You’re Kidding, Right? Book 1

At a recent conference on acquisition integration, a speaker was addressing the importance of corporate culture. This is a good thing; in a world of bankers and lawyers (or – worse yet – bankers or lawyers turned corporate executives), softer stuff like culture has gotten short shrift for years … to the detriment of a lot of otherwise good deals.

So The Merger Verger was listening. Until the speaker came out with this:

“In a true merger, no one culture should win.”

 Early example of a


Early example of a “true merger”

What? Are you trying to make me barf?

The explanation was that adopting one culture over another would leave the losers feeling like (OMG!) losers.

Dammit; give me a minute while I clean off my shoes.

There are lots of meaty issues to consider here but let’s focus on two.

Issue #1 – There is no such thing as a “true merger” or “merger of equals.” That ship sailed a long time ago and anyone who tells you otherwise is either trying to sell you something or has lost all conscious contact with history.  (See: Worst Integration Deal of 2014)

So do not plan your cultural integration (or any other part for that matter) around a striving for universal equality. Your wings will melt and you will fall into the sea.

Issue #2 – Just because an aspect of your deal – culture, for example – is “soft” doesn’t mean that it should be dealt with softly. We are business people, leaders. Our job is to choose between the good and the better. Not to do so is pure abdication.

Are you, for example, going to have a collaborative culture or a hierarchical one? You can’t have both. Maybe it’s the target’s culture that is more conducive to realizing the future objectives of the combined companies. The acquirer doesn’t always have to be the “winner.” But make the choice. Do it thoughtfully but decisively.

Then communicate what choice you have made and why it is the right one. Articulate it. Support it. Sell it. Then leave it to the team to decide whether they wish to mourn what was or jump on the shiny new bus with you.

Integrating Cultures after a Merger

Bain & Company offers a fairly interesting video on the role of culture and its integration. Worth checking out. Three minutes.  There is also a short write-up on the topic available via the same link (below).

Dale Stafford: Integrating cultures after a merger – Bain Video – Bain & Company.

From the Bain article: Culture clashes commonly cause failed mergers, yet few organizations apply the same rigor to managing and steering cultural integration that they apply to creating conventional, hard-dollar synergies.

Portobello Rd DSCN0548a

Photo: Dealmaker, Portobello Road

Processes and People at Heineken

Video

A Thanksgiving lagniappe: a very good, very short video on merging differing processes and cultures at Heineken NV.  What Heineken shows is that differing cultures can be made to enhance one another; it just takes awareness and focus.

Check it out by clicking here, courtesy of McKinsey & Co.

Thanks for alerting The Merger Verger to this video go to Riomar Capital.Thanksgiving_1861

About the art: Sketch by Alfred Waud of Thanksgiving, November 1861, in camp (of General Louis Blenker) during the U.S. Civil War. Collection of the Library of Congress

Deal Rollatini

The process of rolling up acquisitions in a fragmented industry is pretty standard stuff these days. But it’s still worth looking at the topic because there are so many variables within the “sameness” of fragmentation that can go wrong.

One of the major potholes you can hit in rolling up smaller acquisitions is sourcing.  No, not your own sourcing; your customers sourcing you! And if you don’t Getting Flattenedpay attention to that issue, your robust roll-up can get flattened.

Here’s the scenario: Say you’re a private equity investor looking to launch a consolidation play.  You make an investment in a fragmented industry, with the seed acquisition that has all the right attributes including a cornerstone customer, say, a Honeywell or a GE with locations and opportunities all over the map.  Your aspiration is to consolidate the industry and grow that customer into an enormous national account.  Good concept.

Bad reality.

Customers that source products or services from a highly fragmented industry have built up buying practices to mirror the availability of supply.  All of their sourcing processes and sourcing infrastructure are based on purchasing from myriad local vendors.

So if your investment thesis is predicated on reshaping the long-standing business practices of a customer, The Merger Verger predicts that you will be in for some rough going.

It is one thing to do a deal and change the culture of the acquired organization; you own it.  But changing a customer’s culture is quite another thing.  So we strongly recommend that you not base your deal economics on changing any deeply entrenched buying patterns of your customers, however brilliant you think your new offering might be. You could be betting the farm on someone else’s willingness to change.  Never a good strategy.

Reward:

Deal Rollatini in the Works

Deal Rollatini in the Works

If the title of this posting inadvertently led you here in search of Italian food, The Merger Verger appreciates your reading all the way to the end.  Your reward is here: Veal Rollatini with Marsala Sauce.  (Our only suggestion might be to add some fresh ricotta to the mix.)  Let us know what you think.

Bug Trouble: Integrating Pest Management

“Can your bug guys work with my bug guys?” Shakespeare notwithstanding, THAT is the question as far as Neil Parker, President of BugBusters USA is concerned.

In the current issue of Pest Control Management (yes, you read it here first), Neal tells his tale of attempting to integrate an acquired company where the cultural differences loomed larger than they had initially appeared.  Article available here:

Neil asks the kind of questions that all too many senior executives fail to ask until the answer is only clear via an assortment of unanticipated problems:

What happens when a company with a “new school” mentality acquires a company with an “old school” way of doing business?

Parker’s answer echoes that of so many other companies that pay short shrift to the cultural aspects of an integration: disaster (lost employees, lost customers, brand dimunition, bad PR, etc.).

What The Merger Verger likes about his article is that he is so forthright: we blew it.  I recommend reading it (2 minutes, max).  There are both specific examples of cultural hurdles and useful insights.  Check it out.

The message to CXOs:

In the spectrum of companies doing acquisitions, Bug Busters USA is a gnat.  So your choices in reading Parker’s article are these:

  1. Slough off his comments as arising from limited experience and irrelevant smallness; or
  2. Conclude that if cultural issues can trip up a tiny deal by a fairly simple company how much more can they clobber a big, complicated, challenging deal like yours?

Ready. Set. Ego.

There is little in business that is not embossed with the boot marks of ego.  Now I’m just a humble verger, not smart enough to be able to describe the line between ego and courage or ego and decisiveness or even ego and enthusiasm, but I do believe that some level of ego is essential for a business leader.  And I know (we all know) that too much ego poisons.

We’ve all worked on deals where there was a clash of titanic egos.  But I worked on a deal a few years ago where the clash was not between egos of differing sizes but of differing types.  That subtlety went undetected, leading to enormous problems and a huge drain of value from the deal.

This was the case of a wholesale securities brokerage acquiring a company that developed securities-pricing software.  Both were leaders in their markets.  And both had commensurately large egos.  The brokers moved enormous sums of money around each day and thought they were hot shit.  The software designers were the creators of a system through which those enormous amounts of money could move at proper prices.  They thought they were hot shit.

The management of the buyers thought of the software guys as techno-nerds and had no conception that they had egos as big as their own.  Despite knowing well how to stroke the egos of brokers they had no idea how to stroke the egos of software designers (or that software designers needed stroking … or even had egos).

It was a cluster fock.  The large (but fragile) egos of the software guys did not speak up about their gripes.  The large (but blowhard) egos of the broker guys didn’t recognize the underground problem.  One by one the software guys left the brokerage firm and the hoped-for benefits of the deal withered.

Value?  POOF!

Has anyone else seen this kind of similar-but-different scenario trip up their integration process?  I’d love to hear other stories.

Coty on Avon: Identity Issues Abounding

I admire the folks at Coty for stepping up opportunistically and pouncing on Avon.  This will be a very interesting deal to watch if it happens. Can you think of a company that has a more distinct heritage and indentity than Avon?

Avon sells primarily its own products through a fleet of indepenent salespeople (with fully 80% of its sales coming from outside the US).  Coty sells licensed and branded products (including Calvin Klein and dozens of others) primarily through retail chains and department stores.

The situation is made even more interesting by a couple of facts that have lots of potential for head spinning:

  1. Coty had previously been in discussions to sell itself to Avon.  Those discussions went nowhere so Coty turned the tables and went after Avon.
  2. Avon is about two and a half times bigger than Coty.
  3. Avon has huge potential liabilities related to overseas bribery and corruption lawsuits (making valuation a crapshoot).
  4. Avon is in the process of hunting for a new CEO, a process that Coty has pledged not to interrupt.

    Good-bye Tomorrow?

I look forward to watching this deal unfold and would welcome comments from anyone with any inside scoop on it.

Making 1 + 1 = 1

Title get your attention?  Mine too.

The Merger Verger stole it (well, “borrowed” it) from a recent study published by the folks from Knowledge@Wharton dealing with the topic of “identity” as it impacts value creation in the process of a corporate merger.  Authors Hamid Bouchikhi (ESSEC Business School, France) and John R. Kimberly (Wharton) lay out four distinct approaches to identity in the integration process:

  • Assimilation
  • Confederation
  • Federation
  • Metamorphasis

These approaches differ in their degree of retention or replacement of legacy corporate identities and establish the overall framework for the degree and type of integration.

The study is a worthwhile read for all integration practitioners. Click here for the full 24-page study report or here for a shorter write-up on it.  As always, comments welcome.

Aside:

The authors also cite examples of situations where the integration process was pushed ahead TOO fast, a problem that runs counter to the norm (and could be an extremely interesting topic for their next study: when to act the tortoise and when to act the hare).

Quotes:

“For one plus one to make more than two, at the economic level, it is necessary that one plus one make one, at the psychological level.”

The merging of companies will only be successful when the employees of the merged entity “feel a sense of belonging to a single enterprise with which they can identify and to which they are motived to contribute. This is particularly true when one organization acquires a competitor; all of a sudden the enemy is on your side.”

Today’s illustration from my road map collection (no topical rationale).

The Empowerment of Mistakes – 1

Mistakes in the business place are all too often shoved under the carpet or patched and passed on.  Here at The Merger Verger we think that is the wrong strategy altogether.

A company was holding its quarterly divisional managers’ conference call and asked me to participate.  The CEO did his thing and then all the division guys reported on the quarter just ended. 

After the call was over the Chairman/owner asked me what I’d thought.  I told him that I was highly skeptical of the whole thing.  Ten divisions each reporting on three months of activity and not one thing had gone wrong?  That’s the equivalent of one business functioning for two and half years without a single problem.  No.  No!  That’s not what happened; that’s just what got reported.

When a manager reveals a problem or a misjudgment, he is opening the door to his colleagues and saying, “I don’t want you to experience the same problem I did; learn from my situation before it happens to you.”

This practice of encouraging error-sharing enters the realm of acquisition integration at two levels:

Building an Open Culture

  • The revealing of mistakes, unforeseen problems and dropped balls takes courage.  It has one and only one upside: learning potential. If you want to maximize that potential you must build a culture that supports it.  People fundamentally want to be honest but although in the wrong environment their self-protective instincts will quickly override.  An error-sharing culture may take seed by itself but it must be fed and nourished continually from the top in order to multiply.  
  • If you already have that culture in your organization, remember that it will face doubters in an acquisition target.  You must vocalize the policy and its importance frequently to your new employees.  More importantly, you must spotlight examples that model the behavior whenever they occur. 
  • If the target brings to you an environment of openness and error sharing that you do not already have, put it high on your list of things to back-build into your own company… or at least take concerted steps to see that any close-to-the-vest attitudes at home do not squash the constructive example coming in from outside.

Stopping the Dominoes

  • From the angle of a mistake as a learning opportunity, you should think of them as tools, as assets.  Like any tool, the more it sits on the bench or in the warehouse, the lower your return on it.  Put the tool to use.
  • This is particularly true for companies that are consolidating industries, say, through a roll-up or geographically diverse bolt-ons.  The problems or missteps experienced in one unit have a high likelihood of emerging in other units if you don’t empower your managers to share those errors and the lessons learned from them.  It may be that no distinct lesson has been learned other than to watch out; that alone is a useful observation.  If you don’t share operational miscues, you are setting yourself up like dominoes to have the problem befall you again and again and again down the line.

Do I need to add here that the integration team should also be learning from its mistakes?  This is particularly true for companies where the acquisition activity is not constant or where the integration team may be run by a different leader the next time.  All kinds of studies show that the companies that learn from both the ups and the downs of their previous acquisitions and codify that learning in a written Integration Handbook are more successful at making deals work.

Complexity Squared: Merging United and Continental

There was a very interesting article in a recent edition of Bloomberg Businessweek on the integration of United and Continental.  Makes me glad I’m not in the airline industry (although the deal is a “must follow” for anyone interested in acquisition integration).
 
 
The article doesn’t offer a ton of technical or integration know-how but several interesting points emerge:
 

Top business leaders are beginning to understand that integrating acquisitions can take enormous amounts of time.  Jeff Smisek, President and CEO of the new United is quoted as saying the integration will take “several years.”  How many name brand CEOs have that vision on the complexities and subtleties of an integration process?  Bravo, Jeff.

I wonder is the CO/UA situation made even more difficult by two companies that are endeavoring to create a truly merged entity rather than the usual whale/Jonah strategy.  Does a merger of equals require more tact? (That would seem obvious.) More time? (To be done right, I would say, “yes.”)  Different angles or solutions?  (Now there’s an interesting question indeed.  Any thoughts out there?)

The author of the article makes a very salient point about culture but unfortunately buries it deep in the body of the article:

“Before the new United can feel like one entity to consumers, it has to feel like one entity to its employees.  Ultimately, that’s the most difficult part of a merger – combining cultures.”

Smisek himself reinforces that concern on the company’s website:

“The biggest challenge is making sure that we develop the right culture of the combined companies.”

For fun and profit, I offer a few of the issues that the two companies grappled with in their integration process (all serious but some more amusing than others):

  • Differing labor contracts (duh)
  • Differing premium service classes
  • Onboard coffee service (this was apparently a gigantic issues)
  • Inconsistent flight tracking software algorithms
  • Differing customer loyalty systems
  • Plane boarding procedures
  • Staff uniforms

“God is in the details,” said architect Ludwig Mies van der Rohe.

The final solution for the New United’s logo is almost too simple, too obvious. But it does imply the practical, uncomplicated (?) union of two companies … at least to the outside observer!

The other interesting element of the article was the highlighting of the 2005 merger between America West and US Airways as the airline merger nightmare of all time.  I am impressed that someone at CO or UA seems to have read the playbook from that deal and smartly done the opposite.

Historical note: the perhaps colossus of all merger screw-ups was also a transportation deal: the 1968 merger of the Pennsylvania and New York Central railroads.  Is there something about transportation deals that we should be looking at?

Question: What other industries are prone to this kind of high complexity in merging?  Is it the high technology component? The extraordinary requirement for exactitude and safety? The intense demands of highly stressed consumers?  Something else?  Experiences please ….

In a future posting we will take a look at United’s web site and how it is dealing with the integration process.  Stay tuned.