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.

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Deal Magic Potion

Sorry…!

Another interesting article from the folks at CFO magazine, this one from R. Neil Williams, CFO of Intuit, maker of QuickBooks, Quicken, TurboTax and other financial management tools. Intuit (Nasdaq: INTU) has done 15 acquisitions over the last two years. In his short article, Williams looks at the question, “Is there a magic potion to a successful inorganic growth strategy?”

The hags of MacbethShort answer: no … but there are keys to the process. Interestingly, having answered “no” to his own question, Williams turns immediately to the importance of strategic logic. Let the Merger Verger state that another way: he gives first priority to strategic logic, admonishing readers to be aware of (and leery towards) shiny objects that invariably come before acquisition leaders.

Pivotal Quote (wherein Williams comments on his overarching observation about deals as a means to corporate growth):

The lesson was that the most successful mergers involved [targets] that had similar culture, style and operating process. The ones that only brought economic benefit were challenged to succeed.

The Short and Sweet from the Verger:

  1. The best deals arise from a buyer’s strategic plan and they address an identified gap or shortcoming.
  2. A thorough due diligence process must include an assessment of the culture, the values and the operating mechanisms of the target company.
  3. When acquiring a company still managed by its founders/owners, make sure you and they see a common future for “their baby” under your leadership and get them really juiced about that enlarged potential.
  4. Empower your integration team to move quickly, including making rapid decisions.
  5. Determine as soon as possible the fundamental changes that you expect to make and then communicate clearly what will stay the same and what will change.

The full text of the CFO article is available by clicking here. One page, well worth reading.

If you’d like to see some of the deals that Intuit has completed over the last few years, there is good descriptive information on their website. Click here.

Final Note:

Magic potions are not a strong suit here at the Merger Verger but we can offer the following list of ingredients (sourced from an old friend).

Eye of newt, and toe of frog,

Wool of bat, and tongue of dog,

Adder’s fork, and blind-worm’s sting,

Lizard’s leg, and howlet’s wing.

You’re on your own for quantities and procedure.  Just be careful.

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

Five Questions Before Leaping

Robert Sher, a Forbes contributor and author of the book “The Feel of the Deal,” offers an extremely succinct set of questions for any senior executive considering an acquisition. They should be part of the CSEE (C-Suite Entrance Exam).

Writing in the Forbes cliff jumpingLeadership Forum, Sher sets the stage by asking this simple question:

Why is M&A success such a crap shoot?

To which he answers thus:

The sad fact is that most deals look great on paper but few organizations pay proper attention to the integration process – that is, how the deal will actually work once all the paperwork is signed.

His five key questions address the following critical issues:

  1. Management capacity
  2. Cultural compatibility
  3. Alignment with corporate strategy
  4. Purchase price and integration investment
  5. Alternative uses of the invested capital

Check out the full text of Sher’s piece here. And more on Sher here.

 

 

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).

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.

HSBC: Knights in White Satin

My last job on the buy side was with HSBC.  I was a part of the team that launched the company’s USbroker/dealer and one of their first US investment bankers.  I had worked for British banks before so I knew something of the culture.

Now HSBC (we used to call them the “Hot Shit Boys from China” despite their all being Brits) has a very strong corporate culture.  So strong that they are almost arrogant about it.  “Founded on sound Scottish banking principals,” they liked to say.  That means “cheap.”

But for a bank, cheap is good.  You take money in at X, lend it out at Y and if you control costs you can make a lot of Z.  HSBC is good at that.

But they are also good at buying distressed properties.  (Part of the reason for this is that they have seen in their rear view mirror how that are not so great at buying robust properties, more on which some other time maybe.)

An HSBC Opportunity, Texas Panhandle Style

I remember watching the company purchase one of the largest banks in South America for a dollar (or a peso or a zloty or whatever).  That dollar was supported by a commitment to pour in $1 billion more as needed but with the proviso that at the end of a year they could put back to the selling government any truly bad loans.  Now that is some fancy negotiating.  But HSBC knew exactly what they were willing to do and not do and where they were good and not good.

But the key to the bank’s deal success from my perspective was not their negotiating unbelievable terms but their process of making those deals work.  They would drop an integration SWAT team into the acquired company – painted up as knights rescuing damsels – and immediately embark on jamming the HSBC Way into the old bank.  And it worked.  The acquired employees could see that HSBC knew what they were doing, that the prospects for the bank’s future success (and their own future careers) had just gone through the roof and that finally someone was making sense out of what had previously been an unmitigated mess.

Formula: large control-freak organization finds attractive candidate teetering on the financial brink, rides in, imposes immediate order (their definition), makes streets safe again for women and children, holsters guns.  My hero.

Comment: Do not try this at home (or in any industry with strong, change-resistant labor unions).