Merging Corporate Cultures

As many as two-thirds of newly merged companies fail to generate a greater market value than the sum of their previous parts. What looks promising on paper often fails in practice for one reason: People.



People are messy.



That may be the only certainty to materialize from the flurry of mergers and acquisitions in which successful integration of differing cultures has been anything but a sure thing.

Companies that craft strategies and processes to address the human challenges of corporate marriages tend to be among the one third of merged companies that actually succeed in realizing the value of these new relationships.



"Although there is a greater awareness of culture when companies begin to think about integration, it's not necessarily translated into tactics for dealing with the culture or people issues," says John Bogush, business integration managing director for KPMG LLP, Short Hills, N.J. "Companies still seem to be overly concerned with how they are going to achieve the operating synergies?more of a dollars and cents focus?that have been identified during the due diligence rather than how they are going to preserve the value of the people assets."



Indeed, the M&A story lines that play out in the pages of The Wall Street Journal seem to share a common plot: U.S. managers describe a "friendly" DaimlerChrysler merger as a "takeover;" AlliedSignal's union with Honeywell was plagued by management problems; Mattel stock plummets after the Learning Co. deal.



"It's the people stuff that trips up mergers," says Hillary Johnson, director of organization performance for AstraZeneca U.S., Wilmington, Del., now one of the world's largest pharmaceutical companies after the 1998 merger of Astra AB and Zeneca Group PLC. "You can do the deal because it looks really good on paper, but if you don't engage the minds of the people from each culture, you won't get the productivity you need to be successful."



But senior executives are indeed learning. After AOL and Time Warner completed the mega-merger in January, AOL Time Warner Chairman Steve Case admitted that the integration of AOL's New Economy workforce with Time Warner's more traditional culture demanded immediate attention.



"The big challenge here is integration and people," Case told investors two weeks after the newly merged media behemoth opened its doors. The many uncertainties top executives must address, according to Case, include "Are the people going to stay? Are they going to work together? Is it going to be an integrated approach, or the more historical divisional approach? We understand this is something we need to focus on."



Based on his work with merging companies during the past decade, Stephen Wall, an M&A expert with Philadelphia-based Right Management Consultants, believes that human strategy plays a much more prominent role in post-merger integration today than it did even two years ago.



"More and more, companies are evaluating the cultural fits of potential acquisitions," says Wall, co-author of "The Morning After: Making Corporate Mergers Work After the Deal is Sealed" (Perseus Publishing, 2000). "Because of that, I think we're going to see the success rate of mergers and acquisitions increase dramatically over the next decade."



If so, that improvement will take place because management teams of merging companies craft sound human strategies for their corporate marriages, dodge common cultural pitfalls, and hone the people practices involved in post-merger integration.



Human Strategy's Evolution

Traditionally, the HR department's involvement in M&A integration required a technical analysis of each organization's benefits and compensation plans, performance management systems, hiring practices, communication strategies, title structures and competencies. In other words, what HR strategies does each company currently employ and which of those strategies should be adopted following the merger or acquisition?



The answers to those questions, Wall says, starts with a clear understanding of the strategic rationale for the deal. "Why are you buying this particular company?" he asks senior managers. "In what way is this company going to add value to the current entity and to what degree are you doing anything that adds value to the company that's being acquired? If you start with that template, the rest of your cultural assessment can follow very logically."



That assessment includes the determination of whether the post-merger culture will mirror the acquiring company's culture (a consolidation), or whether a new culture will be formed from the union of the two entities (a synthesis). But Wall asserts that the earlier HR issues are addressed in the planning process, the more likely the merger will be handled successfully.



"I was involved from the start," says Diane Davie, vice president of human resources for PolyOne Corp., Cleveland. PolyOne, the world's largest vinyl compounds manufacturer and polymer technology company, was formed last August through the consolidation of The Geon Co. and M.A. Hanna Co. "From previous acquisitions, we put together a nine-phase process guide that delves into great detail each step of the way," explains Davie. "So, we have a definable, repeatable, flexible process guide to follow."



Senior managers also can improve the likelihood of a merger's success by getting a detailed fix on their employees? expectations and facilitating the sharing of best practices. Johnson says senior managers at Astra and Zeneca immediately sponsored a research project, conducted by the Gallup organization, once the merger was announced.



"We asked employees across the United States what they liked about their former culture and what things they would like to leave behind," Johnson says. "We asked them what they admired about the culture of the other company and what are some issues they'd heard about the other culture that concerned them. As a result, we had a very good picture of what type of culture employees wanted in the new organization."



In addition to the Gallup poll, Johnson and her peers on the integration team also conducted executive interviews, Q&A sessions with employee focus groups and their own survey on cultural issues. "You would normally think about doing some of those things a year to 18 months after the merger," she adds. "But that's really too late because you've wasted a year or more of trying to get employees to disengage from the old culture and engage in the new one."



Tori Carroll, director of human resources and operations for Chicago-based Porter Novelli Convergence Group, helped direct her public relations company's January 2000 acquisition of EBS Public Relations, one of the Midwest's leading high-tech PR firms. "One of our key culture-building initiatives was for everyone to share best practices across the new company," she notes. "We implemented groups to perform this objective that report directly to senior management."



Consequently, that sharing of best practices cuts across practice areas and up and down the newly merged company's hierarchy. That type of exchange, Carroll says, helped quicken and deepen the cultural unification process.



Lessons Learned

Post-merger integration does not always go as well as planned. The Porter Novelli/EBS merger, for example, took place during the early 2000 dot-com boom. Laura Bernhardt, now a vice president of recruitment and business development for Porter Novelli, says her fellow EBS employees were swamped with a rush of new high-tech clients during the height of the merger integration process.



"Managing people through a cultural integration during a very intense market time was a challenge that we didn't anticipate," says Bernhardt. "Tori and her staff did a good job of reining us in when it really mattered. It's difficult to rein people in when they're literally trying to close business on a daily basis."



Stephen Covey, vice president of Salt Lake City-based Franklin Covey Co., is careful to differentiate between what an integration looks like "on paper" and the actual process. During the 1997 merger of Franklin Quest Co. and the Covey Leadership Center, where he served as president and CEO, Covey and his fellow executives learned that too much of a focus on the internal, people-oriented issues can prolong the integration process.



"We had some slippage in this area during the initial stages of the merger," he says. "And most companies that merge experience this. You need to remain focused on the marketplace, on the superior value you're delivering to customers as a result of the merger. We actually found that a strong external focus gave us more understanding, balance and perspective to deal with the internal, people issues."



The scope of other potential cultural stumbling blocks during post-merger integration can be much smaller and easily overlooked in the planning process. When EBS employees moved into the Porter Novelli office, for example, they maintained their previous work hours, roughly 9 a.m. to 5 p.m. Porter Novelli employees, on the other hand, adhered to a slightly longer 8:30 a.m. to 5:30 p.m. schedule. The difference was noticeable, and although it didn't cause a rift, EBS employees did, several months after the move, switch to Porter Novelli hours.



"In one culture, everyone arrived to meetings on time, and the meetings started on time," says Johnson of the AstraZeneca marriage. "In the other culture, the meetings tended to start 15 minutes after they were scheduled when everyone drifted in. Yet, a simple thing like that caused friction in the beginning. And it's impossible to predict all of those situations in advance."



The merger also imparted more strategic lessons, Johnson adds. "Having gone through the process, I would recommend staffing your HR function for the new organization prior to staffing the rest of the organization," she says. "That way, you don't have the distraction of HR people working on the integration and not knowing if they're going to have a job at the end of the process. They're going to have double or triple their normal workload, and you don't want them distracted by their own personal issues."



Best Practices

In addition to addressing human strategies as early as possible in a planned merger, HR and business executives with significant M&A experience identify five crucial steps to a successful union:



#1: Define a realistic culture. Terms such as "dominant culture" and "merger of equals" can aggravate the already formidable difficulties involved in the integration process. Davie, who has been involved in more than two dozen mergers as an HR executive and consultant, says the economics of the PolyOne/Geon-Hanna deal were about as equal as they could be.



Prior to the formation of PolyOne, the two companies had nearly identical market capitalization rates. "But we went to great lengths from a psychological standpoint not to talk about the deal as being a merger of equals," she says. "If you set the expectation that it's a merger of equals, everybody thinks there will be a perfect balance of power. But the reality is, no matter how equal the deal is, one company ends up having more influence on the outcome."



PolyOne, Davie adds, was created with a new culture based on a new business strategy to achieve success as an operating company. Yet, of the 16 senior executives that now make up the PolyOne leadership team, 13 came from Geon (an operating company), two hailed from Hanna (a holding company), and one joined from outside the two organizations. "It is clearly a new culture," Davie says, "but there are a lot of characteristics similar to the Geon culture because that was a successful operating company."



Unless a merger is more of a consolidation, where a larger company absorbs a much smaller one, most deals require the formation of a new culture. "At Porter Novelli, we don't have a dominant culture," says Bernhardt of the Porter Novelli-EBS union. "If we did, that means we also would have a subordinate culture. We only want there to be one culture here."



#2: Provide savvy leadership. The definition of a new culture requires visible and strategic leadership. "There is a tendency for leaders to disappear once the announcement happens so that they can focus on operational and technical planning," says AstraZeneca's Johnson. "But it's really important that they remain visible during the first few months.

At that point, people are still in shock to some extent."



Davie recommends that executives avoid intimidating employees with lofty expectations. "After the merger was announced, we did not announce, "Hey, with this deal we are going to capture $100 million of synergy,?" she says. "Doing that and then telling managers they have to go find that amount of synergies can put people into a state of paralysis."



Instead, PolyOne leaders communicated a potential savings on the conservative side of their calculations and replaced the phrase "synergy," which sort of "relays the idea of cutting heads," says Davie, with "value capture." Employees found the conservative figure palatable, and, Davie adds, were much more involved in identifying opportunities for increasing the amount of value captured. As a result, "we were able to go out with much higher estimates of what the value capture from the deal would ultimately be," says Davie. "And we had greater employee buy-in because they were the ones who came up with the ideas that made it happen."



#3: Communicate consistently and carefully. Immediately after the Porter Novelli-EBS deal was announced, Carroll visited the EBS office to discuss changes in benefits and the training and development program that would be offered to EBS employees as a result of the merger. "We wanted to make sure people understood what they were gaining," she says. "So we started with the benefits meeting."



And determining how such information is delivered is as important as the content, warns AstraZeneca's Johnson. "Our Gallup research showed that employees like e-mail and voicemail, but only as a back up to face-to-face communication," says Johnson. "We learned that employees like to get communications from their immediate manager. So you can't rely exclusively on the top leadership team to communicate the mission of the merger. We really equipped all of our managers in the organization to help people go through the change."



And when bad news needs to be communicated, it should be relayed in a way that reflects the new company's values. "We have announced some plant closings," says PolyOne's Davie. "And we have an analysis underway to look at optimizing our whole manufacturing network. I think the way we handle those opportunities is a real testament to our values and how we treat people. That means communicating to people exactly how the decisions were made and being quite generous in the packages we provide to people if their jobs are affected."



#4: Address the "me" issues. "When a merger is announced, employees are in shock," says Johnson. "They know what they had in the old company, and they need to know what they will have in the new company. So, very early on you have to develop your vision for the new company and culture and distill what that means for the individual employee."



A week before the Porter Novelli-EBS merger, EBS Senior Account Executive Brian Pitts says, his "spider sense was tingling." The announcement did not come as a shock but he immediately wondered how the change would affect his career opportunities and benefits.

Pitts, now director of media relations for Porter Novelli, says he scored on both counts?and his new office commands a much more impressive view of Chicago's Michigan Avenue. But most employees feel like climbing the walls when news of a merger breaks. "First, they want to know: Are my benefits going to change?" says Carroll. "Is my compensation going to change? How about my title? They break it down into the things they deal with every day. It's HR's responsibility to raise that level of understanding to all the things they're going to gain from a merger that will deliver better service to our clients."



And that sense of insecurity is not restricted to lower-level employees. It strikes upper-level employees as well, says Johnson. At AstraZeneca, she says, "I was very involved in the integration process and worked on a lot of the integration teams. It wasn't until 10 months after the announcement that I actually knew whether I had a job in the new organization. So, I was distracted at times."



#5: Share space. HR executives involved in both the Porter Novelli-EBS and the AstraZeneca mergers stress the importance of uniting employees on a physical level as well. "We were acquired in January," says Bernhardt, "and we moved in to the Porter Novelli offices in March. The fact that we had to come together from an operational standpoint helped drive our coming together on a strategic level."



Covey agrees, noting that Franklin Covey employees did not share a common headquarters until almost two years after the merger. "Our headquarters were only 40 minutes away from each other, and we kept them separate at first," he recalls. "And that distance became a microcosm for some of the we-they challenges we experienced early on."



"We-they" challenges are unavoidable because most people fear change. HR and other executives should keep in mind that each person adapts to change at a different pace. That's why repeatable, but flexible cultural integration processes can help resolve sticky, people issues and prevent a merger from becoming a mess.



SIDEBAR:

Cultural Investigation



Cleveland-based PolyOne Corp. opened its doors in September 2000 following the merger of The Geon Co. and M.A. Hanna Co., two manufacturing leaders in the field of polymer technology. Hanna had been a holding company for many years, and Geon had acquired eight predominantly decentralized companies in the few years leading up to the merger.



"We were probably trying to merge somewhere in the neighborhood of 25 to 30 different cultural entities at that point," says Diane Davie, PolyOne's vice president of human resources. As complex as that sounds, Davie and her fellow senior managers pulled off a successful union because they leveraged experience from past mergers to create a nine-phase process guide.



"The guide isn't a gospel that we never deviate from," she explains. "But it forces us to get the right people involved at the right moment." The guide calls for HR's involvement early on in the process and often throughout the nine phases.



In the due diligence and planning phase of the merger, for example, PolyOne managers ensure that the following cultural objectives are met:



o Identify cultural differences that may cause conflict or present obstacles to completing the merger and achieving synergies;



o Determine the degree to which there is a match between the culture of the target company and the core values of PolyOne;



o Assess the degree to which the cultures of both companies are supportive of the anticipated strategy for the future; and



o Outline the cultural characteristics of the successful, combined new organization.



SIDEBAR:

A Third Way



During and after the 1997 merger of Franklin Quest and the Covey Leadership Center, the newly formed Franklin Covey Co. had the unique opportunity to practice what it preached. The company counts change management, M&A integration, business communication and strategic alignment among its many training and consulting offerings. The practice, Executive Vice President Stephen Covey avows, was difficult at times, but Franklin Covey's preachings (i.e., its service offerings) are much stronger as a result.



"We have an empathetic understanding of what goes on in a merger and what the key issues are," Covey says. "When we treated ourselves as formal clients during our integration, we realized better, faster results than when we did not."



Here are three practices for addressing the human issues of the post-integration that Franklin Covey found to be particularly valuable:



Develop a shared & compelling vision. "Differences are strengths when you have a common purpose and a shared vision," says Covey. "But when you don't have a common purpose or a shared vision, the differences can undermine the new organization."



Balance understanding with speed. Franklin Covey often advises clients conducting mergers to "seek first to understand." That means developing much more than a cursory understanding of how each culture can benefit the newly created culture. "And that requires time and depth," says Covey, "but it has to be balanced with the need for speed." If a newly merged company does not integrate quickly it can get bogged down in people issues that obscure the bigger-picture value of the deal.



Evaluate third alternatives. Franklin Covey created synergy teams to examine external practices that might be better to adopt than operational and cultural practices from either of the two previous organizations. "We said, "Let's use market criteria rather than lineage criteria," " Covey notes. " "Let's pick something better than either of us have." We didn't achieve it in every case, and it took some time. But in many cases, we came up with third alternatives that were truly better." He also emphasizes that the third alternatives were not compromises that blended Franklin and Covey's previous approaches, but new and better strategies.



COPYRIGHT Bill Communications Inc. 2001. All rights reserved.