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1994 Innovation Optimas Award Profile Novell Inc.

Mergers can be messy. Combining two very different cultures can be chaotic as both parties try to blend. Most often, the process is expensive—in monetary terms and in employee loss.

It needn’t be this way. Although mergers always create confusion and frustrations, the losses can be minimized by involving HR specialists from the get-go.

Management at Novell Inc. knows this. At the Provo, Utah-based computer-networking software manufacturer—a company that relies heavily on mergers and acquisitions as part of its business strategy—the senior vice president of human resources sits in on the executive meetings from the beginning of merger talks. And, with the use of an innovative tool created by the HR department, he and his staff manage the people aspect of the company’s mergers throughout the process.

The tool is called the Merger Book. It’s a set of more than 2,000 questions, mostly pertaining to HR issues, that require anywhere from a one-word answer to a full-page narrative response. It serves as a road map for all of Novell’s merger activities. “It facilitates and organizes management’s approach to a merger or acquisition from a human resources and human resources management perspective,” says Ernest J. “Tim” Harris, senior vice president of HR at Novell.

On personnel issues, it leaves no stone unturned. As Harris puts it, the book examines everything regarding a person’s employment, from applying for the job to leaving the company. This includes which advertising agency the company uses for recruitment ads, what its offer letters look like (and if they’re done legally, containing the latest statement of compliance for employee contracts) and whether or not the company offers hiring bonuses. The book also explores other legal obligations of the company being acquired.

In addition, it compares and contrasts the two companies’ cultures, including pay practices, management styles and worker attitudes, and examines the utilization of personnel at each company to aid human resources in staffing decisions.

Since 1989, the Merger Book has aided in 10 mergers, half of which occurred in 1993 (see “Novell’s Merger Activity”). The companies Novell has acquired have employed from six to 800 people. Some have been international.

Because the development span of networking technologies is so long, explains Harris, to stay ahead of the competition the company continually must mate with these other computer-equipment firms that have leading-edge technologies. He adds that, “The reason a company will buy another company many times is not only because of the technology but definitely because of the people that developed that technology and made it successful in the marketplace. You need to ensure that you can continue to operate the company and develop the technology on an ongoing basis, and the best way to do that is by having an integration that’s successful enough to maintain continuity and continued employment for the people who are part of that entity.”

A smooth integration of the people in these companies with Novell is vital to the organization’s success. Although Novell currently holds nearly 70% of the $2 billion networking-software market, a heavy flow of competitors—including Microsoft and IBM—threatens its stranglehold in this cutthroat industry. Novell can’t afford to engage in a merger with an incompatible organization in which the people and business practices clash miserably with Novell’s. Nor can it afford to manage a merger or acquisition poorly and end up with lowered morale and unforeseen financial liabilities.

How it all began.
Harris and Theresa Dadone, director of compensation, benefits and mergers, created the Merger Book in 1989 when Novell acquired Excelan Inc., a leader in UNIX, Apple and standards-based networking, for which the pair worked. The book started out simply as a template that the HR professionals used as a guide for managing the people aspects of that merger. When they discovered that their new company was engaged in merger activity more often than not, they found that their tool could provide them with a means for conducting each endeavor consistently. “As people responsible for our employee population [at the company being acquired], we knew the things that were upmost in their minds, and that helped drive our Merger Book from an employee perspective,” says Dadone. “When we became a part of Novell and started acquiring companies, we were able to add the concerns of the employee population at the surviving entity as well.”

For each activity, Harris and Dadone begin using the book as soon as they’re informed of the impending merger or acquisition. Before the activity is announced to the employee populations of the two companies, the HR staff sets up a time line for acquiring information. Typically what happens next is that Harris sets up a meeting with the head of HR at the company being merged with or acquired. He explains the intent and rationale behind the book and gives the other company the format for providing data.

Harris says that the HR people at candidate firms usually are impressed with the process and the orderly fashion in which it’s conducted. However, they’re also often intimidated by the amount of information they must cough up. For Novell’s acquisition of UNIX Systems Laboratories (USL), a company that was spun off from AT&T and which has been the largest such endeavor to date, Harris required three 4-inch binders to contain just the summary information. (Dadone keeps all original data, which for USL filled an entire filing cabinet.) The Merger Book synthesizes all of the material into a five-to six-page executive summary. It’s followed by 100 to 150 pages containing more detail.

When gathering the data, a representative of each HR function, such as employee relations or training and development, works with his or her counterpart at the other company. “The book facilitates the two companies feeling like they’re working together,” says Dadone. “We’re sensitive to having an organization that we’re purchasing feel like we’re coming in and taking over. If we work together, then they understand from the beginning that this is a joint effort.”

For example, when Novell acquired USL, Novell’s compensation specialists learned from the other company that USL employees regarded its bonus program as special. The program was similar to but not identical to the bonus system Novell had. Because Novell’s goal is to truly integrate joining organizations, its HR people worked with USL’s to incorporate the plan into Novell’s. Representatives from the two HR functions worked together to create a transitional plan for the USL employees that would incorporate elements of both USL’s and Novell’s systems, preparing them to enter Novell’s plan after one year.

Compensation and benefits practices, which vary widely from company to company, are often the most difficult areas to integrate when joining two firms. Because of this, the Merger Book is particularly heavy with questions pertaining to compensation and benefits. It calls for full examination of medical plans and structures. It asks for such information as pay policies, employee titles and grade levels.

The differences between the acquired companies’ policies and Novell’s present HR with its biggest challenge: blending the two systems to satisfy the employees from both places. With each merger, HR adds or revises many programs and policies. “Our motto is customer service first,” says Dadone. “If we’re going to be successful, we have to make our customers happy in a cost-effective and businesslike manner. [We have to] meet the needs of the majority of that group.”

Here are just a few examples of the programs that Novell has adopted from the companies with which it has merged:

  • When Novell acquired Excelan, Novell didn’t have a vision plan or a formalized, documented incentive plan that it communicated to all employees. Now it has both
  • When Digital Research Inc. and Novell merged, Novell adopted Digital’s tax-free educational-assistance program
  • USL had both a legal-aid program and a long-term care program for its employees that Novell carried over after the acquisition.

Conversely, employees from the companies that Novell acquires receive all of its already established benefits, including its stock-option and bonus programs.

One issue with which Harris and Dadone have struggled is integrating benefits derived from different cultures. Founded by engineers who had strong entrepreneurial spirits, Novell’s environment replicates the high-tech start-up philosophy of Silicon Valley in the late 1970s and early 1980s. That means a partnering with employees in all aspects of employment. “Novell has very competitive benefit and compensation practices,” says Dadone, “but they’re designed to put the employee in charge of his or her life, with Novell supplementing and aiding them where appropriate.”

For example, although Novell believes in providing a retirement benefit for employees, it does so by providing a 401(k) in which employees must set aside money. Many of the companies with which Novell merges, however, take a more paternalistic approach to pension benefits, offering defined-benefit programs in which an employee’s post-retirement income is primarily a result of company funding. Such was the case with USL. As an offshoot of AT&T, the company had negotiated some defined retirement benefits from the parent company for the employees who had come from there. When Novell bought USL, it honored that agreement, rather than taking away those employees’ built-up benefits. (As a result, Novell has ended up with employees who have 20 years of service credited with a company that’s only 10 years old.) “Our department has a sensitivity to meeting the needs of people, especially those who have been around that long and who are used to particular styles of benefits and compensation,” says Dadone. “We’re really challenged with finding a way to meet their needs and fitting them into the Novell culture.”

Corporate cultures affect the success of mergers.
The differences in culture between two companies impact more than benefits. They can have a tremendous effect on whether or not the companies can successfully blend. That’s why the Merger Book addresses cultural issues to a great degree. The section in the book on corporate cultures requires Harris and Dadone to do an analysis of the culture of each organization by interviewing and observing people within the two companies and by going through the information obtained by the different functions. The analysis includes management styles, performance evaluations, pay practices, employee-relations issues, types of affirmative-action programs, utilization based on demographics and other items.

“We update our information as we make changes in various programs and policies,” says Harris. “Then, when we get information from a [candidate] company, we compare it with our information and see how compatible we are in terms of pay practices, management compensation, benefits and employee relations. How does the company manage [people]? How do employees feel about the company? Do employees feel that they’re being treated fairly and that they’re provided with career opportunities? What issues are important to them relative to employee relations and employee-relations management? Culture is a big issue.”

One area that culture impacts is employee relations. For example, at Novell, workers go to employee-relations representatives for a myriad of reasons: counseling, to ask questions or just to talk. USL used an ombudsperson—a single individual who was aligned with nobody but the president of the company and provided simply a free ear to listen.

Novell didn’t want to continue the practice because it didn’t fit in with its own culture. However, because the employees of the acquired company respected and were comfortable with the ombudsperson, Novell brought the person on board. HR groomed the individual to become an employee-relations representative who could help employees of the acquired company understand the role of employee relations within the new context.

Because of Novell’s integration of other cultures, Dadone describes its corporate culture as one of diversity. “We recognize and play on every organization’s strengths and uniqueness,” she says.

The Merger Book looks at legal issues.
There’s no doubt that corporate cultures can impact a merger dramatically. Just as important to the success of the endeavor, however, is the candidate company’s compliance to legal factors. The Merger Book investigates all legal issues pertinent to HR, and serves as a catalyst for Novell’s legal department.

The book does more than just ask questions. It serves as a checklist for acquiring documentation, such as copies of a candidate company’s affirmative- action plans. It enables Novell to identify problems while they still belong to the candidate company. “After the merger’s consummated, we don’t want a legal entity coming back and saying that this or that happened [before the company merged with Novell] because it becomes our responsibility once [the other company] is a part of us,” says Harris.

In some cases, the Merger Book alerts Novell to a candidate company’s pending lawsuits. Novell, in most of these instances, has the company resolve the lawsuits before finalizing or consummating the mergers.

The book also helps Novell identify areas that need to be specifically managed. For example, during the acquisition of Digital Research Inc., the book flagged a major problem with its 401(k) plan. The plan was with Mutual Benefit Life, an insurance company whose rating dropped from AAA to A in less than a few days. Digital, not aware of the drop, didn’t take action to withdraw their money from the company before all assets were frozen. As a result of the investigation with the Merger Book, Novell was able to work with Digital to put in place a plan for withdrawing whatever money it could and addressing the concerns of employees whose money remained in the frozen account. “If the problem with that 401(k) plan had proved to be material to our finance people, then it’s conceivable it could have stopped the merger,” says Dadone.

To date, Novell hasn’t halted any mergers based solely on information extracted by the book. Most of what Novell discovers through the book is solvable and workable. After the Merger Book identifies liabilities, for example, Novell can estimate that particular benefits or liabilities will cost the company x dollars during the next so many years, and communicate that information to the company’s legal and financial specialists. The information is incorporated in the financial negotiation, says Harris. “In a lot of cases, we’re talking about millions of dollars.”

Information found by the Merger Book impacts negotiations in other ways as well. The book enables Novell to identify how the population is utilized at the candidate company and to key in on efficiencies. “Whenever two companies come together, there are duplications—two HR departments, two sales forces, two finance areas, and so on,” says Harris. “We have to plan what would be necessary to run the company effectively but efficiently.” Included in such considerations: staff reductions, the economy being inherited, and outplacement costs.

The Merger Book keeps up morale and raises respect.
As a result of using the Merger Book to investigate cultures and policies, along with a strategic communications process that accompanies the investigation (see “Merger Book Coaches Communications”), Novell’s merger activities have been successful from an HR standpoint. A majority of employees who Novell brings over from acquired companies go through with the change. Most are comfortable with their decision and happy with Novell.

Also, the investigation into liabilities protects Novell financially. It’s impossible to calculate the effect HR’s recommendations have on the bottom line, yet there’s no doubt that uncovering problems before they become Novell’s has an impact.

The Merger Book has reaped additional benefits. Harris and Dadone say that because of the book and the activity it requires, they’re forced to continually evaluate their company’s policies and practices. And by having to integrate new people and programs into the culture on a constant basis, they hone their skills and don’t become complacent. “We constantly have to be able to respond to that one individual,” says Dadone. “We can’t take things for granted, and we can never get lazy.”

The fact that HR has had responsibility for the management of the company’s merger activity all along demonstrates the value that Novell puts on the function. The innovation of the HR department in its managing of the responsibility has elevated the company’s respect for it further. “We’re really proud of the fact that HR at Novell receives a lot of respect,” says Dadone. It’s respect well deserved.

Personnel Journal , March 1994, Vol.73, No. 3, p. 42.