Post-merger Integration

1. Poor post-merger integration is one of the primary reasons acquisitions fail. • Must have adequate planning, timing, attention to detail as well as contingency plans. Post-merger Integration • Acquisition posture • Methods for motivation and integration • Types of integration approaches

2. Post-merger Integration • Acquisition Postures Contested Situation Collaboration Rescue Raid Cooperative Adversarial

3. Post-merger Integration • Acquisition Postures Rescue Contested Situation Collaboration Rescue Raid Cooperative Adversarial • Rescue • Financial salvage operation • Firm has significant weaknesses • Incumbent top management generally leaves (had their chance). • Loss of leadership • Target firm employees threatened by layoffs, sell-offs etc. • Generally good cooperation (target firm employees are still part • of the vanquished firm). • Primary issues - Rebuild corporate self esteem - Well-defined sense of direction

4. Post-merger Integration • Acquisition Postures Rescue Contested Situation Collaboration Rescue Raid Cooperative Adversarial • Rescue • White Knight Scenario • Decisions based on expediency (severe time pressure) • Second guessing (seller), buyers remorse (buyer) • Significant post-merger surprises • Post-rescue must determine how the firms will interact and • conduct compatibility studies of the different cultures, • processes and procedures. • Chevron rescue of Gulf oil from T. Boone Pickens.

5. Post-merger Integration • Acquisition Postures Collaboration Contested Situation Collaboration Rescue Raid Cooperative Adversarial • Collaboration • Acquirer generally does not use heavy-handed tactics. • Diplomacy and goodwill are critical. • Often difficult because of poor follow-up management. • Generally less post-merger drift (sag in productivity, loss of morale, etc.). • American Airlines acquisition of TWA.

6. Post-merger Integration • Acquisition Postures Contested Situation Contested Situation Collaboration Rescue Raid Cooperative Adversarial • Contested situation • Conditions • One party has a strong interest in the deal • Two parties want very different deals • Competitive bid situation • Less of a feeling of a victor and vanquished than in “raid” situations. • Competition can lead to increased ambiguity • Significant post-merger drift. • Example: Walmart, J. Sainsbury PLC, and William Morrison Supermarkets PLC competitive bids for Britain’s Safeway PLC.

7. Post-merger Integration • Acquisition Postures Raid Contested Situation Collaboration Rescue Raid Cooperative Adversarial • Raid • Adversarial climate is at its peak (maximum resistance by target firm). • Intense emotional battle • Rumor mill operates in both firms. • Target firm generates antagonism among its employees • toward the raider (move will hurt employees, morale, and • create an uncertain future). • Rally around management and become more cohesive in • the struggle against a common enemy. • IBM’s hostile takeover of Lotus Development Corp.

8. Post-merger Integration • Acquisition Postures Raid Contested Situation Collaboration Rescue Raid Cooperative Adversarial • Raid • If the takeover is successful it does not end the impact of residual antipathy. • Employees of the acquired firm may find it difficult to make the • psychological shift from conflict to brotherhood. • Battles may continue for years (subtle resistance, guerilla • warfare). • Incumbent management concerns (recant position of defiance • or resign).

9. Post-merger Integration • Acquisition Postures Raid Contested Situation Collaboration Rescue Raid Cooperative Adversarial • Best and brightest may flee to friendlier settings. • Talent usually leaves in the aftermath of hostile takeovers. • May leave behind a shell of the former firm and a workforce • plagued by resentment. • Parent firm management. • Need to engage in fence mending but... • Newly acquired managers and employees may be recalcitrant • so more policing is necessary (tighter controls) and • “occupation troops.” • Further alienates acquired employees, increases • demoralization, management bail outs, and sabotaged • productivity.

10. Post-merger Integration • Acquisition Postures Incline of Resistance Cooperative Adversarial • Incline of resistance • The degree of resistance becomes more pronounced as one moves from a rescue acquisition to a raid. • Illustrates the intensity of the opposition to the other party’s merger objectives. • Also reflects the amount of resources (time, energy, money etc.) expended struggling with the event. • As the incline mounts, both negotiation strategies and eventual • integration policies must change. • Resistance also leads to individuals becoming more attached • to and have more personally invested in their particular side of • the issues.

11. Post-merger Integration • Acquisition Postures Incline of Resistance Cooperative Adversarial • Incline of resistance • The higher the incline of resistance goes, the longer it takes • for the resistance to subside. • Raids and contested situations usually involve the most • concerted efforts to resolve. • One-shot attempts usually don’t work in these situations • (too much polarization) • - Requires a strategic integration program.

12. Post-merger Integration • Acquisition Postures Risk Incline of Resistance Cooperative Adversarial • The risk curve • Financial risk tends to be greater at each end of the continuum. • In a rescue situation the acquirer gains a firm beset by financial woes and a dearth of leadership. • Raids almost guarantees resistance and the threat of bail outs by the most capable people. • In a rescue fewer people leave. Incompetent individuals who created the conditions may be difficult to dismiss. • Employees may be passive and inertial • Many surprises

13. Methods for Motivation and Integration • M&As invariably destabilize firms and create dissonance. This can • be used as a motivating force to strive for resolution or restabilization. • Dissonance is not necessarily negative (decreases likelihood that people • get into a rut or become complacent). • In effect, leaders can create dissonance as “change agents.” M&As • are, in effect, “change events.” • Ideally, M&As should be used for morale building, attitude • improvement, innovation, and increased productivity. Without • deliberate strategic planning directed towards these goals a company • is likely to be motivated along negative lines. Post-merger Integration

14. Methods for Motivation and Integration • Timing Issues Post-merger Integration • Impose changes too fast. • Approach changes too slowly allows an increase in uncertainty and ambiguity. • Acquirers want to reduce dissonance quickly so they maintain a low profile and offer assurances that there will be no major changes. • Reducing dissonance quickly glosses over needed changes in corporate culture, operating practices, management philosophies

15. Methods for Motivation and Integration • Integrated plan Post-merger Integration • Employee involvement through surveys. • Make tangible, popular, high-profile decisions. • Utilize the Pygmalion Effect (“we will get what we expect from other people”) . • Provide a sense of corporate direction. • Take an affirming stance. • Give people a flag to wave. • Clarify roles, responsibilities and working relationships. • Conduct team-building sessions.

16. Types of Integration Approaches • Two dimensions: Strategic interdependence and organizational • autonomy. • Autonomy may be necessary to allow boundary protection such that • the unit can use its capabilities. Post-merger Integration • Particularly important when organizational culture contains the key capabilities necessary to create value. • Tampering may destroy these capabilities • Strategic interdependence needs • Synergy arguments • Transfer capabilities (resource sharing, functional skill transfer, and general management skills. • Functional skills transfer requires transfer of personnel. • Difficulty in transferring resources horizontally (violates integrity of units).

17. Types of Integration Approaches Need for Interdependence Low High High Preservation Symbiosis Need for Autonomy Low Holding Absorption

18. Types of Integration Approaches Need for Interdependence Low High • No intention of integrating and creating value through anything other than financial transfers or risk sharing. • Holding company (unrelated- diversified) strategy. High Preservation Symbiosis Need for Autonomy • Examples: • McAndrews and Forbes • (a financial firm) acquisition • of Revlon and Max Factor. Low Holding Absorption Holding

19. Types of Integration Approaches Need for Interdependence Low High • Integration implies a full consolidation of all operations, organization and culture of the two firms. • Key issue is timing as opposed to how much integration should take place. • Won’t see benefits until this is accomplished. High Preservation Symbiosis Need for Autonomy Low Holding Absorption Absorption

20. Types of Integration Approaches Need for Interdependence Low High • First draft of integration should occur before acquisition is completed. High Preservation Symbiosis • Choose a single leader to • manage the process. • Choose the transition team • Set up transition structure • including task forces. • Determine a calendar of • events. • Communicate throughout • the process. Need for Autonomy Low Holding Absorption Absorption

21. Types of Integration Approaches Need for Interdependence Low High • Managing rationalization • Which functions will be • merged based on resources/ • capabilities to be shared. • Evaluate costs, both savings • and additional costs • associated with compromises. • Determined, fast-paced • changes are best. High Preservation Symbiosis Need for Autonomy Low Holding Absorption Absorption • Establish best practices • Establish skills to be • transferred. • Determine who use them • most efficiently and model • other, less efficient teams, • units etc. after these.

22. Types of Integration Approaches • American Airlines acquisition of TWA Need for Interdependence Low High • Harness complementary High • Absorption that homogenizes • two cultures may improve • manufacturing but destroy • value in other areas. • Must balance absorption • versus need to keep some • operations separate Preservation Symbiosis Need for Autonomy Low Holding Absorption Absorption • Examples: • American’s acquisition of • TWA. • Cisco Systems quickly integrates its acquired units into existing units using an • integration plan based on absorption. Cisco focuses on acquiring small companies • with new technology and products that are similar to Cisco’s.

23. Types of Integration Approaches Need for Interdependence Low High • Key issue is to keep the source of the benefits or capabilities intact. • Manage operations at arms length (except where interdependencies such as financial risk sharing and general management capability transfer are needed). • Continued boundary protection High Preservation Preservation Symbiosis Need for Autonomy Low Holding Absorption • Preserve the culture in which the capabilities are embedded. • Make managers and employees in both firms more tolerant of differences.

24. Types of Integration Approaches Need for Interdependence Low High • Accumulate information about the business (domain exploration effort). • Learn about the acquired • business through gate- • keepers. • Learning from the business • (difficult due to distrust • and takes time). High Preservation Preservation Symbiosis Need for Autonomy • Identify a host (parent) champion Low Holding Absorption • Acquired unit requires • resources despite • uncertain record • Examples: • Time-Warner merger (protect different cultures). • BP’s acquisition of Hendrix (family owned) to form BP Nutrition (protein from oil). • BASFs acquisition of Celanese (protect Celanese’s entrepreneurial culture).

25. Types of Integration Approaches Need for Interdependence Low High • Most complex • Issue is to transfer capabilities but maintain necessary autonomy. • Start process like a preservation High Symbiosis Preservation Symbiosis Need for Autonomy • Premium versus patience • (costs are considerable but • it takes time to develop). • Clear understanding • regarding strategic • objectives, time horizons, • and procedures. Low Holding Absorption • Shield acquired firm from uncontrolled interactions

26. Types of Integration Approaches Need for Interdependence • Set up gatekeeper function to control interactions between acquired and parent units that will be collaborating. • Gate keeper (senior executive) must reformulate the goals etc. in both units. • Trade operational responsibility for strategic control. Low High High Symbiosis Preservation Symbiosis Need for Autonomy • Gradual shift towards • strategic control (parent • management increases • influence). • Parent must adopt a long- • term perspective and adopt • the correct time horizon. Low Holding Absorption • Physically or geographically regroup individuals in new buildings with close proximity to • parent businesses.

27. Types of Integration Approaches Need for Interdependence Low High • Example: High Symbiosis Preservation Symbiosis • ICI’s acquisition of LNP and • Fiberite (both chemical • companies) from Beatrice • Foods and their amalgamation • into ICI’s advanced • composites business. Both • units produced reinforced • plastic compounds. • Started as a Preservation then • shifted to a Symbiotic • relationship within a year. • Maintained a “gatekeeper”, all • contact with ICI was initiated • by LNP or Fiberlite. Need for Autonomy Low Holding Absorption