Avoiding "Morning After" M&A Problems (1/18)

Avoiding "Morning After" M&A Problems

Anticipating problem areas before undergoing a merger or acquisition reduces transition obstacles and increases long-term success.

1998 was the year of the "mega-merger," spawning more than 13,000 mergers and acquisitions (M&A) in excess of $1 trillion. And experts predicted that 1999 would see this trend continue as a means of affecting accelerated and substantive corporate growth across many industries.

"Markets are moving very quickly, competition is increasing every day, and one of the primary ways companies are finding that they can best compete and grow is through M&A activity," says Mark Clemente, author of "Winning at Mergers and Acquisitions" and partner in Clemente, Greenspan & Co., a New Jersey-based M&A consulting and training firm.

Experience also indicates, however, that there is no such thing as a problem-free merger or acquisition, and even the happiest of corporate marriages will not guarantee a successful relationship. An increasing number of difficulties with the integration process is prompting experts to insist that typical due diligence is no longer enough to effectively anticipate the myriad of complications common to mergers in the '90s.

While there is almost always time pressure in the due diligence process, Ron Norelli, CEO of North Carolina-based Norelli & Company, a management consulting firm, stresses that conducting more in-depth research before the transaction can save the merged company a lot of headaches in the long run. Clemente agrees: "A lot of mergers get off to a bad start when management rushes through the process. M&A is too difficult, too complex a process, to jump in without doing your homework."

Whether they're confronting unprofitable product lines or incompatible corporate cultures, merging companies very often learn that "morning after" problems are more the rule than the exception, says Norelli. "What looked great the night before may lose its glow in the day-to-day world of running a business. Asking the right questions beyond a typical due diligence can help eliminate problems," he repeats.

And although investigations into the financial and legal liabilities of a target company are the norm in such situations, experts suggest that examining other areas, such as corporate culture and marketing issues, is equally important to ensuring the long-term success of a merger or acquisition.

Marketing Due Diligence

Beyond typical due diligence, marketing due diligence (MDD) is designed to unearth both liabilities and opportunities of a potential merger from a marketing standpoint. Marketplace threats can include weaknesses in a target company's product and service offerings, customer service capabilities or promotional activities.

"A company may have tremendously strong products that have strong differentiators, but unless that company is doing an adequate job of telling the story to the marketplace relative to competitors' activities, you'll never have a really firm appreciation of how well those products could be doing in the marketplace," argues Clemente. He says these types of pitfalls must be uncovered early to prevent massive financial loss after the deal is final. Clemente says since most of today's deals are being done for marketing reasons, such as obtaining products and technologies and tapping into new markets and distribution channels, MDD is vital to the merged company's efforts toward reaching its expectations for projected growth.

A competitive analysis can usually reveal the market possibilities - for better or worse - of two companies engaged in merger discussions. "As you are entering into a marriage, you need to first figure out if the marriage is right for you. Normally what you are looking for is a situation where one plus one equals more than two - where there is synergy," says Jeff Muir, executive vice president of Target Marketing Systems, Inc., an international sales training and consulting firm in Atlanta.

"Unfortunately, many companies tend to gloss over these critical marketing, sales and corporate-growth issues when they are undertaking due diligence," explains Clemente. He says long-term revenue-generation issues do not receive as much attention as other types of synergies, and that is a mistake. "Synergy historically meant cost-cutting, and we've seen a lot of deals fail when that was the sole focus," says Clemente.

Revenue-Enhancement Opportunities

When two companies unite in a strategically sound combination, revenue enhancement is an expected result. And MDD can uncover opportunities for accomplishing this goal, including cross-selling, developing new product offerings, adding a service component to a product or vice versa. Further, the identification and prioritization of these revenue-enhancement opportunities (REO) will lend direction to the M&A integration process. "You must attend to those major opportunities. You must prioritize what your integration activities will be based on those core opportunities that are unique to the combination of the two companies," says Clemente.

While focusing on the marketing potential of a target company, however, experts point out that product development, customer service and marketing strategies are all dependent upon a company's most valuable soft asset: people.

"Marketing is an area driven by relationships. If the marketing department is an asset that you want to acquire, then you want to make sure those people are committed to the transaction and stay with the new organization going forward," says Muir. "Our economy is primarily service-oriented and knowledge-based, and the assets are the people. So in marketing, that's all in the creativity of the people behind the marketing plans," he continues.

Cultural Due Diligence

Experts say the biggest mistake companies make in mergers is failing to examine and address cultural and personality issues before such transactions are complete. As managers become increasingly aware that individuals drive the success of companies, a new type of due diligence is emerging called cultural, or human resources, due diligence. This process focuses on identifying intellectual capital, assessing it, and most importantly, taking steps to preserve it. "It is important to look at the cultural issues before the merger because the actual success of the merger will be based on the ability of both companies to deal with the people issues to achieve the results they were expecting," says Edgardo Pappacena, partner in charge of Arthur Andersen Business Consulting's Change Enablement practice.

Culture clashes have been blamed for more than one failed merger, prompting observers to recommend dealing with HR issues as soon as possible. "There's no sense in talking about what a transaction might look like in structure if you can't make the marriage work long-term," insists Muir.

Specifically, HR due diligence examines the corporate culture of each organization for incompatibilities in such areas as compensation, benefits, reward systems, communications processes, information-sharing policies and overall organizational hierarchy.

The Transition Minefield

Perhaps the highest percentage of merger problems can be attributed to failure to execute after a deal has been announced, says Mark Feldman, co-author of "Five Frogs on a Log: A CEO's Field Guide to Accelerating the Transition in Mergers, Acquisitions and Gut Wrenching Change" and partner at PricewaterhouseCoopers (PwC). He says most companies lose market share after a deal and productivity falls dramatically because of chaos in the organization. Feldman calls this situation "the economics of confusion": "If you have 1,000 people in your company, and each person spends one hour a day speculating with others about the future and what will happen as a result of the deal, that's 1,000 hours of lost productivity a day, 5,000 hours a week, and 20,000 hours a month."

Management can help stabilize and build early momentum for the merged company by setting priorities during the transition stage. Feldman says, however, that management frequently mistakes prioritizing with obsessive list-making and often fails to emphasize the revenue drivers that initially made the deal so attractive. He explains that the focus shifts to the minutiae of melding the companies together - and away from the real reason they were doing the deal in the first place. "Unfortunately list-driven transitions tend to be prolonged, they dilute resources and undercapitalize efforts in the organization," he explains.

To avoid this problem, Feldman advises placing priorities on value-creating actions. "Businesses need to focus on the 20 percent of actions that are likely to drive 80 percent of the economic value with the highest probability of success in the shortest time frame," says Feldman. "If you can allocate all of your available resources to that 20 percent, you're going to have a more focused and much faster transition."

Indeed, speed is a major key to successful mergers. PwC research indicates that companies that accelerate through the transition perform better, consistently, on every measure of economic performance. "You will always make some mistakes, so don't delay decisions, and don't overanalyze situations trying to make things perfect because that delays the process and consequently creates more problems in the merger integration," advises Pappacena. Norelli strongly agrees, "To delay just allows resistance to build, allows morale to get worse, perpetuates the problem, makes the solution harder and perhaps even makes some of the problems more intransigent. [Make the transition] quickly so the attention of all the employees can return to servicing customers at a profit."

Critical Issues

Reporting relationships become an urgent concern for employees during the M&A integration process as the pecking order becomes confused by the introduction of new people. "After a deal, all the managers in a company begin to jockey for position, and unfortunately, years of personnel decisions have to be made in a matter of weeks," says Feldman.

To retain star employees, management must provide assurances to workers that their jobs are secure. "Although you may not be able to say specifically what their role will be, it's critical that you at least acknowledge their contribution and that there will be a role for them," says Clemente.

Once employees become more secure in their positions, their attention will likely turn toward compensation and benefits issues. Key players may wonder how the deal will affect their paychecks, vacation time, and so on - and how their packages will measure up to their counterparts' in the merged organization. "There is nothing that will cause more internal strife or animosity than two people holding the same basic job and being compensated differently," warns Clemente.

If, for example, the acquiring company rewards risk-taking, entrepreneurial employees, and the target company rewards only those people who are order-takers, the result is often more confusion. According to Pappacena, people won't know if they are playing by the rules of one company or the other.

Feldman says integrating two cultures requires integrating two behavior sets. "You can't merge a culture by waving a banner proclaiming common vision and values. Culture doesn't come from newsletters and logos and screen savers," Feldman explains. "It's not about hype, it's not about promotions, its not about mantras and prayers. It's about the behaviors that you reinforce and the best way to do that is to identify who within your organization are the best role models of the behaviors that you want to reinforce. Take those people, and put them in the most visible positions in the organization, recognize them, reward them, and continue to reinforce those behaviors anywhere you see [them] throughout the organization. If you do that, you can change a culture virtually overnight."

The Morning After

Experts say an objective third party can often be the best judge of which company has the best processes, which decision-making style will be the most relevant in the new organization, and which evaluation system might work better for the merged company. And, Norelli explains, once those decisions are made, it's important to confidently enforce them. "Somebody has to take charge and send the clear message that there is no turning back," he explains. "You are either jumping on the train or getting off."

Take, for example, the case of Individual and Desktop Data, which merged to create the newly formed NewsEdge Corp.. When the deal was inked, Al Zink was brought in as HR Director to help establish a new and improved HR department.

"I began looking for the best of both companies -- things that already existed that I wasn't going to have to invent or change -- and not only pick the best elements, but make sure that employees from both Individual and Desktop saw that we were using elements from the two companies," he says. Zink says his approach helped to build a sense of team in the new organization, but he admits that the most important aspect of the transition was maintaining open communications. "I spent most of my time in the first four to six months of the merger in face-to-face meetings with people," he explains. "The one-on-one time that you need to spend with people doesn't go away. There's no secret or magic for spending time with people"

Indeed, to get to the root of M&A problems, experts agree strong communication models are vital. "After the deal is finalized, the challenge is now to bring these companies together. Communication is absolutely critical to do that. You have to understand the media through which employees receive communications, as well as the messages and the tone of given communications," says Clemente. Pappacena adds that if the outgoing communications focus on different "audiences" within the organization, each department will receive a message appropriate to their needs.

Pappacena also suggests integrating two-way feedback into the communications strategy. "If you build feedback mechanisms, you really create the right venues for people to be able to communicate with management," he explains. "If you don't know what is going wrong, you will never have a chance to correct the problem."

Experts say there is no silver bullet for easing through a merger. "Due diligence can reduce surprises, but cannot eliminate them," says Norelli. "The key is to recognize problems early and take decisive action. Even a marriage with a rocky start can lead to years of wedded bliss through planning, compromise and a shared vision of the future."