Making Mergers Work – Case Analysis

Making Mergers Work – Case analysis

Identity Integration

• Once a target has been identified, senior managers tend to be obsessed with what it takes to close the deal. Only after the papers are signed and the news of the merger go public does their attention turn to the issue of making the deal work, creating value for customers, for shareholders and for the employees.
• The expectation is that the economic performance of the merged entity will be positive, in other words, 1+1>=2. However, for this to happen, the new entity must fully engage the employees from both sides and be a whole. In other words, 1+1=1.
• Because merging two companies disrupts the identities of the involved parties, generates fear of identity loss and raises questions about the identity of the new combination, the merger cannot succeed before employees feel a sense of belonging to a single enterprise with which they can identify and are motivated to contribute. Alienated employees who feel a loss of identity could place financial and strategic objectives of a merger at risk through lack of drive and reduced performance.
• Managers who understand the significance of identity issues and develop strategies to deal with them well before the deal is closed have a better chance of being successful than those who don’t.
• Understanding the history behind employee’s identification with the merged organization during the corporate merger is crucial, because stronger post-merger identification results in less conflict and higher levels of motivation.

Common pitfalls in identity integration

1. Ignoring identity

• Senior management places more emphasis on the financial and strategic dimensions of the deal than on planning for the post-merger integration. Articulating and communicating an identity fir the new combination receives even less attention.

1. Mistaking culture for identity

• When corporate managers pay attention to the human side of a merger, they often confuse culture and identity.
• Culture refers to values and beliefs while identity refers to self-concept. While cultural convergence can help, it does not guarantee shared identity.
• Managers who mistake culture for identity may see their efforts to promote a set of common values dissatisfied by persisting “Us vs Them” feeling among employees.
• A good example is the merger of local branches of the Caisses d’Epargne, the French savings banks. Although people in local branches share similar values, merging the branches proved more difficult than expected as members of local branches defined themselves historically as independent, distinct from other branches. Merging two or more branches to achieve economies of scale generated fears of identity loss at the individual branch level.

1. Mistaking an organization’s skin for its soul

• A name, a logo and other visual representations can say something about what an organization stands for, but they must not be confused with its identity. Identity lies much deeper in the organization’s history and its stakeholders’ long held view of what makes it unique among all other organizations. Its identity is its soul, the shared sense of who it is.
• Corporate branding practices frequently fail to acknowledge this fundamental distinction. When managers do not understand the significance of identity, they may believe that they have given an identity to the new company when, in fact, what they have done is only the surface.

1. Focusing on external audiences and neglecting internal audiences

• Because mergers have to be explained and sold to many stakeholders outside the organization (shareholders, analysis, regulators, bankers, strategic partners), managers are easily induced to spend much time selling a merger story to external audiences.
• While securing outside support for a merger is a necessary first step, ultimately the success or failure of a merger depends largely on how people inside the merged organization make it happen through daily actions and interactions.
• Mergers affect people inside the merged organizations in a much deeper way than external audiences. It is much easier for an average shareholder or customer, with little or no involvement in the organization, to accept or walk away from a merger. This is less easy for an employee whose personal identity may be largely derived from intimate identification with the organization.

1. Sending mixed signals

• Managers send mixed signals when their words and deeds are inconsistent.
• Mixed signals are also sent when the acquiring firm makes public statements about preserving the identity of the acquired company but cannot realize the value of the merger without reneging on such a commitment. This typically happens when the acquired company is perceived as too unique or when its symbolic value to its home country is high.
• CEOs need to articulate a clear view of the new combine’s identity. If instead they send contradictory signals, either intentionally or unintentionally, the resulting ambiguity creates a context where integration efforts will be even more difficult than it would be otherwise.

1. Setting the wrong pace (Explanation for 1st paragraph of article)

• Example: The case of BPC discussed above concerns a CEO who was very deliberate about making acquisitions and very cautious about integration. Deeply influenced by Christian humanist values, he believed that people in acquired firms should be respected and must not be made to feel invaded. He was persuaded that BPC was so attractive and desirable that, with time, members of the acquired firms would progressively identify with it. While this philosophy worked to his advantage in other areas of the world where the identity of BPC was positively valued, it didn’t work in North America. a. The end result was the persistence of a psychological divide between the parent and its many North American subsidiaries, with detrimental performance consequences.

1. Mixing apples and oranges and hoping for apple sauce

• When a merger brings together organizations that are different in every respect and when managers realize only after the deal is done that they can never build a common identity, we have an example of unrealistic expectations.

Avoiding the pitfalls: 4 Approaches to identity integration

1. Assimilation

• Many reasons why assimilation acquisitions fail is because the companies are left independent for too long. Or worse, they know they are eventually going to combine, but you leave them alone and the politics begin and people begin to question what is going to happen to their positions. To make it successful, you have to tell the employees of the companies up front what you are going to do, because trust is everything in this business.

The Cisco Systems case

• Cisco’s management team realized that the market was changing rapidly, with the advancement of faster and more intelligent “internetworking” devices. To dominate such markets, Cisco knew it could not hope to internally develop the needed array of technology. Once an emerging market is identified, Cisco prefers to have its internal R&D organization develop a product. But the rule is that if the company does not have the resources to become a market leader within 6 months, it looks to buy its way in.
• Nearly all the acquisitions have been completed in the same regiment manner and the goal is to smoothly ship the acquired company’s products under the Cisco label by the time the deal is officially closed. So, even before the deal is closed, Cisco’s information technology department sets an aggressive integration of the new company’s technology. The idea is to present the acquired company to its customers, as part of Cisco, as soon as possible.
• The acquisition process has become so much a part of the Cisco’s culture that everyone, from sales people to engineers, is agreed to potential deals.

• There are two keys to the approach Cisco uses:

1.  Doing their homework to select the right companies

• Cisco is very disciplined in looking at an acquisition, and has turned down more companies than it has acquired.
• It asks these basic questions when considering an acquisition:

1. Are our visions basically the same?
2. Can we produce quick wins for shareholders?
3. Can we produce long-term wins for all four constituencies — shareholders, customers, employees and partners?
4. Is the chemistry right?
5. For large M&A, is there geographic proximity?

1. Applying an effective reliable integration process once the deal is struck.

• Every acquisition is driven by time to market.
• Cisco wants to be able to ship the acquired company’s products under the Cisco label within 3–6 months from the closing of the deal.
• Another measure of integration success is the retention of the high-priced talent acquired in the new company. Her teams stay at the target company from the start of the acquisition through closing to the deal. They tailored their integration process to each acquisition. They map where each employee will best fit in Cisco.
• Cisco has created a positive reinforcing cycle — when target companies realize how good Cisco is at acquiring companies and retaining people, it makes it easier to acquire the next organization.

Cisco Acquisition strategy

• With multiple acquisitions occurring each year, it became clear that Cisco could not approach the integration effort in an improvised manner, with different personnel and activities engaged each time. Instead, acquisition integration needed to become a standard way of doing business for Cisco employees. Cisco needed an integration approach that would be consistent across the company, repeatable for each new acquisition, and adaptable as Cisco began to acquire large companies with different operational parameters.
• Cisco has developed—and continues to evolve—a well-defined approach to integrating acquired companies. This approach encompasses the following elements:

1. Formalized and centralized integration management through a designated team. The centralized integration is efficient and allows to capture best practices, use skills and resources and discipline to the entire acquisition process. Standard processes allow you to move quickly through the straightforward tasks of integration with clear responsibilities.
2. Cross-functional teams for each acquisition that plan, manage, and monitor integration activities across Cisco.
3. Standard principles, metrics, tools, methods, and processes that can be repeatedly applied to new integration efforts, yet are adaptable to the unique issues and parameters of each deal. These standards are defined both at the corporate level and within the many Cisco departments involved in acquisition integration.

Integration Principles

1. Alignment - Set common standards so that all internal organizations and integration activities are aligned to achieve the business goals of the acquisition.
2. Communication - Enhance cross-functional communication to highlight interdependencies, overlaps, and gaps in activities and schedules, and to encourage cooperation on integration tasks.
3. Expertise VS Standardization -  For typical acquisitions, we can standardize the integration processes for each functional area. But specific integration and business issues come up in every deal that you can’t anticipate in advance. For those issues, you need people on the integration teams who have the experience and creativity to develop the right solution for the business.

Lessons learned

1. Treat acquisition integration as a normal business activity. Set the tone that integrating an acquired company is a normal part of how Cisco conducts business and we have built standard teams and processes in Cisco IT to support this activity.”
2. Apply a holistic approach. Approaching integration planning holistically significantly increases the probability of success. This approach means involving all parts of both companies in a single, high-level team (e.g., finance, human resources, IT, operations, sales), not distinct groups working on separate functional areas with minimal interaction.
3. Follow a structure to integrate quickly and consistently. Rapid and structured integration of acquired companies helps to achieve the expected business value.
4. Build integration expertise. A post-project analysis identifies lessons that can be applied to future integration plans and activities. Consistency in processes and team membership also build integration expertise with each new acquisition.

1. Confederation

Renault/Nissan

• Inside Nissan, people recognized that Renault was not trying to take the company over but rather were attempting to restore it to its former glory.
• Renault had the trust of employees for a simple reason: They had shown them respect. Although they were making many profound changes in the way Nissan carried out its business, Renault was always careful to protect Nissan's identity and its dignity as a company.
• To achieve synergies quickly in the purchasing area, Ghosn created a purchasing organization incorporated in the Netherlands under Dutch law and jointly owned by Renault and Nissan. He also created ad hoc task forces to encourage new product managers and engineers at Renault and Nissan to use common parts and platforms.
• In the years since the alliance was formed, the two firms have sought to learn from each other and have engaged in numerous cross-company projects, including joint product development projects and third-country production and distribution collaboration. They have also broadly shared information and knowledge.
• The Renault-Nissan Alliance was established with the aim of developing synergies while keeping the identities of Nissan and Renault brands intact and preserving the corporate culture of the two identities.
• The partnership was based on trust and mutual respect. You can make companies work together even if they are on different continents. One company does not need to take over the other, nor is it crucial for both companies’ cultures to meld into one. Preserving distinct styles helps each company’s employee’s identity with their employer and stay motivated.

1. Federation

J&J

• The integration of ALZA, the worldwide leader in drug delivery solutions, after its acquisition in June 2001 is a good illustration of the federalist approach at Johnson & Johnson. After the acquisition, ALZA retained its identity and managerial autonomy. Without knowing that ALZA is a member of the Johnson & Johnson family, one can hardly determine its relationship with Johnson & Johnson from browsing the subsidiary’s website.

1. Metamorphosis

Symbolic Lever of Identity Integration

Substantive Lever of Identity Integration

Lessons Learned from the course:

Purchasing a company is a quick way to gain market presence in a new or emerging marketplace. A company can invest the time and money in creating that market presence itself, but might be able to accomplish the same goals with less money and risk by purchasing an existing company. These types of purchases only make sense when the purchasing company understands its marketplace and its strategic position within the market place.