Butterwo rth-Heinemann Linacre House, Jordan Hill, Oxford OX2 8DP 225 Wildwood Avenue, Wobum, MA 01801-2041 A division of Reed Educational and Professional Publishing Ltd a A member of the Reed Elsevier plc group OXFORD AUCKLAND BOSTON JOHANNESBURG MELBOURNE NEW DELHI First published 1992 Second edition 1996 Reprinted 1997, 1999 (twice), 2000 0 Sue Cartwright and Cary L. Cooper 1992, 1996 All rights reserved. No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1P OLP. Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publishers British Library Cataloguing in Publication Data Cartwright, Sue Managing Mergers, Acquisitions and Strategic Alliances: Integrating People and Cultures - 2Rev.ed I. Title 11. Cooper, Cary L. 658.16 ISBN 0 7506 2341 1 Composition by Genesis Typesetting, Rochester, Kent Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Comwall FOR EVERY TFtWTHAT We PIWWSH, BVITBRWOATH.HEINEMANN WILL PAY POR BTCV TO PLAN? AND CARE POR A Tm. Acknowledgements With particular thanks to Jenny Ellison for her patience in typing this manuscript and Joe Jordan for his research contribution to the inter- national material included in this volume. 1 Introduction: mergers, acquisitions - and strategic alliances a people issue During the 1980s, mergers, acquisitions and other forms of strategic alliance, dominated the business and financial press, especially when they proved unsuccessful: ‘An Engagement is Broken - The Collapse of a Dutch-Belgian Banking Merger’ (Financial Times, 19 September 1989) ‘Marriage brings woe for Wedgwood - Broken dreams: shares nose dive since the “perfect” marriage in 1980’ (The Mail, 25 March 1990) This preoccupation with the incidence and outcome of such organiza- tional marriages was hardly surprising for, in the 1980s, mergers and acquisitions (M & A) became a worldwide growth industry. The global value of M & As has risen rapidly from €60 billion in 1984 to €355 billion in 1990. Thirty-seven per cent of the 1990 figure relates to cross-border international M & As. This occurred despite the seemingly high risks attached. For, although the opportunity to merge or acquire is presented to shareholders as a strategy for wealth creation, it is estimated that more than half of all mergers and acquisitions prove financially unsuccessful. As the business world entered a new decade and the gloom of global recession, the merger mania of the 1980s seemed to have lost its impetus. M & A activity began to decline as many organizations moved to ‘downsize’ rather than ‘upsize’ their operations. However, managerial predictions, suggesting that the potential growth benefits to be gained from M & A would continue to exercise a persuasive and seductive appeal to organizations, have proved accurate. Recent upturns in the economy have caused a resurgence in business confidence, and M & A activity has started to pick up once again. In the first six months of 1993, the number of US M & As showed an increase of 30 per cent compared with the same period in the previous year (New York Times, 1993). The value and 2 Managing Mergers, Acquisitions and Strategic Alliances frequency of cross-border deals has steadily risen between 1991 and 1993, with a marked increase in joint ventures (KPMG, 1994). A recent survey (Cartwright, Cooper and Jordan, in press) of almost 500 senior European managers suggests that the upward trend is likely to continue. The survey found that 50 per cent of managers considered that it was highly likely that they would make acquisitions within the next three years. Forty per cent indicated that they expected to become involved in a joint venture/ strategic alliance, while 10 per cent expected to merge, within the same period. Therefore, there are powerful indicators to suggest that M & A activity is likely to continue to be an important feature of organizational life throughout the 1990s. As, historically, mergers and acquisitions have been considered exclusively the domain of economists, market strategists and financial advisers, the financial and strategic aspects of the activity are well appreciated and have been extensively addressed and debated in the management literature. In contrast, although mergers and acquisitions are something which happens to people in organizations rather than to organizations in any abstract sense, the human aspects of the phenom- enon have received relatively little attention. Indeed, ‘people’ are largely ignored or dismissed as being a soft or mushy issue by those who initiate or guide the merger decision. Consequently, people have come to be labelled the ‘forgotten or hidden factor’ in merger success. There are a number of reasons why managers need to recognize the importance of human factors to any inter-organizational combination. 1 There has been a R henomenal growth in M & A activity in t e 1980s which will continue The financial importance of mergers and acquisitions is blatantly obvious, as indicated by the size of the reported bid prices and the high cost of broken or incompatible organizational marriages. But beyond the headlines - what Harry Levinson (1970) terms ‘the hoopla and the glamour’ - there is a human side to merger, whereby the lives of millions of employees are likely to be changed with the stroke of a pen. In the United States alone, it is estimated that 25 per cent of the workforce has already been affected by merger and acquisition activity during the 1980s (Fulmer, 1986). It has been estimated that if the level of the activity were to continue at its current pace, by the end of this decade every public company would be under new ownership and/or manage- ment (McManus and Hergert, 1988). As the trend seems likely to continue, no manager or worker can consider themselves to be immune Introduction: mergers, acquisitions and strategic alliances - a people issue 3 from the likelihood that their organization will be taken over or merged with another in the future. Or alternatively, that they will be charged with the responsibility of managing a merger or acquisition, and implementing or perhaps handling the consequences of sudden and major organiza- tional change at some time in their career. It is highly likely that many of you who are reading this book will have already been affected in some way by merger and acquisition activity, or been involved in other less dramatic but equally important forms of inter-organizational combina- tion, such as joint ventures. 2 Merger and acquisition activity has increasingly become ‘people intensive’, and concerns cultural change or integration The recent boom in merger and acquisition activity differs from previous waves, not only in terms of its increased scale and geographical spread (discussed in detail in Chapter 2), but also in terms of the type of organizational combinations it has spawned. It is usual to consider mergers and acquisitions in terms of the extent to which the business activities of the acquired organization are related to those of the acquirer as falling into four main types: (a) vertical, (b) horizontal, (c) conglomer- ate and (d) concentric. (a) Those of a vertical type involve the combination of two organizations from successive processes within the same industry, e.g. a manu- facturer may acquire a series of retail outlets. (b) Horizontal mergers and acquisitions involve combinations of two similar organizations in the same industry. (c) Conglomerate refers to the situation where the acquired organization is in a completely unrelated field of business activity. (d) In concentric mergers, the organization acquired is in an unfamiliar but related field into which the acquiring company wishes to expand, e.g. a producer of sports goods might acquire a leisure-wear manufacturer. In the last major wave of merger and acquisition activity in the 1960s, most combinations were of the conglomerate type. When an acquiring organization makes an acquisition in an unrelated area, it is unlikely that it would seek to change, other than perhaps minimally, the way in which the acquired company transacts its business - at least until it has learnt the 4 Managing Mergers, Acquisitions and Strategic Alliances ‘logic’ of its new appendage, when it may move to integrate it more fully within its own activities. Consequently, conglomerate mergers and acquisitions tend not to have any large-scale impact on the working lives of the vast majority of employees. The previous domination of the conglomerate type merger or acquisition is reflected in the existing literature which has not tended to extend beyond stressing the impor- tance of the buyer-seller relationship. In contrast, the current wave of activity is dominated by combinations between companies in similar rather than unrelated business activities. Consequently, the fusion or integration of some or all of their human resources is required, and success becomes heavily dependent on human synergy. It has been suggested (Porter, 1987) that related acquisitions and diversifications tend to have a greater probability of financial success than unrelated acquisitions. This is primarily because they have the advantage of transfer of product knowledge and expertise, and offer more potential economies of scale. The growing trend towards related combinations has had important implications for merger and acquisition management in that the successful outcomes of such combinations have increasingly become dependent on the wide-scale integration of people, as well as the imposition of external financial control and accounting systems. Whereas in the past acquiring organizations may have been more content to adopt a ‘hands-off’ approach, the management of mergers and acquisitions today is definitely more interventionary and ‘hands on’, which brings its own set of problems (Cartwright and Cooper, 1993b). Most acquisitions in the 1980s and 1990s have been made with the intention of changing the way in which the acquired company transacts its business. Even if it is already performing successfully, the high level of investment which the acquisition represents means that shareholders will expect it to do even better in the future. Many organizations borrow heavily to make an acquisition which has the effect of substantially increasing their gearing ratios, thus increasing their own vulnerability to takeover. In an accountancy-led economy, dominated as it is by ‘short termism’, the pressure ‘to turn a company round’ and integrate it into core business activities as quickly as possible is likely to be extreme. Because mergers and acquisitions are associated with large-scale and often sudden organizational change, they have come to represent the challenge par excellence for the management of change. As the organiza- tional title changes hands, so too does the ownership and control of an entire workforce. Company logos are revamped, often together with the organizational chart; management changes; and so inevitably does the style of work organization. Changing the way in which the organization conducts its business - its managerial style, systems, procedures and the Introduction: mergers, acquisitions and strategic alliances - a people issue 5 symbols of its identity - means changing its people and their organiza- tional culture. 3 Human factors are increasingly being held responsible for merger and acquisition failure Because financial and strategic factors dominate merger and acquisition selection decisions, the diagnosis and analysis of merger failure has traditionally tended to adopt a similar focus. Mergers and acquisitions are considered to fail for rational economic reasons, e.g. economies of scale were not achieved of the magnitude anticipated, the strategic fit was poor or ill-matched, or there were unexpected changes in market conditions or exchange rates. It is true that mergers and acquisitions do fail for reasons of a rational financial and economic nature; but making a successful merger or acquisition, as many organizations have learnt to their cost, is more than just a matter of ‘getting the sums right’! Many have also come to recognize that a compatible and successful organizational marriage depends upon characteristics of the partner, which extend beyond the suitability of the strategic match. Financial advisers may guide merger managers in suggesting the broad areas in which economies of scale might be achieved, but they do not have to translate them into practice, and physically implement such decisions. Readers who have already experienced the trauma of merger and acquisition activity, are likely to be well aware of the multitude of ‘people problems’ and issues which inevitably arise, many of which involve non- routine managerial decisions, e.g. who to lose and who to retain. Nobody comes through the experience entirely unscathed or without a tale to tell, as evidenced by the many anecdotal reminiscences which make up the folklore of a company, and regularly appear in popular management journals. As one manager, speaking on the basis of his own experience, suggests: ‘those who underestimate or ignore the human factor do so at their peril!’ Although his particular organization, a large multi-national, merged over three years ago, it is still considered to be experiencing human merger problems, and a rate of staff turnover in a difficult recruitment market which is uncharacteristically high compared to that pre-merger. As the inadequacies of traditional, rational economic explanations of merger and acquisition failure are increasingly being recognized, more progressive companies are coming to realize that what happens to the employees involved, and their organizational cultures, cannot be con- 6 Managing Mergers, Acquisitions and Strategic Alliances sidered as separate and distinct from what happens to the organization. There are, therefore, two important human factors to merger and acquisition success which determine the speed and effectiveness with which integration can be achieved. They are: The culture compatibility of the combining organizations, and the resultant cultural dynamics. The way in which the merger/acquisition integration process is managed. The importance of organizational culture was well demonstrated in a now classic study of over forty highly successful American organizations carried out by Tom Peters and Bob Waterman (1982). The message of In Search of Excellence was loud and clear: consistently outstanding financial performance was the outcome of a strong, dominant and coherent culture. This link has subsequently been supported by research in the UK (Goldsmith and Clutterbuck, 1984). Organizational culture has also been linked to market strategy (Piercy and Peattie, 1988) and managerial style (Sathe, 1983). The experiences of organizations operating in a highly mobile job market and changing external environment suggests that a strong coherent and unitary culture injects stability into the workforce and reduces labour turnover. The issue of cultural compatibility and its implications for subsequent integration is important in the context of any inter-organizational combination or collaboration. Cultural differences and the concept of cultural distance can inhibit and positively obstruct management attempts to create a cohesive and coherent organizational entity. Such problems are unlikely to be confined to domestic M &. A activity. Certainly, combinations between two organizations within the same country are likely to result in a greater degree of physical and procedural integration than cross-border collaborations. However, in order to be successful, international M & As and strategic alliances will also, at least minimally, require certain groups of key individuals to work together and to establish a shared or joint understanding of common objectives and strategy. In the context of international combinations, the integration issue is further complicated by national cultural differences. The implications for mergers and acquisitions are clear. The type of culture of the combining organizations, the resultant cultural dynamics and the extent and speed with which a unitary and coherent culture emerges, will play critical roles in determining the eventual outcome of any inter-organizational combination or joint venture. Indeed, a survey carried out by the British Institute of Management (1986) concluded that managerial underestimation of the difficulties of merging two cultures - Introduction: mergers, acquisitions and strategic alliances a people issue 7 was a major contributory factor to merger and acquisition failure. Interestingly, despite evidence to suggest that UK acquirers typically pay on average a 40 per cent premium over pre-bid stock market valuation, cultural compatibility was rated by managers as significantly more important than price paid. For those who still remain unconvinced that merger is an essentially human activity, involving the fusion of organizational cultures, in the course of this book we will present further and more recent evidence to support this proposition. On the basis of recent research undertaken by the authors, which draws on the experiences of both successful and unsuccessful combinations, we will demonstrate how the cultural dynamics of mergers and acquisitions influence both organizational and individual outcomes. 4 Managing people more effectively in mergers and acquisitions requires a proactive approach A considerable amount of managerial time and energy is expended in negotiating and completing a merger or acquisition deal. Recent evidence on the pattern of acquisition activity in this country (Hunt, 1988), suggests that having made an initial identification of a potential acquisition target, it is usual for a predator to stalk its prey for a period of two years before making a bid. Then, having made a bid, the subsequent negotiations are likely to lengthen the process. It is not uncommon for such negotiations to last several years. During this period, the acquiring organization is likely to have become extremely well informed as to the financial health of the acquisition - but little more beyond that! Typically, it is only when ‘the ink has dried’, and the initial euphoria has begun to wear off, that the question of what happens next is raised or given any serious consideration. On the basis of our research, we were left with the distinct impression that acquisition/merger success was more a matter of ‘good fortune’ than the outcome of any well-conceived management strategy. From the time the deal was signed, what subsequently followed then became something of a journey into the unknown. Most organizations are ill prepared for the scale of problems that they invariably have to face. In the absence of any human merger audit, or carefully formulated human merger integration plan, most organizations muddle through the merger process, moving from one organizational crisis to another, rather than proactively managing people and anticipat- ing and confronting problems before they get out of hand. Indeed, current merger management is characterized by an ad hoc, reactive ‘fire- 8 Managing Mergers, Acquisitions and Strategic Alliances fighting’ approach, particularly in terms of the Anglo-American model. Although cultural compatibility and the way in which the merger integration process is managed are to some extent related, cultural compatibility or fit alone is no guarantee of merger or acquisition success. Combinations between organizations with well-matched and highly compatible cultures will fail to meet expectations if they are insensitively or poorly managed. Conversely, in situations where the cultures of the combining organizations prima facie are highly dissim- ilar and potentially incompatible, good management can still prove effective. As the business world continues to demand rapid response to change, organizational survival will increasingly hinge upon the ability to implement and manage that change successfully. For many, this means getting the ‘people issues’ right. We consider that this book will make an important contribution to the merger literature in extending understanding in an under-researched and important area of business activity. Most of the literature to date that has addressed the human aspect of the phenomenon emanated from the boom of the 1960s, and is now outdated. We also hope that its implications and recommendations will lead to an improvement in the way in which mergers, acquisitions and other forms of strategic alliance are managed in the future; and that we will move to a more healthy and positive situation, in which mergers and acquisitions are no longer automatically seen as ‘win/lose’ games, but are approached from the premise that both sides can potentially win. The book is based on an extensive survey of public information and research, both in the UK and overseas, carried out by the authors in the last seven years. Included in this volume are a number of case studies, all of which involve horizontal combinations in which success is dependent upon the integration of people. They involve combinations within a wide range of business activities in manufacturing and retailing, and within a variety of business sectors including information technology, engineering and financial services. They range in size from small ventures involving less than one hundred employees, to a large UK and pan-European merger involving several thousand employees. They are representative of merger and acquisition activity generally in terms of success, in that about half lived up to initial financial expectations. In drawing on their experiences and the collective lessons learnt, we have used these studies to illustrate both effective and ineffective managerial integration practices, which have implications not only for inter-organizational combinations, but also for major intra-organizational restructure and change generally.