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You're Next There Is No Escaping Merger Mania!

April 1, 1997
Related Topics: Mergers and Acquisitions, Featured Article
As the business news splashed across newspapers and blared across television screens in April 1996, even the most hardened financial analyst might have thought merger mania had somehow spiraled into another dimension. On the first day of the month, telephone behemoths Pacific Telesis Group and SBC Communications announced they would wed to create a $23.8 billion enterprise. The same day, Wells Fargo finished digesting First Interstate Bancorp—a $14.2 billion takeover that had shaken the banking world to the foundation. Then, only a few weeks later, NYNEX and Bell Atlantic decided they would join forces to form a new enterprise with a market value of more than $50 billion—the second largest phone company in the world.

Before anyone could flip the calendar to May, a dozen other major firms had wangled deals topping out at well over $15 billion. And as the year flashed by, merger and acquisition (M&A) activity showed no signs of slowing down. By the time CFOs sang "Auld Lang Syne" to 1996, more than 10,200 mergers involving a record $659 billion had taken place in the United States alone, according to Newark, New Jersey-based Securities Data Co. The firm reports the 1996 activity represents a 10 percent increase in the number of deals and a 30 percent increase in the total value of transactions from 1995.

Already, another wave of megadeals has rippled throughout Corporate America this year. Recent mergers include companies such as 3Com and U.S. Robotics; Hughes Aircraft and Raytheon; and Morgan Stanley and Dean Witter Discover. These days, work for a company long enough and you're sure to get caught up in a merger … or two … or three.

The upshot? Turmoil and confusion for the workforce as everyone tries to sort out pay, benefits, severance packages, cultural issues and more. To make all the pieces fit, the merging companies have to tweak titles, alter pay and realign benefits. They're forced to change work assignments and rethink job responsibilities. They have to make tough decisions about laying off some people to avoid duplication. And they must reconcile the inevitable tug of war over cultures and business practices that will ensue. In short, they must rethink all of their people practices.

Although the CEO and finance department might pull the strings on a merger, no department is likely to find itself with greater responsibility for affecting change after a merger or acquisition than human resources. Behind the ceaseless chatter about competitive advantage, greater efficiencies of scale, boosting the stock price and cutting costs, its the human side of the equation that matters most. A merger or acquisition affects every employee—as resources and cultures coalesce into a single entity. Ultimately, it's HR's responsibility to oversee the disparate array of programs and policies that are designed to smooth the transition and oil the profit machine. "It's one of the most tumultuous experiences a workforce can endure," explains Pat Callahan, human resources director at San Francisco-based Wells Fargo Bank. But as such, it's also one of the greatest opportunities for HR to prove its strategic worth.

Successful mergers are based on dollars and sense.
Mergers and acquisitions aren't new. For decades, corporations have courted and devoured one another in the endless pursuit of growth and profit. Today, a handful of companies—General Electric, Eli Lilly and Company and 3M, for example—serve as testaments to the power of a clearly defined M&A strategy. They've managed to build huge empires with business units that synergistically feed off one another. In virtually every instance, it would've been impossible for these corporations to construct such an enormous enterprise from the ground up. The resources, brainpower and expense required to start new lines of business would've been prohibitive.

Over the last decade, however, merger and acquisition activity has exploded. Although the wild excesses and hostile bids of the 1980s—capped by the now infamous Kohlberg Kravis Roberts & Company's $26.4 billion buyout of RJR Nabisco in 1989—have faded, the record activity of the last couple years proves corporate executives still view M&As as a valuable tool. In fact, in today's low-growth and low-interest-rate economy, it's increasingly seen as a way to boost top-line growth by pooling revenue and slashing costs.

One system wasn't necessarily better than the other. It was just the way the two companies operated—and it was based largely on business needs.

But melding two distinct organizations is risky. Harvard University's Michael Porter, in a landmark May 1987 Harvard Business Review article, argued persuasively that most would-be synergies from mergers never are realized. Indeed, Morristown, New Jersey-based Gemini Consulting has found that 50 percent of all companies fail to maintain their book value two years after the merger. Many others stumble while trying to achieve their initial set of objectives. Take AT&T's 1991 acquisition of NCR which became a colossal flop and eventually led to a spinoff. Or Matsushita's 1991 acquisition of MCA which never created the sales and growth both companies had hoped for. They're not the exceptions. Companies that wed all too often wind up losing market share and profits, frequently resembling the Titanic as they capsize in a sea of debt.

Ron Landis, a former principal in the Leadership, Mobilization and Renewal Discipline at Gemini, says he believes the process all comes down to two basic issues: cost and culture. "The key to successful mergers is understanding the costs associated with the deal and how to make the organizations function efficiently once people and resources are combined."

Wells Fargo and First Interstate learn it's all about people.
Wells Fargo's Callahan knows that mergers involve monitoring morale, melding cultures, creating new organizational structures and streamlining benefits. When the bank announced it would launch a hostile bid for Los Angeles-based First Interstate in November 1995, it spawned several weeks of uncertainty. Initially, First Interstate rebuked the Wells Fargo offer—opting for another bid that came from First Bank System of Minneapolis. However, after the dust had settled, shareholders pushed First Interstate's board of directors into the pact with Wells Fargo, refusing to back the First Bank System's deal. Wells Fargo and First Interstate signed the final agreement at the end of January 1996.

That left the banks only two months to combine their operations and handle the required due diligence. Wells, with 19,000 employees at its 974 California branches, had to find the most efficient way to combine operations with First Interstate, which had 28,000 employees working in 1,142 branches in 13 western states. The first problem Callahan had to cope with, not surprisingly, was the initial shock that rippled through the organizations. "A lot of the First Interstate employees had convinced themselves the merger was going to be very bad—they were worried they'd lose their jobs or wind up in less-meaningful positions. An incredible amount of worry and demotivation existed," she says.

Another problem was dealing with two wildly divergent cultures. According to Callahan, First Interstate had a long-standing habit of handing out titles rather freely. When the time came to streamline, Wells Fargo employees didn't want to have their titles cheapened, but First Interstate workers insisted on not losing the titles they'd earned. The two companies also handled work and decision making in drastically different ways. The Wells method was rapid-fire, while First Interstate was meticulous about conducting research and creating formal presentations before teams would take any action.

In fact, these work patterns helped dictate the entire organizational structure at First Interstate. Because the company had a greater reliance on teams and had built up a larger infrastructure, it required additional layers of management. Whereas a Wells Fargo manager might have had three or four supervisors or managers directly reporting to him or her, a First Interstate manager could easily have had eight or 10. "One system wasn't necessarily better than the other. It was just the way the two companies operated—and it was based largely on their business needs," Callahan explains. Ultimately, Wells Fargo reduced the number of layers, but didn't clone its existing structure over First Interstate's.

There also was the enormous struggle to streamline benefits and compensation. Naturally, the two companies had different 401(k) plans, medical insurance and attitudes about pay. First Interstate's board also had enacted a lucrative severance package—one that offered every employee four weeks of pay for each year of service, with a maximum payout of 24 months. Says Callahan, "The plan turned out to be tricky because there was so much money involved that in some cases people actually wanted to get laid off and find another job."

Wells Fargo's HR staff wasted no time in developing a comprehensive plan. Special teams and task forces—with active participation from HR—studied virtually every aspect of the two companies, quickly deciding which components of each would be plugged into the new organization. For example, when it came to dealing with job titles and the pay associated with them, the organization moved mostly to the Wells Fargo model but also kept certain titles that existed at First Interstate. Overall, about 15 percent of the job grades were affected. "The initial mapping has indicated that some employees are in higher grades than they should be. However, you can establish an edict, but it's unlikely you'll be able to follow it exactly. The reality is, we'll use titles differently than we did in the past," says Callahan. What's more, Wells Fargo also has moved to a grading system similar to the one First Interstate used to better control pay equity issues.

The organization also ratcheted up the retirement plan for former First Interstate employees to match Wells Fargo's plan. The latter, which had offered more than a dozen mutual funds, had previously funded 6 percent of an employee's annual salary into a 401(k) plan, and it then matched up to an additional 4 percent. First Interstate, which had used a defined benefit plan, had only a 3 percent match that was payable only in the company's stock. When it came to dealing with layoffs and the prickly severance issue, Wells made its decisions about employees based strictly on who would provide the greatest long-term value to the organization. Not surprisingly, some employees who felt they wouldn't fit in began to perform poorly, and even hired attorneys to search for ways to get fired, says Callahan.

Upgrading benefits for First Interstate workers was a double-edged sword. Although the severance package made it difficult to keep some of the key people Wells had targeted—particularly senior managers who could opt out of the organization with a full severance simply because their jobs had changed—it also made it easier to cope with the wave of impending layoffs. In fact, hardly a whisper of complaint could be heard when the organization announced that more than 7,000 positions would be eliminated. "That has been a fairly painless process," Callahan explains.

Ultimately, it's been a balancing act for HR. "The best system isn't necessarily the one you wind up using," says Callahan. "You have to weigh cultural and strategic factors, and financial issues and have an excellent understanding of your workforce and its requirements. In most instances, neither system alone will produce the desired results. You have to keep an open mind and avoid the arrogance that the acquiring company's processes and procedures are best and that's what'll be used."

Keep the communication channels open.
As the Wells Fargo/First Interstate example shows, cultural issues reverberate to the core of any merger or acquisition. And no other department feels the workquake as sharply as human resources—not the board of directors or the merger task force, and certainly not the key players who tie the knot. Although the due diligence process allows a corporation to assess many of its needs and requirements—as well as ensuring that it's in compliance with all laws and regulations—it's only the starting point for the journey. "It isn't just a matter of pulling information out of files and conducting study after study. It's understanding how individuals feel and what the perspective of the workforce is," says Kathy M. Van Zant, president of Van Zant Resource Group in Norcross, Georgia, a firm that specializes in the HR side of M&As.

It's certainly no bulletin that an M&A announcement can stir emotions that range from sheer jubilation to outright anger and hostility. Somewhere between such extremes might be a workforce that's anxious, if not downright scared—for themselves and their colleagues. After all, jobs usually are at stake. Even for those who may not be directly threatened with a layoff, the idea of enduring a change in job title, supervisor and the benefits they receive is usually enough to create a disruption of epic proportions. "Regardless of the type of merger and how the deal is constructed, there's always anxiety and confusion about what's going to happen and how people are going to be affected. The rumor mill can easily get out of control," says Van Zant.

The best way to deal with the disruptive situation, Van Zant says, is for human resources to get involved from the start and put a heavy emphasis on quality employee communication. Honesty is at the core of a successful merger. "If the company can't discuss the situation, it's best to admit it. The worst thing a company can do is continually deny rumors that it's discussing a merger or acquisition and then make a move. Nothing destroys a company's credibility faster. If the company misleads employees and loses their trust, why should employees believe anything they hear in the future?"

The best way to deal with the disruptive situation is for human resources to get involved from the start and put a heavy emphasis on quality employee communication.

Newsletters, e-mail, voicemail, teleconferences and intranets all offer efficient ways to feed important information to employees. The obvious advantage of electronic communication is that it can span continents and reach across oceans, providing up-to-the-second news and updates. But, according to Alan Culler, a senior consultant at Gemini, technology can't replace face-to-face contact. "Too often, the blitz of communication is one-way and it's information overload," he states. "It involves management sending out information and memos based on what it feels is important. Unfortunately, there's nothing coming in to managers and executives. The standard top-down mode of communication doesn't work. During a merger, a bottom-up communication system is essential."

That translates into town hall meetings, focus groups and forums during which employees can vent, ask questions and voice concerns. An executive who stands in front of a group and offers a rambling 30-minute monologue isn't likely to dispel the collective stress of the workforce. The executive who fields questions and encourages discussion—admitting when he or she doesn't have an answer but vowing to check on it—is likely to gain far more respect. As Culler explains: "These are times when you're dealing with the emotional issues as well as the rational ones. Sometimes, seeing an executive honestly struggle with a question goes a long way toward relieving tension."

A well-defined strategy can enhance the new culture.
When two highly successful networking companies, Synoptics and Wellfleet, merged operations in October 1994 to form Bay Networks, the need to bridge the continental divide and ensure solid communication became paramount. Time zones and geographic distances suddenly entered the corporate equation. Synoptics, with 1,500 employees, was based in Santa Clara, California, while Wellfleet, with an equal number of workers, had offices in the Boston area. Both were high-growth companies, and layoffs weren't an issue. But that didn't diminish the tension of how titles, benefits and job assignments might change. And it did nothing to eliminate the need to merge payroll and HRMS systems to suit the new company.

Bay Networks responded by immediately linking e-mail systems and using voicemail broadcasting. It also installed videoconferencing so meetings, briefings and discussions could be handled in a more personal manner. "Since people didn't necessarily know one another but suddenly had to work together, it was a useful way of helping everyone become more familiar with each other," notes Susan Keck-Truman, director of human resources for worldwide staffing. Meanwhile, the company's newsletter kept employees posted on events as they developed, and the intranet included a Usenet-style discussion group that "allowed a public forum for questions and answers." The company made a commitment to address any questions that appeared in the forum within 24 hours.

Human resources then began sorting through the dizzying array of cultural issues that affected the merged company. Contrary to what one might expect, the workers at the East Coast offices tended to be less formal than their counterparts on the West Coast in terms of both dress and behavior, and the company made no attempt to change the situation. T-shirts and an array of other gimmicks became an enjoyable way for the entire organization to communicate goals and build a greater sense of cohesion. In fact, one of the top priorities was establishing a new name, logo and identity. "We wanted everyone to feel as though they belonged to a single organization, but wanted them to retain a sense of identity," says Keck-Truman.

Nevertheless, Bay Networks faced some perplexing issues. The human resources department, then 55 employees, studied companywide compensation for more than six months before adopting and switching over to a banded system for the entire organization. That helped group similar positions and eliminate controversy over who deserved higher pay. It also eliminated the need to rewrite job descriptions and realign duties. When it came to titles, the company took a hands-off approach. "We decided that over time, the situation would take care of itself and the company could slot people into new positions as needed. But we had to explain that we were leaving titles intact and that an employee might have a peer with a more senior title, though workers would be paid according to the job duties and responsibilities," Keck-Truman explains.

Despite such progressive policies, the merger has been a tepid success at best. Bay Networks has struggled to digest the enormous debt created by the coupling of the two companies and has subsequently fallen to third place behind rivals Cisco Systems and 3-Com in the computer networking industry. Analysts say that product lines have not kept up with competitors, and the company has been slow to make some needed structural changes. Still, it has grown from an organization with $1 billion a year in revenue at the time of the merger to a $2 billion enterprise in 1996. And the challenge of merging the two companies and cultures continues. Says Keck-Truman: "It's a long and ongoing process. You can set deadlines and establish objectives, but it takes time to evolve."

Expect severe labor pains.
In many respects, Bay Networks was more fortunate than many companies attempting to manage a merger. Thanks to continuing growth in the computer-networking sector and the fact that it had engineered a horizontal merger of equals, the firm never found itself pulverized by mass layoffs. It needed every employee it could muster from the two organizations just to remain competitive. But that's not the norm. The human debris generated by merging firms often serves as a financial and psychological drag on productivity and profits, and can create a legacy of problems that can hex human resources and vex senior executives.

According to John A. Challenger, executive vice president of international outplacement firm Challenger Gray & Christmas, based in Chicago, one of the biggest mistakes companies make is "reflexively" cutting workers after a merger. Although layoffs and outplacement are frequently valid and necessary options, he says, an unfortunate side effect too often occurs: the loss of corporate memory. What's more, "Many organizations find they have new requirements after a merger. Although there's pressure to cut costs and look for duplications, there's also a need for talented people to handle new functions."

One solution? Inplacement and redeployment programs that can help prevent memory loss and keep a workforce engaged. "A merger usually represents an opportunity to reengineer operations. A company must examine how work gets done, and it must look for new ways to get work done more efficiently," says Challenger. "Inplacement and redeployment reap the gain of retaining people who understand the organization, even if it's changing under their feet. They're more likely to fit, particularly in key management positions, than someone who comes in from outside. It also cuts down tremendously on recruitment and turnover costs."

Yet, it's a shortsighted strategy to simply shuffle managers around the organization to plug holes in the dike. A lack of knowledge can create enormous problems, and an absence of understanding can generate additional stress and turmoil. "The idea that you can slap together a management team or an integration team and enjoy clear sailing is flawed," explains Gemini's Culler. At one chemical company, he witnessed a full-scale cultural war that almost dismantled the merger. After the corporation closed a facility, it moved the plant manager to another factory. Within two weeks, the company found itself staring down the barrel of seven EEO suits—all directed at the same manager. "Had the company's HR executives read the employee surveys, one would have known a problem existed. Several of the managers they decided to keep had a record of previous problems."

HR must put the pieces together.
Cultural issues too often become a nagging concern because they're not examined during due diligence, Culler insists. If a human resources director or vice president isn't sitting at the table with other senior executives who are planning the merger, scores of problems usually develop. Although a company might conduct HR-related surveys as part of the due diligence process, the information can easily "wind up in the data room collecting dust. It's not read by the financial types; it's not understood by the financial types," says Culler. Ultimately, it's the responsibility of HR to make sure that the data is seen and used to make decisions.

One way to make sure inclusion happens is to present a pro forma business case to senior executives. It's important to identify the critical issues, how they can impact things on the upside and downside, and how they can affect the bottom line. "It's crucial to talk to senior executives and the CEO in a language they can understand—the language of how a decision or action will contribute to or detract from shareholder value. Vague abstract references to problems and incompatibilities just won't do. You may get intellectual agreement, but you won't get the emotional buy in," says Landis.

It's crucial to talk to senior executives and the CEO in a language they can understand—how a decision or action will contribute to or detract from shareholder value.

Navigating the merger maze requires patience and determination. Over the last half-dozen years, Wilton, Connecticut-based Dun & Bradstreet leaped numerous hurdles to bring together 33 legal entities and 50,000 employees under a single umbrella. As work dried up in one part of the company, human resources found a way to slot workers into other departments. The end result? An organization that avoided a hemorrhage of its brainpower. And while the company split into three separate companies last September, that transition also went smoothly—partly because of the strategic planning that had gone into reorganizing operations.

Dun & Bradstreet had put a heavy emphasis on laying the foundation for cultural change. It had combined computer systems, reorganized mail rooms, handled differing dress codes, created a standardized payroll system and streamlined benefits. It had created dozens of work teams and task forces, with as many as 60 people focusing on a single study or task. "Ideas, brainpower and involvement are all key," says Evelyn Follit, vice president of human resources at A.C. Nielson Co. of Stamford, Connecticut, one of D&B's recent spinoffs.

Despite Herculean attempts to streamline communication and implement well-designed systems, anger and hostility erupted. "Hostility comes with the territory. If people aren't upset, then there's probably not enough change," explains Follit. "In order to move people away from the old and embrace the new, some friction and chaos must exist." However, she and others in the human resources department made it a point to steer clear of a defensive posture. "The best thing you can do is use everything as a learning experience," she says. In fact, it took 75 days to put the basic plan together, and about nine months to put all the pieces in place and close the deal. "It's an incredible amount of work, but it should ultimately create greater efficiencies and a more motivated workforce," says Michael P. Connors, vice chairman of A.C. Nielsen and the former Chief of human resources at D&B.

Indeed, it can take years for cultures to coalesce and for the intended synergy to play itself out. Mergers and acquisitions can become an odyssey deep into the cracks and crevasses of any organization. Good post-merger integration rarely puts a poorly constructed deal over the top, but bad execution can obliterate a merger that might have had a legitimate shot at success. As Landis puts it: "It's up to HR to find the barriers and help the company break though them." Only then can two organizations merge and realize their full potential.

Workforce, April 1997, Vol. 76, No. 4, pp. 52-62.

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