Anatomy of a Merger: Behavior of Organizational Factors - Research Paper Example

 Anatomy of a Merger: Behavior of Organizational Factors Mergers and acquisitions (M&A) have become a popular form of corporate development as liberalization and globalization have changed the business environment. Industry consolidation and privatization, and the liberalization of economies are the most significant factors that have fueled M&A at the international level. BMW has acquired Rover and Total has taken over Petrofina while PPR has acquired Christie’s in the UK and Gucci in Italy (Garette & Dussauge, 2000). Acquisition allows pooling of assets, and exploiting of synergies. The resources can be combined although they have the option to retain their autonomy completely or partially. While M&A are described among the most important strategic decisions that companies ever make (Duncan & Mtar, 2006), post-acquisition integration is the most challenging task in mergers and acquisition. Worldwide acquisitions hit an all-time high of $3.7trillion in 2006 but literature suggests that most acquisitions fail (Barkema & Schijven, 2008). People are the key to integrating a new organization into an existing one. While acquisitions are based on presumed benefits, there are several issues that face companies post-acquisition. Acquisitions can be categorized into four different types and each has a different approach towards integration and success (Early, 2004). The first is the acquisition of new skills and products which becomes essential during acquisition. The second is the market roll-up when a series of acquisitions take place as geographic expansions. The third is when consolidation takes place in a mature market as in the case of BP’s acquisition of Amoco. The fourth is the transformation acquisition such as AOL’s acquisition of Time Warmer. Hence the issues that arise post-acquisition could be that the acquiring company may want to consolidate the acquired company totally into its own system but this is not practical because the acquiring firm must be open to learning new skills and products. If this is not done, the acquiring firm may be able to take only limited advantage of central and shared services. Johnson (2002) contends that post-acquisition issues could involve one of the following – employees of the acquired business, post-acquisition operating results, business systems integration and unanticipated liabilities. All of these issues are interrelated because if the employees are not handled properly business system integration suffers. The acquisition process consists of many interdependent sub-activities such as due diligence, negotiation, financing and integration. There is a high level of heterogeneity in the deals and no two deals are the same. Some firms or people believe that experience effects are always positive and hence they fail to acknowledge that experience can even be detrimental when transferred to a setting where previous lessons do not apply (Barkema & Schijven, 2008). Secondly, experience need not always translate into learning and more deliberate actions may be needed to for learning to take place. The acquiring firms usually focus on their own learning disregarding the learning of the firm acquired. Literature suggests that firms only learn if new experience is related to what they already know. Integration again, can be task integration and human integration. The issues that confront an organization post-acquisition, range from wealth creation at the societal and the corporate level, to behavioural implications both at the individual and the organizational level (Birkinshaw, Bresman & Håkanson 2000). The focus is on executing the deal and realizing the operational synergies. In the process the human side of the acquisition is often neglected. Long-term success can be achieved only through effective process management, effective communication and sensitivity to the concerns of the individuals on both sides of the acquisition. While strategic and organizational fit offers the potential for synergies, their realization depends upon the managerial ability to manage the post-acquisition process in an effective manner. Communication is a very important factor that can help in post-acquisition integration (Klein, 2006). Even the body language has to be consistent and clear. Lack of top-down communication gives rise to rumour mills churning as employees remain occupied with their own careers and problems (Appelbaum, Gandell, Yortis, Proper & Jobin, 2000). Distrust becomes widespread and inevitable unless communication is handled properly and hence being truthful, open and forthright in communication is important. One person should be in charge of the integration process as this would allow the acquired and the acquiring person to come to a point person to resolve the issue, contends Klein. The essence of communication is to be a good listener than to keep talking. If the person in charge of the integration process gives a patient hearing to all the issues that may be narrated by both the companies concerned, he will be able to make the right sense of the problem and arrive at a workable solution. The staff has to be made to feel wanted and needed and hence they have to be involved. When businesses are acquired both sides think that they and their processes are superior to the other. This has to end and face-to-face meetings are often best to eliminate misunderstood communications. Most important is to pay attention to the people because people can make the acquisition a success. Hence during the post-acquisition phase, regular communication channels such as newsletters, magazines, staff memos, or bulletins should be the medium through which the new management should keep in constant touch with the employees (Appelbaum et al). The management has to be sensitive to staff concerns and the basic human needs. Communication needs to be timely and as comprehensive as possible. During the post-acquisition phase employees fear the loss of situational control, fear loss of job, and the financial obligations concomitant with the loss of job. The very thought of moving into the realm of unknown with a new manager gives rise to apprehensions and fear. Resistance arises due to distrust, loss of respect and the fear of actual loss. They start questioning the employer’s motives and they try to fight the change. At this stage the employees need to be reassured that change will be beneficial for them. They need to be involved in the decision-making process and communication has to be continuous and effective. The quality of communication from the acquiring firm to the target firm is crucial for the post-acquisition success. Factors that can enhance the quality of communication include showing respect for people, trying to understand and to value their culture, taking their problems seriously, engaging in a dialogue to reach mutual agreement on changes and to gain commitment of people involved, legitimisation of changes, evaluation and feedback and trustworthy behaviour of managers in charge of the process (Bijlsma-Frankema, 2004). These actions can cause trust of the target firm members in managers of the acquiring firm. If managerial actions signal low trust in members of the target firm, it could trigger distrust among the target firm members. According to Salama, Holland and Vinten (2003), M&A have the unique potential to transform firms but empirical evidence suggests that the success rate is low. Value is not created until capabilities are transferred and both parties have to collaborate. This requires integration and involvement of managers on both sides. The authors studied three companies and found that merging of cultures is the key to success. In the acquisitions of Deutsche Bank-Bankers Trust, British Petroleum-Amoco and Ford-Volvo, transfer and value creation was possible because there was an inclination to achieve success. Hence the inclination or the strategic objective to achieve success is important in a firm. Post-acquisition several cultural problems arise repeatedly in the newly acquired firms that prevent them from achieving the desired level of synergy. The central dilemma that the managers face is the control versus commitment dilemma (Bijlsma-Frankema, 2004). These dilemmas occur because two key success factors of acquisition – control of return on investments and managing human resources of the acquired firm – do not go hand in hand. Another dilemma that arises is whether to trust the managers and members of the target firm. Too much control can damage the commitment to cooperation. Rather than just control, there should be a balanced mix of clarity about goals and cooperation directed strategies, such as negotiation, legitimization and communication. Control-bound thinking is one reason for poor post-acquisition performance. When the focus is more on the strategic and financial considerations with too little emphasis on the people and the problems they experience due to change in the work environment. Changing the culture requires the right leadership. The acquiring company immediately expects non-cooperative behaviour from the managers of the acquired firm and this gives rise to feelings of distrust. Synergy is based on the transfer of capabilities and this requires mutual understanding and learning. Trust between actors is a critical success factor in socio-cultural integration, which in turn determines the success or failure of the post-acquisition process. Distrust destroys integration because it causes unwillingness to share perspectives with distrusted members. It discourages interaction thereby further reducing the chances of integration. Culture has to be used as a value tool in the post-acquisition integration process (Chanmugam, Shill & Mann, 2005). One chemicals company could capture value by recognizing and identifying cultural intangibles like unwritten rules in its acquired companies. It then compared the acquired companies’ culture with its own, to understand how employees would react to various situations. This allowed them to tailor their change management programs and achieve synergies in all of their acquisitions. The cultural differences can be overcome through the process of acculturation and this can be best achieved when buying firms rely on social control (Larsson & Lubatkin, 2001). Buying firms need to conduct introduction programs, training, cross-visits, retreats, celebrations and similar socialization rituals. The outcome would be a joint organizational culture irrespective of the expectation of the synergies and the differences in nationalities and culture. This requires high information flow for the integration of the two firms and according to the authors cultural differences alone cannot be held responsible for failures in integration. Mutual trust is essential to have cultural integration. Communication is the key to successful integration of two clashing cultures (Appelbaum et al). Culture has become an important paradigm and a broad umbrella that encompasses beliefs, norms, values, cognitions, emotions, practices, rules or routines without clear specification (Angwin & Vaara, 2005). However, what is required is ‘connectivity’ that highlights the complexities, interconnected processes and synchronized activities in organizations and their contexts. Focus on connectivity can bring to light certain factors such as linkages, interdependencies, coordination questions and power implications. These can go unnoticed if the acquisition process is viewed in isolation. This requires transfer of experienced-based knowledge from the parent to cross-border acquisitions. Cultural learning in the post-acquisition integration is also important. Deeper-level cultural learning efforts can produce better results than superficial approaches. In the post-acquisition context focus of the top management shifts to many kinds of issues which results in lack of attention to the core issues (Angwin & Vaara, 2005). Besides, the decision-makers tend to look at the same problem with different perspectives and this adds to the confusion. In the case of an acquisition of a major hospital in the US, the issue of patient care was neglected as they focused on other problems post-acquisition. Decision makers get stuck with their particular cultural sense-making frames and these created challenges in the post-acquisition integration. When Eka Nobel acquired Albright & Wilson, they wanted to have a decentralized approach. They did not want the knowledgeable people to leave so they instituted a large number of integrating mechanisms. These included quarterly technical centre manager meetings, rotation of personnel between Rollsbo and Bristol, standardized documentation (Birkinshaw, Bresman & Håkanson 2000). Despite these efforts, the level of integration was considered insufficient. While some thought there was overlapping of functions and locations, others believed that the organization was caught up in the day to affairs of the unit. Whatever be the reason, if the integrating mechanisms are not in place, it takes the attention away from the core global issues. When companies have several units, lack of proper interaction between the units can not only lead to duplication of activities but also lead to a situation where no individual is willing to take responsibility. The acquired company usually displays hostility as in the case of Sharples that was acquired by Alfa Laval. Absence of clear leadership results in the integrating mechanisms not being used even when they have been developed. In the initial years of acquisition, clear leadership with designed responsibilities is essential. It has also been found that if the individuals responsible for integration leave before the transition has been smooth and complete, their replacements do not see the continuance of the integration process as priority. This results in a stalled integration process where no synergy takes place between different units. Delays can occur even in the second phase of integration despite integrating mechanism such as international task forces, use of common standards, quarterly development meetings, and video-conferences being used. The reason for the delay, as found by Birkinshaw et al, is that there can be differences between the two systems combined with the geographical and cultural differences between the two units. This can create much greater obstacles to joint development than anticipated. Sometimes parallel development practices can be found and the integration task force is unable to detect this. The task of integration is not pushed too hard for fear of losing good people or there can be hostility from the acquired firm. Birkinshaw et al find that the current performance level of the individual units determines the relationship between the task integration process and acquisition success. If the individual units are performing low, it will limit the effectiveness of task integration as a driver of acquisition success. Hence it would be prudent to first maximize the performance of the individual units and then enter the integration phase. A very low level of human integration limits the level of task integration as a driver of acquisition success. Managing employee resistance and support is the most difficult activity post-acquisition (Larsson, Driver, Holmqvist & Sweet, 2001). Resistance can arise due to cultural clashes, ineffective communication and spreading of rumors. While two organizations attempt to integrate it could lead to the dis-integration of employees. There are numerous examples where downsizing, layoffs and relocations have upset career plans of employees. Such disruptions can lead to demotivation and insecurity among the employees which affects productivity. Technical integration problems can also inhibit synergy realization. Leadership is an essential requirement as there has to be a point from which both the firms take decisions or accept instructions. Leaders also have to involve managers with operations and integration skills (Early, 2004). This has to start from the due diligence phase itself and then transition into the post-acquisition management phase. The integration team should be small and professional which would help to maintain confidentiality and focus on post-acquisition learning. Leadership is also essential to ensure that cultures are integrated because a divided top management team cannot be in a position to suggest a new strategy for effective integration (Bijlsma-Frankema, 2001). Even if the management is united there is a need for leadership and for authority that is attached to good leadership. Lack of unity and quality of leadership at the top management level can lead too underperformance in designing and implementing the changes. Leadership is required because insight is needed into how people can be persuaded to contribute to the productivity of the new firm (Bijlsma-Frankema, 2004). In any change effort, leadership can provide a clear direction for the move into an uncertain future (Huang & Kleiner, 2004). Acquisitions have suffered due to unclear relationships and a tendency to change already vague, poorly defined reporting relationships several times a year. However, Goh (2001) found that even the best laid out plans can get sidetracked. Post-acquisition, as anticipated problems are encountered, the efforts of the companies in the integration process diminish. The companies then opt for delineation of the roles and responsibilities thereby settling for organizational effectiveness at the expense of cross-organizational integration. As companies experienced frustration over time, they renewed the efforts at task integration. As far as human integration is concerned, it may take up to six years and besides, full human integration may not be necessary for achieving operational synergies. Integration takes time and hence pushing it too quickly can result in failure or frustration. Thus, firstly patience is the key to successful integration. Secondly, integration should start at a slow pace which would help both the groups to function more effectively and adjust to the new situation. When the individual organizations start operating at acceptable levels, attempts at faster integration may be made. Thirdly, the human side of the integration should start early since it is a difficult process and may take time. Better human integration can lead to better outcomes such as greater trust and mutual respect. This would help to overcome the initial resistance and the cultural barriers. Huang and Kleiner (2004) contend that in a technologically driven and globally competitive world, the process of integration cannot be slow paced. If the process is delayed they will not be able to reap the benefits as prolonged transition adds costs, delays profits and decreases cash flow. In fact employees have expressed uncertainty if the integration process moves slowly. The immediate post-acquisition period is critical because of the expectations, questions and reservations among the personnel and managers of both the companies. The workers at the acquired company get a psychological shock that they would have to accept orders from a new authority. To minimize the anxieties requires discussing the reasons behind the corporation’s policies and procedures. It becomes essential to maintain closer-than-usual contact. Another situation that could arise post-acquisition is that the managers and employees in the acquiring company start feeling threatened by what they feel is a more efficient process and high level of talent in the newly acquired company. Top management and the leaders have to be prepared for such reactions and effective communication can help get rid of such anxieties. Post-acquisition sales have been known to suffer in addition to increased complaints from the customers (Huang & Kleiner, 2004). This is because immediately after the deal is announced the focus of both the companies shifts inwards, thereby neglecting the customers. Often acquisitions fail due to over paying. This is the worst and the most frequent mistake made by the buyers. The buyers assume too quickly that they know how to run that business and success is inevitable. Firms even end up buying the wrong business in their excitement to acquire a new company. For instance, AT&T acquired NCR but it took them a long time to realize the significant cultural differences between the two organizations. The failure in integration cost AT&T more than $3billion and NCR lost almost half its market value. The funding needed for the acquisition and smooth transition is often underestimated. Another reason for attaining less than expected performance from acquisitions is due to the fact that inadequate attention is paid to corporate image and corporate branding. Legal considerations often restrict the firms from pursuing pre-merger or pre-acquisition brand specific market research (Jaju, Joiner & Reddy, 2006). Very often acquired companies create an absolutely new identity a corporate brand name as in the case of Ciba-Geigy and Sandoz that renamed the new company Novartis. In such a strategy the loss of equity associated with the two firms’ corporate names is significant. Usually an acquiring firm should maintain the identity and brand name of the acquired firm as even though Proctor & Gamble acquired Gillette, it continues to be subsidiary of Proctor & Gamble. Post-acquisition, it has been found that the target brand suffers less than the acquiring brand. This is because the focus of the managers during the acquisition process shifts to deals and negotiations. As such the other stakeholders groups get neglected. Consequently the brand equity related to corporate brands decreases. This enhances the importance of managers to evaluate the corporate branding component in acquisitions as a part of the process of managing corporate brands. Integral integration includes various activities such as business policies and procedures, information technology and financial reporting (Johnson, 2002). In the first phase when the opportunity is identified, there is inadequate understanding of the intricacies of the vendor’s system prior to the purchase. All the issues have to be duly scrutinized before the purchase. The associated costs have also to be considered by the purchaser when valuing and pricing the acquisition target. In many cases the acquiring company discovers that the target company ahs material liabilities that were not disclosed prior to the transaction. These are most often not considered before the purchase and the pricing and hence ultimately the buyer ends up over paying for the acquisition. Post-acquisition issues can affect the value and price of an acquisition. Unanticipated risks should also reflect in the price and terms of purchase and sale. A successful post-acquisition integration requires that the ground work be done before the actual acquisition. Many companies buy complete businesses and then take the risk of deciding which segments to divest. Other companies such as British Telecom (BT) try to negotiate carve-outs upfront so that the post-acquisition integration is very fast (Waring, 2008). The acquiring company has to be alert to the challenges and design approaches. Instead of focusing on the deal, the focus should be on quickly realizing the value of the new company. It is also helpful to look into the acquisition process of the serial acquirers as this gives a lot of insight into the strategies that should be deployed. Looking into the strategies of firms such as HP, CISCO and the Royal Bank of Scotland would enable to understand their approach and incorporate the best part of their strategies. A high level of consistency is required in reporting and measuring. The integration planning cannot start after the acquisition but it has to be during the negotiation phase itself. The shorter the integration cycle the less uncertainty is created for employees and customers. Thus a study of the post-acquisition literature suggests that acquisition can be categorized in to several types and the approach has to differ for each case. It is generally believed that acquisition result in failures more often than success. The reasons are many and it cannot be attributed to post-acquisition efforts alone. Literature suggests that the integration planning has to start at the negotiation stage itself and not after the acquisition. There are several issues that can arise post-acquisition. These include the human integration, task integration and the unanticipated risks and liabilities. Human integration could be difficult due to lack of proper and timely communication and information, lack of top management involvement, lack of right leadership, lack of acculturation among the workers of the acquired and the acquiring firms. Lack of integration of the human resources can adversely impact the task integration process. People issues are more important than the task issues. Once the people side is effectively managed, the tasks integration becomes easier to achieve. There have been differences of opinion on what should be the strategy for integration. While some researchers argue that the managers and leaders need to exercise patience, others contend that the faster the integration process, the lower the uncertainties in the minds of the people. However, most of the literature agrees that the integration process has to start at an early stage and not post-acquisition. The integration process itself has to be in different stages and the strategy at each stage has to be designed well. For instance, the employees have to be made to feel involved and a part of the newly formed or acquired company. People management requires a very professional approach so as not to lose the key personnel in the first few years of integration. If the leaders or senior mangers leave the organization in the first year of the acquisition, the integration is hampered. Very often the focus is on the deals and negotiation while the major areas such as customers are ignored. This affects the service and in turn customer retention. Secondly, the focus is on the deals and negotiations which ignore the other stakeholders such as the customers. The focus of the organization shifts to non-sore issues and as a result the integration process is delayed. All of these issues can be handled efficiently by effective communication, the right leadership, involvement of the top management, and acculturation. Reference: Appelbaum, H. S. Gandell, J. Yortis, H. Proper, S. & Jobin, F. (2000) "Anatomy of a merger: behavior of organizational factors and processes throughout the pre- during post- stages (part 1)', Management Decision, 38 (9), p649-661 Angwin, D. & Vaara, E. (2005) "Introduction to the Special Issue. ‘Connectivity’ in Merging Organizations: Beyond Traditional Cultural Perspectives", Organization Studies, 26(10), p1445–1453 Barkema, H. G. & Schijven, M. (2008) "How Do Firms Learn to Make Acquisitions? 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