with leaders at all levels of the acquired company to assure they understand the desired behaviors and possess the values of the acquiring company. A good amount of coaching may be required to give those who lack the behaviors requirements or don't display the values a chance to modify their behavior and leadership style. Obviously, some people will leave or need to be replaced when it is determined that they are not capable, or do not desire, to change their style to fit in the new organization.

    Some questions to consider during this process are: “How do leaders in your respective organizations drive and assess business results? What types of leaders tend to advance in your respective organizations? How would you describe the leadership style in the two organizations? When differences of opinion exist among senior staff, how are these differences resolved?” (Fletcher, 5)

  3. Interactive Communications with Employees
    Ongoing communication are critical to assuage the normal response of being acquired. This should be a two-way process that includes use of organizational blogs and other interactive message carriers as well as more formal surveys to collect data. At a minimum, a survey of existing and new employees can provide information about the concerns, fears, frustrations, belief in leadership & direction, and confidence in the future as related to the acquisition. To be effective, however, people must believe in the confidentiality of the survey and that action will be taken based on its results.

Remember the People

The acquisition was made with a specific business and economic justification. The benefits to be achieved from the acquisition and integration must be defined and communicated to the integration team, which will be chartered with executing the plan and achieving the defined business and economic benefits (ie, major cost improvements, consolidation and/or organization realignment, asset utilization and revenue enhancement).


Integration Strategy & Execution Plan

Developing an integration strategy and detailed work plan to execute the integration requires a few days of dedicated focus from the executives of both companies and from the integration team. The strategy and work plan will provide a road map for the integration and keep disruption to a minimum. The strategy defines what will take place for the integration to be achieved, along with the sequence and timing. The work plan defines all the tasks that must be executed to complete the integration. The intent is to start the integration process as soon as the acquisition is completed.

Right Leaders


The importance of the right leader for the integration cannot be underestimated, and a senior executive or senior manager should be assigned the responsibility. The leader can be selected from either the acquired company or the firm that made the acquisition. This individual should be the person who selects the integration team members. These employees should have good reputations within the company and be proven responsible in terms of completing assignments. Team members will require a safe rite of passage while executing the integration and must have a guaranteed position with the company after the integration is completed.

Constantly Communicate

Acquisitions generally create a level of uncertainty for some time, until the chaos settles. Defining the vision, putting the team in place, as well as defining and executing the integration strategy and work plan are critical components to ensuring an integration's success and minimizing uncertainty. However, employees, customers and suppliers may become nervous with the announcement of the acquisition. Settling any nerves can be accomplished very quickly with customers and suppliers by preparing a separate message to them announcing the acquisition and integration, and articulating the benefits. For employees, the task is more complicated. Therefore, a consistent and concise message to employees should be communicated, highlighting the benefits and outlining any changes that may be forthcoming. The intent is to be proactive with employees to avoid creating any surprise changes and to circumvent unnecessary turnover by employees. 

Forces for Change and Forces for Sameness.

Integrating an acquisition successfully is not trivial and requires a rigorous effort to do it right. An integration that fails is like a tar baby that keeps coming back like a bad dream: It siphons resources, creates unnecessary distractions for management and hinders operating and financial performance. Even the best integration strategy and plan can be derailed by something unforeseen that arises during the execution of the integration but still will fare better than an integration effort that was not properly prepared.

Deal with the Complexity (or it will deal with you)

The people issues increase the complexity of successfully leading an organization. It is a difficult and never-ending responsibility to keep people united toward a common purpose in a way that leads to continual growth in revenues and earnings. This complexity grows exponentially when a new group of people with a unique set of values and concerns are added to the mix.

Recognizing the complexity of the process and attending to the human elements of integration can greatly increase the speed and potential benefit of the acquisition.

Footnotes

1See Pautler, Paul A. (January, 21, 2003) The Effects of Mergers and Post Merger Integration: A Review of the Business Consulting Literature. Bureau of Economics, Federal Trade Commission for a thorough review of the research indicating these figures.

References

Argyris, Chris, and Schon, Donald A. (1974) Theory in Practice: Increasing Professional Effectiveness. San Francisco: Jossey-Bass.

Argyris, Chris. (1977) Double Loop Learning in Organizations, Harvard Business Review. September/October. 115-121.

Argyris. Chris. (1990) Overcoming Organizational Defenses. Upper Saddle River, N. J.: Prentice-Hall.

Argyris, Chris. (1985) Strategy, Change, and Defensive Routines. Boston: Pitman.

Dawson, Christopher S. (2010) Leading Culture Change: What Every CEO Needs to Know. Stanford, Ca.: Stanford Business Books.

Fierce Loyalty: Central Pacific Bank showed it in its dogged pursuit of a merger with City Bank, but exposed a cultural rift. Now they have to bring both sides together. www.allbusiness.com/print/194561-1-22eeq.html

Fischer, Arthur K. and Rush, Tom. (December 2008) Staffing After Mergers & Acquisitions: A Human Resource Management Case Study. Journal of Business Case Studies, Vol. 4, No 12.. 29-35 www.cluteinstitute-onlinejournals.com/PDFs/1590.pdf

Fletcher, Alexis. Avoiding Post Merger Blues.  White Paper .www.manda-institute.org/docs/m&a/bearingpoint_01_avoiding%20post-merger%20blues.pdf

Hinchliffe, Karen S. Early Warning Signals of a Merger (Cultural Integration) Going Awry- A new role for HR managers in supporting the due diligence
http://kshstrategyhouse.com/pdf/earlywar.pdf

Pautler, Paul A. (January, 21, 2003) The Effects of Mergers and Post Merger Integration: A Review of the Business Consulting Literature. Bureau of Economics, Federal Trade Commission. www.ftc.gov/be/rt/businesreviewpaper.pdf

Stocker, Greg,(2010). Rapidly Integrating Acquisitions. http://corporatedeathspiral.blogspot.com/2010/02/rapidly-integrating-acquisition.html

Zueva, Anna & Ghauri, Pervez. (2007). Managing Post-Acquisition Cultural Change: An Acquired Company’s Perspective. Manchester Business School Working Paper no. 516, available: www.mbs.ac.uk/research/workingpapers/

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